FINRA Restricts Internal Use Only Rules Through Enforcement Actions


Over the past few years, FINRA has narrowed the gap between sales material for use with the public and internal material intended only for registered representatives. This trend continues with a series of recent enforcement actions involving Auction Rate Securities (ARS). It now appears that FINRA may be closing any remaining gap between material for the public and internal use only material.

Previous regulatory guidance on internal use only material focused primarily on two issues: first, whether the material was used only internally and not with investors; and second, whether the pieces were balanced. Now, through four enforcement settlements, which substantively dealt with the sale of ARS, FINRA is taking the position that firms violated the institutional sales literature rule, NASD Rule 2211, because their internal use only material failed to include specific cautions regarding potential risks of the type typically included in advertisements for the general public. Thus, it appears that FINRA may be of the view that at least FINRA Restricts Internal Use Only Rules Through Enforcement Actions By Deborah G. Heilizer, Clifford E. Kirsch and Brian L. Rubin Sutherland Asbill & Brennan LLP in certain circumstances, internal use only materials must include disclaimers equivalent to those required in marketing material distributed to public customers.

Recently, FINRA settled a number of actions through Letters of Acceptance, Waiver and Consent (AWCs), against firms that sold ARS.1 The cases arose following the recent market freeze of liquidity for ARS. In one of those AWCs, the firm, which was fined $200,000, was charged with violating NASD Rules 2211 and 2110 relating to communications in its marketing and sale of ARS, as well as related supervisory violations. 2 FINRA found that the firm’s internal marketing materials “were not fair and balanced and did not provide a sound basis for evaluating the facts in regard to purchases of ARS” insofar as the internal marketing pieces did not disclose the risk that ARS auctions could fail and that, as a result, customers might be unable to access their funds “for substantial periods of time.” FINRA found that internal sales material available to registered personnel on thefirm’s internal Web Site failed to disclose these risks; FINRA chided the firm for maintaining pieces on its internal Web Site that “described ARS as ‘Typically AAA rated bonds’” and for comparing the investments “as similar to seven-day variable rate put bonds,” without disclosing failed auction and resulting liquidity risks.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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