FINRA Files Proposed Amendments to Communications Rules

by Goodwin

FINRA filed with the SEC proposed amendments to FINRA Rule 2210, related to communications with the public, and FINRA Rule 2214, which sets forth requirements for the use of investment analysis tools (the “Amendments”).  FINRA Rules 2210 and 2214 became effective on February 4, 2013 in connection with FINRA’s adoption of comprehensive rules for communications with the public (the “Communications Rules”).  For a description of the Communications Rules, please refer to the April 24, 2012 Financial Services Alert (discussing the SEC’s approval of the Communications Rules), the July 17, 2012 Financial Services Alert (discussing the effective date for the Communications Rules), and the January 15, 2013 Financial Services Alert (discussing FINRA guidance on the Communications Rules).

Amendments to FINRA Rule 2210

FINRA Rule 2210 generally establishes content, approval, filing and other requirements with respect to communications with the public by FINRA member broker-dealers.  The Amendments include proposals to amend FINRA Rule 2210 as follows:

Exclusion of Certain Research Reports from Filing Requirements. FINRA proposes to exclude from the filing requirements of FINRA Rule 2210 research reports concerning only securities listed on a national securities exchange, other than research reports which must be filed pursuant to Section 24(b) of the Investment Company Act of 1940 (the “1940 Act”).  In explaining the Amendment, FINRA stated its belief that the likelihood of harm to investors resulting from the distribution of research reports concerning only exchange-listed securities is significantly lessened due to additional investor protection standards that apply to research reports, including (i) the comprehensive disclosure, content and analyst independence requirements of NASD 2711 and SEC Regulation Analyst Certification, and (ii) the liquidity and price discovery mechanisms in place for securities that are listed on a national securities exchange, which  reduces the risk that a research report could manipulate a security’s trading price. 

FINRA noted that Section 24(b) of the 1940 Act requires a registrant, and the underwriter for such registrant, to file all advertisements, pamphlets, circulars, form letters and other sales literature (including research reports) addressed to or intended for distribution to prospective investors with the SEC within 10 days of distribution of such material, and that Rule 24b-3 under the 1940 Act deems such material to be filed with the SEC upon its filing with FINRA.  Because of this separate filing requirement, FINRA does not believe it appropriate to include investment company research reports within the proposed exclusion.

Clarification with Respect to Free Writing Prospectuses. FINRA proposed to amend FINRA Rule 2210 to clarify that free writing prospectuses that are exempt from filing with the SEC are not subject to the rule's filing or content standards.  FINRA explained that since the effective date of the Communications Rules there has been some confusion as to the applicability of the filing and content requirements of FINRA Rule 2210 to free writing prospectuses.  The Amendments clarify that (i) a free writing prospectus that is exempt from filing with the SEC pursuant to Securities Act Rule 433 is not subject to the filing requirements and content standards of FINRA Rule 2210, and (ii) that the filing and content requirements apply to free-writing prospectuses required to be filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii).

Amendments to FINRA Rule 2214

FINRA Rule 2214 generally establishes the requirements for FINRA member broker-dealers when making use of investment analysis tools.  FINRA is proposing to correct a mistaken cross-reference in the Rule by replacing a reference to FINRA Rule 2210(c)(3)(D) with the correct reference to FINRA Rule 2210(c)(3)(C), which relates to the filing requirement for any template for written reports produced by, or retail communications concerning, an investment analysis tool. 

Public Comment

FINRA’s filing with the SEC proposes that comments on the Amendments be submitted no later than 21 days after the SEC publishes the proposal in the Federal Register.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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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