The Securities and Exchange Commission (SEC) recently issued Release No. 34- 65663 (the SEC Release), which seeks comments on the Financial Industry Regulatory Authority's (FINRA) proposed amendments to proposed FINRA Rule 2210 (the Rule), issued in July of this year, regarding FINRA member firms' communications with the public.
Additionally, the SEC instituted proceedings, pursuant to Section 19(b)(2)(B) of the Securities Exchange Act of 1934, in order to determine whether to approve the Rule, as modified by the amendments. The unusual step of instituting proceedings marks a new development in the SEC's handling of self-regulatory organization (SRO) rulemaking that has been encouraged through recent procedural amendments required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is possible under the new procedural rules that SRO member firms will have greater opportunity for comment and the opportunity to request oral presentations of their views to the SEC.
The SEC Release provides, through the renewed comment period, member firms with the opportunity to voice their comments on the amendments to the Rule as well as other issues related to the Rule as outlined in the SEC Release. The SEC requests that comments be submitted by Dec. 7, 2011. Rebuttals to any submissions will be accepted by the SEC and must be filed by Dec. 22, 2011.
The Rule would replace the six communication categories that exist under existing NASD Rule 2210 with three consolidated categories: institutional communication, retail communication and correspondence. The Rule and accompanying proposed FINRA Rules 2212 through 2216 would also prescribe approval, review, record-keeping, filing and content requirements.
Comment letters on the earlier rule proposal were received by the SEC, and FINRA filed a response letter and Partial Amendment No. 1 (the Amendment) in response to those comments, for which the SEC has opened the current comment period. The Amendment would, among other things:
- clarify that a member is required to have a principal approve retail communications that are excepted from the definition of "research report" in NASD Rule 2711(a)(9)(A) if those communications make any financial or investment recommendations;
- eliminate the filing requirement for retail communications concerning government securities, as defined by Section 3(a)(42) of the Securities Exchange Act of 1934;
- modify the disclosure requirements for retail communications and public appearances that include a recommendation of securities, changing the category of associated persons whose financial interest would have to be disclosed pursuant to paragraph (d)(7)(A)(ii) of the Rule. Under the modification, the communication would need to disclose if the member or any associated person that is directly and materially involved in the preparation of the content of the communication has a financial interest in any securities of the issuer whose securities are recommended, and the nature of the financial interest, unless the extent of that financial interest is nominal;
- revise the disclosure standards for public appearances that include securities recommendations to apply only to associated persons, since members do not engage in public appearances except through their associated persons; and
- add paragraph (d)(8) to the Rule, which would exclude from the content standards of proposed paragraph (d) prospectuses, preliminary prospectuses, fund profiles and similar documents that have been filed with the SEC. The Amendment also clarifies that those content standards do not apply to an investment company prospectus published pursuant to Securities Act of 1933 Rule 482 and a free writing prospectus that has been filed with the SEC pursuant to Securities Act of 1933 Rule 433(d)(1)(ii).
The Investment Management Alert summarizing the initial rule filing can be read at: http://www.drinkerbiddle.com/finra-proposes-new-rules-regarding-communications-with-the-public-08-18-2011/
The Amendment can be read at: http://www.finra.org/web/groups/industry/@ip/@reg/@ rulfil/documents/rulefilings/p124982.pdf
The SEC Release can be read at: http://www.sec.gov/rules/sro/finra/2011/34-65663.pdf
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