FINRA Restricts Internal Use Only Rules Through Enforcement Actions

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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 in certain circumstances internal use only materials must include disclaimers equivalent to those required in marketing material distributed to public customers.

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Published In: Administrative Agency Updates, Securities Updates

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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