FINRA Manual: Contents
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15-16 FINRA Requests Comment on Proposed Amendments to Rules Governing Communications With the Public; Comment Period Expires: July 2, 2015
Communications With the Public
Request for Comment
Referenced Rules & Notices
FINRA Rule 2210
FINRA Rule 2213
FINRA Rule 2214
Communications with the Public
FINRA is soliciting comment on proposed amendments to the FINRA rules governing communications with the public. The proposed amendments would revise the filing requirements in FINRA Rule 2210 (Communications with the Public) and FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools) and the content and disclosure requirements in FINRA Rule 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings).
The proposed rule text is attached as Attachment A.
Questions concerning this Notice should be directed to:
FINRA encourages all interested parties to comment on the proposal. Comments must be received by July 2, 2015.
Comments must be submitted through one of the following methods:
Marcia E. Asquith
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1506
To help FINRA process comments more efficiently, persons should use only one method to comment on the proposal.
Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.1
Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).2
Background and Discussion
In April 2014, FINRA launched a retrospective review of its communications with the public rules to assess their effectiveness and efficiency. In December 2014, FINRA published a report on the assessment phase of the review.3 The report concluded that, while the rules have met their intended investor protection objectives, they could benefit from some updating to better align the investor protection benefits and the economic impacts. To this end, FINRA recommended a combination of rule proposals, guidance and administrative measures.
Pursuant to these recommendations, FINRA initially is proposing amendments to the filing requirements in FINRA Rule 2210 and FINRA Rule 2214 and the content and disclosure requirements in FINRA Rule 2213.4
New Firm Communications
New FINRA member firms currently are required to file with FINRA retail communications used in any electronic or other public media at least 10 business days prior to use. This requirement extends for one year from the effective date of the firm's membership. This new firm filing requirement only applies to broadly disseminated retail communications, such as generally accessible websites, print media communications, and television and radio commercials.
The new firm filing requirement predates the Internet, and today new firms primarily reach customers and potential customers through websites. Accordingly, the review of these websites has become the most important objective of this filing requirement. FINRA's comments on new firm filings typically focus on their websites, particularly the websites of new firms with novel or unusual business models. FINRA also believes that the requirement for new firms to file their retail communications at least 10 business days prior to use unnecessarily delays firms' abilities to communicate with the public without a corresponding investor protection benefit beyond what post-use review would provide.
Accordingly, FINRA proposes to narrow the new firm filing requirement by requiring new firms to file only their websites and material changes to their websites within 10 business days of first use for a one-year period. FINRA intends to continue to review new firms' communications for adherence with applicable standards by focusing on new firms' websites after they are filed with FINRA, and reviewing applicants' websites as part of the new firm application process.
Investment Company Shareholder Reports
FINRA has required firms to file the manager's discussion of fund performance (MDFP) portion of a registered investment company shareholder report if the report is distributed or made available to prospective investors. FINRA has required the MDFP to be filed because firms sometimes distribute or make shareholder reports available to prospective investors to provide more information about the funds they offer, and thus FINRA has considered the MDFP to be subject to the filing requirement for investment company retail communications. Registered investment companies are also required to file their annual and semi-annual shareholder reports with the SEC.5
Because investment companies already must file shareholder reports with the SEC, and because the MDFP typically presents less investor risk than other types of promotional communications concerning investment companies, FINRA proposes to exclude shareholder reports that have been filed with the SEC from the filing requirements. The rule already excludes prospectuses, fund profiles, offering circulars and similar documents that have been filed with the SEC. As such, FINRA believes it would be consistent to add shareholder reports that have been filed with the SEC to that list.
Backup Material for Investment Company Performance Rankings and Comparisons
Firms that file a retail communication for a registered investment company that contains a fund performance ranking or performance comparison must include a copy of the ranking or comparison used in the retail communication. When FINRA adopted this requirement, prior to the Internet, FINRA staff did not have ready access to the sources of rankings or comparisons. Today, this information typically is available online. FINRA therefore proposes to eliminate the requirement to file ranking and comparison backup material and instead expressly to require firms to maintain back-up materials as part of their records.
Generic Investment Company Communications
Firms must file within 10 business days of first use retail communications "concerning" registered investment companies. FINRA proposes to exclude from the filing requirements generic investment company retail communications that do not promote a particular fund or fund family. An example might include a communication that describes different mutual fund types and features but does not discuss the benefits of a specific fund or fund family.
This type of material typically is intended to educate the public about investment companies in general or the types of products that a firm offers, and thus does not present the same risks of including potentially misleading information as promotional communications about specific funds or fund families. FINRA is proposing to require instead the filing of retail communications that "promote or recommend a specific registered investment company or family of registered investment companies."
Investment Analysis Tools
"Investment analysis tools" are interactive technological tools that produce simulations and statistical analyses that present the likelihood of various investment outcomes if certain investments are made or certain investment strategies or styles are undertaken. Firms that intend to offer an investment analysis tool must file templates for written reports produced by, or retail communications concerning, the tool, within 10 business days of first use. They also must provide FINRA with access to the tool itself, and provide customers with specific disclosures when they communicate about the tool, use the tool or provide written reports generated by the tool. In light of the investor protection afforded by other content standards and the requirement that firms provide access to the tools and their output upon request of FINRA staff, FINRA proposes to eliminate the filing requirements for investment analysis tool report templates and retail communications concerning such tools.
Filing Exclusion for Templates
Firms are not required to file retail communications that are based on templates that were previously filed with FINRA but changed only to update recent statistical or other non-narrative information. FINRA proposes to expand the template filing exclusion also to allow firms to include updated non-predictive narrative descriptions of market events during the period covered by the communication and factual descriptions of portfolio changes without having to refile the template.
Bond Mutual Fund Volatility Ratings
Firms may use retail communications that include ratings provided by independent third parties that address the sensitivity of the net asset value of an open-end management investment company's bond portfolio to changes in market conditions and the general economy, subject to a number of requirements. For example, these communications must be accompanied or preceded by the bond fund's prospectus and contain specific disclosures.
Firms currently must file retail communications that include bond mutual fund volatility ratings at least 10 business days prior to first use, and withhold them from publication or circulation until any changes specified by FINRA have been made.
Accordingly, FINRA proposes to modify some of the rule's requirements. Consistent with the filing requirements for other retail communications about specific registered investment companies, the proposal would permit firms to file these communications within 10 business days of first use rather than prior to use. The proposal also would streamline the content and disclosure requirements and eliminate the requirement that the rating could only be included in a retail communication that accompanies or is preceded by the bond fund's prospectus.
Economic Impact Assessment
The assessment phase of FINRA's retrospective review of the communications with the public rules concluded that these rules have been largely effective in meeting their investor protection goals but there are several areas where the investor protection benefits may not align with the associated economic costs. For example, the views expressed by the stakeholders during the assessment suggested that certain filing requirements (e.g., prior to use filing requirements for new members, filings of investment company shareholder reports or generic investment company communications, and filing requirements for investment analysis tools) may be too broad and the direct and indirect costs associated with such filings may be unnecessarily large.
The amendments in this rule proposal are intended to address opportunities to better align the protections to investors with the associated risks of the activities and the costs of compliance.
The proposed amendments would impact firms that are subject to the filing, content and disclosure requirements in this proposal. Approximately 770 firms filed communications material with FINRA in 2014. FINRA estimates that about 80 to 90 percent of these firms filed communications specific to the requirements in this proposal. These firms would be directly impacted by the proposed amendments.
The amendments will benefit firms by reducing their costs associated with the specific requirements in this proposal. These cost savings would include savings on filing fees from the proposed elimination or reduction in the scope of certain filing requirements.
FINRA reviewed the communications filing history and related comments on the material filed in 2014. Based on this review, FINRA preliminarily estimates that, as a result of the proposed amendments, there would be a reduction in filings of new member communications of approximately 300 filings per year, a decrease in the filings of investment company shareholder reports of 5,000 filings per year, and a potential decline in the filings of generic investment company communications of approximately 3,000 filings per year. FINRA further estimates that the anticipated decline in filings related to investment analysis tools and filings of templates would be approximately 500 and 13,000 filings per year, respectively. Overall, FINRA estimates that as a result of the proposed amendments, the total communications material filed would decline by 21,800 filings per year. Accordingly, based on an average filing fee of $185 in 2014, FINRA estimates that the proposed amendments would reduce the filing fees for firms by approximately $4 million per year.
In addition to this reduction in filing fees, firms would likely also benefit from a decrease in other direct costs associated with filings, such as staff, systems and infrastructure costs, or third-party consulting fees associated with the requirements applicable to this proposal.
The proposed amendments may also enable firms to communicate additional valuable information to investors (e.g., educational information about mutual funds in general or bond mutual fund volatility ratings), reduce disruption in the firms' marketing activities associated with filings of low-risk communications, and reduce barriers to entry for new firms by streamlining the filing requirement associated with new firm communications.
The ability to provide additional educational material that permits investors to better understand the relative risks, costs, strategies and historical performance of mutual funds may generate a benefit to the public.
Firms that are subject to the filing, content and disclosure requirements in this proposal would likely incur costs associated with updating their policies and procedures. These costs would include training their advertising review and other staff. Firms may also need to update their systems to reflect changes in the filing requirements. FINRA, however, anticipates that these costs would likely be minimal relative to the cost savings from the proposed amendments.
FINRA would also incur costs associated with updating its internal systems as well as training the relevant staff on the amendments in the proposal.
Other Economic Impacts
The proposed exclusions and streamlining of filing requirements would not diminish investor protection because the applicable communications are either already subject to other regulatory reviews or pose little risk to investors, or FINRA believes that investors can still be protected through a post-use rather than a pre-use filing requirement. For example, investment company shareholder reports are already filed with the SEC and subject to regulatory review, and generic investment company retail communications or non-predictive narrative descriptions about market events in report templates are low-risk communications. Accordingly, excluding such communications from the filing requirements would not compromise investor protection.
FINRA notes that some firms choose to file some mutual fund communications on a voluntary basis. Firms that choose to do so base their decision on business needs and not FINRA requirements. This proposal would not limit the ability of firms to continue to make voluntary filings if they should deem them to be valuable.
Request for Comment
FINRA requests comment on all aspects of the proposed amendments to the rules governing communications with the public, including the appropriate scope of these amendments and potential impacts on member firms, associated persons and the public. FINRA requests that commenters provide empirical data or other factual support for their comments whenever possible. FINRA specifically requests comments concerning the following issues:
1. FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Person should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (Online Availability of Comments) for more information.
2. See SEA Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.
3. See Retrospective Rule Report, Communications with the Public, December 2014.
4. Stakeholders commenting on the retrospective rule review also recommended that FINRA revise Rule 2210's content standards to address other issues, such as the amount of disclosure required in communications with the public, the standards applicable to the presentation of performance, and the standards governing online, mobile and social media communications. FINRA is considering whether to propose additional changes to Rule 2210 in response to these comments.
5. See Section 30 of the Investment Company Act of 1940 and Rules, 30b1-1 and 30b2-1 thereunder.
Below is the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.
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2000. DUTIES AND CONFLICTS
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2200. COMMUNICATIONS AND DISCLOSURES
2210. Communications with the Public
At least 10 business days prior to first use or publication (or such shorter period as the Department may allow), a member must file the following retail communications with the Department and withhold them from publication or circulation until any changes specified by the Department have been made:
Within 10 business days of first use or publication, a member must file the following communications with the Department:
If a member has filed a draft version or "story board" of a television or video retail communication pursuant to a filing requirement, then the member also must file the final filmed version within 10 business days of first use or broadcast.
A member must provide with each filing the actual or anticipated date of first use, the name, title and Central Registration Depository (CRD®) number of the registered principal who approved the retail communication, and the date that the approval was given.
In addition to the foregoing requirements, each member's written (including electronic) communications may be subject to a spot-check procedure. Upon written request from the Department, each member must submit the material requested in a spot-check procedure within the time frame specified by the Department.
The following communications are excluded from the filing requirements of paragraphs (c)(1) through (c)(4):
Although the communications described in paragraphs (c)(7)(H) through (K) are excluded from the foregoing filing requirements, investment company communications described in those paragraphs shall be deemed filed with FINRA for purposes of Section 24(b) of the Investment Company Act and Rule 24b-3 thereunder.
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2213. Requirements for the Use of Bond Mutual Fund Volatility Ratings
For purposes of this Rule and any interpretation thereof, the term "bond mutual fund volatility rating" is a description issued by an independent third party relating to the sensitivity of the net asset value of a portfolio of an open-end management investment company that invests in debt securities to changes in market conditions and the general economy, and is based on an evaluation of objective factors, including the credit quality of the fund's individual portfolio holdings, the market price volatility of the portfolio, the fund's performance, and specific risks, such as interest rate risk, prepayment risk, and currency risk.
Members and persons associated with a member may distribute a retail communication that includes [use]a bond mutual fund volatility rating [only in a communication that is accompanied or preceded by a prospectus for the bond mutual fund ("supplemental sales literature") and]only when the following requirements are satisfied:
2214. Requirements for the Use of Investment Analysis Tools
This Rule provides a limited exception to Rule 2210(d)(1)(F). No member may imply that FINRA endorses or approves the use of any investment analysis tool or any recommendation based on such a tool. A member that offers or intends to offer an investment analysis tool under this Rule (whether customers use the member's tool independently or with assistance from the member) must, within 10 business days of first use[, (1)] provide FINRA's Advertising Regulation Department ("Department") access to the investment analysis tool [and, (2) pursuant to Rule 2210(c)(3)(D), file with the Department any template for written reports produced by, or retail communications concerning, the tool].
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