[Federal Register Volume 77, Number 65 (Wednesday, April 4, 2012)]
[Notices]
[Pages 20452-20471]
[FR Doc No: 2012-8043]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66681; File No. SR-FINRA-2011-035]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 3 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendments Nos. 1, 2 and 3, To Adopt FINRA Rules 2210 (Communications
With the Public), 2212 (Use of Investment Companies Rankings in Retail
Communications), 2213 (Requirements for the Use of Bond Mutual Fund
Volatility Ratings), 2214 (Requirements for the Use of Investment
Analysis Tools), 2215 (Communications With the Public Regarding
Security Futures), and 2216 (Communications With the Public About
Collateralized Mortgage Obligations (CMOs)) in the Consolidated FINRA
Rulebook

 March 29, 2012.

I. Introduction

    On July 14, 2011, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt NASD Rules 2210 and 2211
and NASD Interpretive Materials 2210-1 and 2210-3 through 2210-8 as
FINRA Rules 2210 and 2212 through 2216, and to delete paragraphs
(a)(1), (i), (j) and (l) of Incorporated NYSE Rule 472, Incorporated
NYSE Rule Supplementary Material 472.10(1), (3), (4) and (5) and
472.90, and Incorporated NYSE Rule Interpretations 472/01 and 472/03
through 472/11. The proposed rule change was published for comment in
the Federal Register on August 3, 2011.\3\ The Commission received nine
comment letters in response to the Original Proposal.\4\ On October 31,
2011, FINRA filed Amendment No. 1 to the proposed rule change and a
letter responding to comments.\5\ In order to solicit additional input
from interested parties on the issues presented in FINRA's proposed
rule change, on November 1, 2011, the Commission published notice of
Amendment No. 1 and instituted proceedings pursuant to Section
19(b)(2)(B) of the Act, to determine whether to approve or disapprove
FINRA's proposal as modified by Amendment No. 1.\6\ The Commission
received seven comment letters in response to the Notice and
Proceedings Order.\7\ On December 22, 2011, FINRA filed Amendment No. 2
to the proposed rule change and a letter responding to comments.\8\ The

Commission published notice of Amendment No. 2 on December 23, 2011,\9\
and the Commission received two comment letters in response to
Amendment No. 2.\10\ On March 6, 2012, FINRA filed Amendment No. 3 to
the proposed rule change and a letter responding to comments.\11\ The
Commission is publishing this Notice and Order to solicit comment on
Amendment No. 3 and to approve the proposed rule changes, as modified
by Amendments Nos. 1, 2, and 3, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 64984 (July 28, 2011), 76 FR
46870 (August 3, 2011) (``Original Proposal''). The comment period
closed on August 24, 2011.
    \4\ See letter from Peter J. Mougey, Public Investors
Arbitration Bar Association, dated August 23, 2011 (``PIABA August
Letter''); letter from Oscar S. Hackett, BrightScope, Inc., dated
August 23, 2011 (``BrightScope August Letter''); letter from Z. Jane
Riley, The Leaders Group, Inc., dated August 24, 2011 (``TLGI August
Letter''); letter from Dorothy M. Donohue, Investment Company
Institute, dated August 24, 2011 (``ICI August Letter''); letter
from Sandra J. Burke, Vanguard, dated August 24, 2011 (``Vanguard
August Letter''); letter from Alexander C. Gavis, Fidelity
Investments, dated August 24, 2011 (``Fidelity August Letter'');
letter from David T. Bellaire, Esq., Financial Services Institute,
Inc., dated August 24, 2011 (``FSI August Letter''); letter from
John Polanin and Claire Santaniello, Securities Industry and
Financial Markets Association, dated August 24, 2011 (``SIFMA August
Letter''); and letter from Yoon-Young Lee, Wilmer Hale LLP, on
behalf of Citigroup Global Markets, Inc., Credit Suisse Securities
(USA) LLC, Goldman, Sachs & Co., JP Morgan Securities Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.,
LLC, and UBS Securities LLC, dated August 26, 2011 (``Wilmer August
Letter''). Comment letters are available at www.sec.gov.
    \5\ See letter from Joseph P. Savage, FINRA, dated October 31,
2011 (``October Response Letter''). The text of proposed Amendment
No. 1 and FINRA's Response Letter are available on FINRA's Web site
at http://www.finra.org, at the principal office of FINRA and at the
Commission's Public Reference Room. FINRA's Response Letter is also
available on the Commission's Web site at http://www.sec.gov.
    \6\ See Exchange Act Release No. 65663 (November 1, 2011), 76 FR
68800 (November 7, 2011) (Notice of Filing of Amendment No. 1 and
Order Instituting Proceedings SR-FINRA-2011-035) (``Notice and
Proceedings Order''). The comment period closed on December 7, 2011.
    \7\ See letter from Melissa Callison, Vice President,
Compliance, Charles Schwab & Co., Inc., dated December 7, 2011
(``Schwab December Letter''); letter from Alexander C. Gavis, Vice
President & Associate General Counsel, Fidelity Investments, dated
December 7, 2011 (``Fidelity December Letter''); letter from David
T. Bellaire, General Counsel and Director of Government Affairs,
Financial Services Institute, dated December 7, 2011 (``FSI December
Letter''); letter from Dorothy M. Donohue, Senior Associate Counsel,
Investment Company Institute, dated December 7, 2011 (``ICI December
Letter''); letter from John Polanin and Claire Santaniello, Co-
Chairs, Compliance and Regulatory Policy Committee of the Securities
Industry and Financial Markets Association, dated December 7, 2011
(``SIFMA December Letter''); letter from Sandra J. Burke, Principal,
Vanguard, dated December 7, 2011 (``Vanguard December Letter''); and
letter from Jeremiah McGair, Attorney, Wolverine Execution Services,
LLC, dated December 7, 2011 (``Wolverine Letter''). Comment letters
are available at www.sec.gov.
    \8\ Joseph P. Savage, FINRA, dated December 22, 2011 (``December
Response Letter''). The text of proposed Amendment No. 2 and FINRA's
Response Letter are available on FINRA's Web site http://www.finra.org, at the principal office of FINRA and at the
Commission's Public Reference Room. FINRA's Response Letter is also
available on the Commission's Web site at http://www.sec.gov.
    \9\ See Exchange Act Release No. 66049 (Dec. 23, 2011), 76 FR
82014 (Dec. 29, 2011) (``Notice of Amendment No. 2''). The comment
period closed on January 18, 2012.
    \10\ See letter from Dorothy M. Donohue, Senior Associate
Counsel, Investment Company Institute, dated January 18, 2012 (``ICI
January Letter'') and letter from Yoon-Young Lee, Wilmer Hale LLP,
on behalf of Citigroup Global Markets, Inc., Credit Suisse
Securities (USA) LLC, Goldman, Sachs & Co., JP Morgan Securities
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co., LLC, and UBS Securities LLC, dated January 19, 2012
(``Wilmer January Letter''). Comment letters are available at
www.sec.gov.
    \11\ See letter from Joseph P. Savage, FINRA, to Elizabeth M.
Murphy, Secretary, SEC, dated March 6, 2012 (``March Response
Letter''). The text of proposed Amendment No. 3 and FINRA's Response
Letter are available on FINRA's Web site at http://www.finra.org,
at the principal office of FINRA and at the Commission's Public
Reference Room. FINRA's Response Letter is also available on the
Commission's Web site at http://www.sec.gov.
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II. Description of Proposal

    As described in the Original Proposal, FINRA is proposing to adopt
NASD Rules 2210 and 2211 and NASD Interpretive Materials 2210-1 and
2210-3 through 2210-8 as FINRA Rules 2210 and 2212 through 2216, and to
delete paragraphs (a)(1), (i), (j) and (l) of Incorporated NYSE Rule
472, Incorporated NYSE Rule Supplementary Material 472.10(1), (3), (4)
and (5) and 472.90, and Incorporated NYSE Rule Interpretations 472/01
and 472/03 through 472/11 as part of the process of developing a new
consolidated rulebook (``Consolidated FINRA Rulebook'').\12\
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    \12\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
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    The proposed rule change would create a new FINRA Rule 2210 that
would encompass, subject to certain changes, the provisions of current
NASD Rules 2210 and 2211, NASD Interpretive Materials 2210-1 and 2210-
4, and the provisions of Incorporated NYSE Rule 472 that do not pertain
to research analysts and research reports. Each of the other
Interpretive Materials that follow NASD Rule 2210 would receive its own
FINRA rule number and would adopt the same communication categories
used in proposed FINRA Rule 2210.\13\
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    \13\ NASD Interpretive Material 2210-2 is the subject of a
separate proposed rule change. See Securities Exchange Act Release
No. 61107 (December 3, 2009), 74 FR 65180 (December 9, 2009) (Notice
of Filing File No. SR-FINRA-2009-070) (proposing to replace NASD
Interpretive Material 2210-2 with proposed FINRA Rule 2211
(Communications with the Public About Variable Insurance Products)).
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    Proposed FINRA Rule 2210 would reduce the number of defined
categories of communication from six (in the current rule) to three and
would set forth requirements governing pre-use principal approval of
communications, recordkeeping, filing with FINRA's Advertising
Regulation Department (the ``Department'') and content standards. The
definitions of the three communication categories (``institutional
communications,'' ``retail communication,'' and ``correspondence'') are
important because the principal approval, filing and content standards
apply differently to each category.
    The remaining proposed rules establish guidelines and restrictions
governing: the use of investment companies rankings in retail
communications (proposed FINRA Rule 2212); the use of bond mutual fund
volatility ratings (proposed FINRA Rule 2213); the use of investment
analysis tools (proposed FINRA Rule 2214); communications with the
public regarding security futures (proposed FINRA Rule 2215); and
communications with the public about collateralized mortgage
obligations (proposed FINRA Rule 2216).
    FINRA has modified its Original Proposal in certain respects
through Amendments Nos. 1 and 2, as described in the Notice and
Proceedings Order \14\ and Notice of Amendment No. 2,\15\ respectively.
FINRA has further modified its proposal through Amendment No. 3, as
described immediately below.
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    \14\ See supra footnote 6.
    \15\ See supra footnote 9.
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III. Self-Regulatory Organization's Statement of the Terms of Substance
of Proposed Amendment No. 3

    FINRA is proposing to amend FINRA Rule 2210 to expand the scope of
retail communications that a Supervisory Analyst may approve pursuant
to NYSE Rule 344. In this regard, FINRA proposes to replace proposed
FINRA Rule 2210(b)(1)(B) with the following:

    (B) The requirements of paragraph (b)(1)(A) may be met by a
Supervisory Analyst approved pursuant to NYSE Rule 344 with respect
to: (i) research reports on debt and equity securities; (ii) retail
communications as described in NASD Rule 2711(a)(9)(A); and (iii)
other research that does not meet the definition of ``research
report'' under NASD Rule 2711(a)(9), provided that the Supervisory
Analyst has technical expertise in the particular product area. A
Supervisory Analyst may not approve a retail communication that
requires a separate registration unless the Supervisory Analyst also
has such other registration.

IV. Discussion of Comment Letters

    On August 3, 2011 the Commission published in the Federal Register,
FINRA's proposed rule change governing communications with the
public.\16\ The comment period ended on August 24, 2011, and the
Commission received the nine comment letters listed above.\17\ Many of
the commenters generally supported the proposal, but eight of the
commenters raised specific concerns discussed in more detail below.
FINRA filed Amendment No. 1 to address commenter concerns and responded
to comments in a letter dated October 31, 2011.\18\
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    \16\ See supra footnote 3.
    \17\ See supra footnote 4.
    \18\ See supra footnote 5.
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    On November 7, 2011 the Commission published in the Federal
Register, the Notice and Proceedings Order. The comment period ended on
December 7, 2011, and the Commission received the seven comment letters
listed above.\19\ Again, many of the commenters generally supported the
proposal, but each of the commenters raised specific concerns discussed
in more detail below. FINRA filed Amendment No. 2 to address commenter
concerns and responded to comments in a letter dated December 22,
2011.\20\
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    \19\ See supra footnote 7.
    \20\ See supra footnote 8.
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    On December 29, 2011, the Commission published in the Federal
Register, Amendment No. 2 to the Original Proposal, as modified by
Amendment No. 1.\21\ The comment period ended on January 17, 2012, and
the Commission received the two comment letters listed above.\22\ The
commenters reiterated previously raised specific concerns discussed in
more detail below. FINRA filed Amendment No. 3 to address commenter
concerns,

and responded to comments in a letter dated March 6, 2012.\23\
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    \21\ See supra footnote 9.
    \22\ See supra footnote 10.
    \23\ See supra footnote 11.
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    The section below includes a detailed description of: the comments
received in response to the Original Proposal, the Notice and
Proceedings Order and the Notice of Amendment No. 2; FINRA's October
Response Letter, December Response Letter and March Response Letter;
Amendments Nos. 1, 2 and 3; and the Commission's findings.

V. Discussion and Commission Findings

A. Categories of Communications

    The proposed rule change defines three categories of
communications: retail communications, correspondence, and
institutional communications. \24\
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    \24\ See proposed FINRA Rule 2210(a).
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1. Retail Communication and Correspondence
    FINRA proposed to define ``retail communication'' as ``any written
(including electronic) communication that is distributed or made
available to more than 25 retail investors within any 30 calendar-day
period'' and ``correspondence'' as ``any written (including electronic)
communication that is distributed or made available to 25 or fewer
retail investors within any 30 calendar-day period.''
    Two commenters raised concerns regarding these definitions.\25\ The
comments focused on the scope of the definitions of retail
communications and correspondence and the numerical limit on recipients
of communications.
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    \25\ See TLGI August Letter and SIFMA August Letter.
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    One commenter argued that the definition of correspondence is too
limited, and that the definition of retail communication is too
broad.\26\ The commenter recommended that FINRA instead consider all
communications to existing retail customers to be correspondence, as
NASD Rule 2211(a)(1) currently does. Another commenter recommended that
the definition of correspondence be qualified to state that the 25-
person limit is determined by the number of persons to whom a member or
associated person directly distributes a communication (and thus does
not include persons to whom such recipients forward the
communication).\27\
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    \26\ See TLGI August Letter.
    \27\ See SIFMA August Letter.
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    FINRA responded to the comments and disagreed that the term
``correspondence'' should include all communications to existing retail
customers.\28\ FINRA indicated that the definition is intended to allow
greater supervisory flexibility for communications sent to a limited
number of recipients. For example, FINRA proposed to make
correspondence subject to the content standards of proposed FINRA Rule
2210, but would not require it to be filed with FINRA and would not
subject it to the principal pre-use approval requirement. Instead,
correspondence would be subject to the supervision, review and
recordkeeping requirements under NASD Rules 3010 and 3110. FINRA also
noted that it included in the proposal other exceptions that allow
firms to supervise certain types of retail communications similarly to
correspondence, such as retail communications posted on an online
interactive electronic forum, and retail communications that do not
make any financial or investment recommendation or otherwise promote a
product or service of the member, irrespective of the number of
recipients.
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    \28\ See October Response Letter.
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    FINRA indicated, however, that retail communications to large
numbers of retail investors (regardless of whether they are existing
customers) that include financial or investment recommendations or
otherwise promote the products or services of the member should receive
the additional scrutiny required through the pre-use principal approval
and filing requirements. Accordingly, FINRA did not expand the
definition of correspondence as the commenter recommended.
    FINRA agreed with commenters that a member generally should not be
responsible for a third party that independently forwards a retail
communication to additional recipients. However, FINRA clarified that
whether a member is responsible for a communication that is forwarded
by a third-party will depend on the facts and circumstances surrounding
a particular communication.
    The Commission believes that FINRA has addressed adequately
comments regarding the definitions of retail communication and
correspondence by, among other things, explaining its rationale for
including communications to large numbers of recipients (including a
firm's existing customers) in the definition of retail communication.
2. Institutional Communication
    Under the proposal, ``institutional communication'' would include
written (including electronic) communications that are distributed or
made available only to institutional investors. ``Institutional
investor'' would include, among other persons and entities, any
employee benefit plan (under Section 403(b) or Section 457 of the
Internal Revenue Code) or qualified plan (under Section 3(a)(12)(C) of
the Exchange Act), or multiple such plans offered to employees of the
same employer, that in the aggregate have at least 100 participants,
but would not include any participant of such plans. The proposed
definition also would include a category for any other person (whether
a natural person, corporation, partnership, trust or otherwise) with
total assets of at least $50 million. The proposal states that no
member may treat a communication as having been distributed to an
institutional investor if the member ``has reason to believe that the
communication or any excerpt thereof will be forwarded or made
available to any retail investor'' (the ``reason to believe''
standard).
    In the Original Proposal, FINRA also included Supplementary
Material 2010.01 to clarify that a member's internal written (including
electronic) communications that are intended to educate or train
registered persons about the products or services offered by a member
are considered institutional communications. Accordingly, those
internal communications would be subject to both the provisions of
proposed FINRA Rule 2210 and NASD Rule 3010(d) (Review of Transactions
and Correspondence).
    Commenters raised a number of concerns regarding the definition of
``institutional communication'' (focusing on the scope of the category
of institutional investor and the reason to believe standard) and the
treatment of internal communications.\29\
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    \29\ See Fidelity August Letter; SIFMA August Letter; FSI August
Letter; Wolverine December Letter; Fidelity December Letter; SIFMA
December Letter; and FSI December Letter.
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a. Scope of the Definition of Institutional Investor: Retirement Plans
    One commenter recommended that the definition of institutional
investor be revised to cover any size retirement plan (including those
with fewer than 100 participants) and that it cover any type of
retirement plan, including those that do not meet the requirements of
Sections 403(b) or 457 of the Internal Revenue Code and are not
qualified plans as defined in the Exchange Act.\30\ The commenter
argued that the 100-participant minimum is arbitrary because there is
no correlation between plan size and investor sophistication, and that
the standard is difficult to

administer in practice because it requires firms to track the number of
participants in clients' retirement plans. The commenter further argued
that the retirement plans' coverage under the Employee Retirement
Income Security Act of 1974 (``ERISA'') provides sufficient protection
to small retirement plans without having to treat them as retail
investors for purposes of FINRA communications rules. In a second
letter, the commenter again recommended FINRA eliminate the requirement
that such plans have at least 100 participants.\31\ The commenter
further argued that because all retirement plan sponsors have fiduciary
responsibilities under ERISA, they are required to have an in-depth
understanding of investment concepts and of the products chosen as
retirement plan options or they are required to use the assistance of
others who have such knowledge. Accordingly, the commenter argued that
small retirement plans do not require the same investor protections as
retail investors.
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    \30\ See Fidelity August Letter.
    \31\ See Fidelity December Letter.
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    FINRA responded to the comments and declined to broaden the
universe of retirement plans that are included or to eliminate the 100-
participant threshold for employee benefit plans to be considered
institutional investors. FINRA maintained that while some plans with
100 or more participants may have no more investment sophistication
than smaller plans, that does not mean that all plans should be treated
as institutional investors. FINRA believes that smaller plans require
greater protection under the rules governing member communications than
do larger plans because plans with at least 100 participants are more
likely to have either the sophistication required to scrutinize member
sales material without the benefit of the filing and more prescriptive
content standards applicable to retail communications, or have the
resources necessary to hire an outside party with this
sophistication.\32\
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    \32\ See October Response Letter.
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    FINRA also indicated that commenters did not identify any provision
in ERISA or any Department of Labor rule under that Act that is
intended to provide the same protections to investors with regard to
communications with the public as those provided to retail investors
under Rule 2210. FINRA further indicated that commenters also did not
identify other plans that do not meet the requirements of Sections
403(b) or 457 of the Internal Revenue Code and are not qualified plans
as defined in the Exchange Act that should be included as institutional
investors.\33\
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    \33\ See October Response Letter.
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    FINRA noted that when it first adopted the institutional investor
definition in 2003, it had determined that retirement plans with fewer
than 100 participants should receive the same investor protections as
other retail investors. FINRA indicated that the Investment Company
Institute had, at that time, recommended this 100-participant threshold
as an appropriate cut-off point for retirement plans, citing the fact
that ERISA distinguishes qualified plans with at least 100 participants
from smaller plans.\34\ At that time, FINRA agreed that this standard
was a reasonable way to distinguish between large and small retirement
plans.\35\ FINRA does not believe commenters have provided any
compelling reason to revise this standard.\36\
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    \34\ See December Response Letter (citing to letter from Craig
S. Tyle, General Counsel, Investment Company Institute, to Joan
Conley, NASD Regulation, Inc., dated October 29, 1999, citing ERISA
103(a)(3)(A) (auditing requirements) and 104(a)(2)(A) (annual
reporting), 29 U.S.C. 1023(a)(3)(A), 1024(a)(2)(A)).
    \35\ See December Response Letter (citing to Securities Exchange
Act Release No. 45181, 66 FR 67586 (December 31, 2001) (Notice of
Filing of Proposed Rule Change and Amendments No. 1 and 2 Thereto by
the National Association of Securities Dealers, Inc. Concerning
Amendments to Rules Governing Member Communications with the
Public)).
    \36\ See December Response Letter.
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    The Commission recognizes that the number of participants may not
in all cases be a perfect proxy for investment sophistication, but
believes that FINRA, in its statements summarized above, has responded
adequately to comments regarding the definition of institutional
investor with respect to retirement plans and that FINRA has provided
adequate justifications for the adoption and continuing use of the 100-
participant threshold.
b. Scope of the Definition of Institutional Investor: Minimum Asset
Threshold and Inconsistency With Other Regulatory Thresholds
    As noted above, the proposed definition of ``institutional
investor'' would include a category for any other person (whether a
natural person, corporation, partnership, trust or otherwise) with
total assets of at least $50 million. Several commenters argued that
the $50 million asset threshold is too high.\37\ Two commenters
recommended that the $50 million asset threshold be decreased to $5
million in order to make the definition of institutional investor more
consistent with the Commission's Regulation D \38\ which includes a $5
million asset threshold within the definition of ``accredited
investor.'' \39\ Alternatively, one of the commenters recommended that
FINRA adopt the ``qualified investor'' definition under the Exchange
Act,\40\ or the ``qualified purchaser'' definition under the Investment
Company Act of 1940,\41\ as a test of investor sophistication in lieu
of its proposed definition.\42\ These commenters argued that adopting
one of these alternative tests would create greater harmony among
various securities laws and regulations.
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    \37\ See Fidelity August Letter; SIFMA August Letter; Fidelity
December Letter; Wolverine December Letter; and SIFMA December
Letter.
    \38\ See Fidelity August Letter; Fidelity December Letter;
Wolverine December Letter.
    \39\ See 17 CFR 230.501(a).
    \40\ See 15 U.S.C. 78c(a)(54).
    \41\ See 15 U.S.C. 80a-2(a)(51).
    \42\ See Wolverine December Letter.
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    Another commenter similarly recommended that the definition be
expanded to include unregistered hedge funds, money managers and family
offices, regardless of the assets under management.\43\ Alternatively,
the commenter recommended that the asset threshold be reduced to $10
million. In a second letter, this commenter noted that while it prefers
the expanded definition of institutional investor under proposed FINRA
Rule 2210(a)(4) to the definition of ``institutional account'' under
FINRA Rule 4512(c), it ``strongly urges FINRA to adopt one standard or
the other.'' \44\ The commenter indicated that firms should not be
required to build systems to comply with inconsistent definitions of
``institutional investor'' and ``institutional account,'' and thus
FINRA should have a uniform standard within the Consolidated Rulebook.
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    \43\ See SIFMA August Letter.
    \44\ See SIFMA December Letter.
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    FINRA declined to lower the minimum asset threshold from $50
million to $5 million or $25 million for investors that are not
included in another institutional investor category because it believes
that the definition of institutional investor with its $50 million
threshold has long served as a reasonable way to distinguish retail and
institutional customers.\45\ FINRA pointed to the practical effect of
designating a communication as retail rather than institutional:
certain additional principal approval, filing and content standards
apply. FINRA believes that these additional requirements help ensure
that investor

communications are fair, balanced and accurate.\46\
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    \45\ See December Response Letter.
    \46\ See December Response Letter.
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    FINRA noted that in its experience regulating member sales
material, even where investors may meet an ``accredited investor'' or
other standard under the federal securities laws, it is not assured
that sales material used with such investors will not be misleading or
fraudulent, nor are such investors immune from being deceived by such
material.\47\ FINRA indicates that, in FINRA's view, this is
particularly true for individual investors that may have enough wealth
to qualify for investing in privately placed securities, but lack the
knowledge and understanding necessary to prevent investor harm from
occurring.
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    \47\ See December Response Letter (citing examples of
problematic practices. For example, FINRA notes that in one case, a
member distributed sales literature regarding specific hedge funds
to its customers that had inadequate risk disclosures about the
specific risks of investing in these hedge funds and made unbalanced
presentations that failed to provide investors with a sound basis
for evaluating the facts associated with investments in these funds.
FINRA states that these materials included projections of
performance that were unwarranted. Id. at footnote 22 and
accompanying text (citing to Altegris Investments Inc., AWC No.
CAF030015 (April 15, 2003)).
    FINRA cites another case, in which a member distributed sales
literature regarding privately placed registered investment
companies that contained inadequate risk disclosures, and that
stated that the fund was seeking a targeted rate of return without
providing a substantiated basis for the target. Id. at footnote 23
and accompanying text (citing to UBS Financial Services Inc., AWC
No. CAF040051 (June 16, 2004)). In another case regarding the
advertising of hedge funds, FINRA states that sales presentations
and prospecting letters did not provide a sound basis for investors
to evaluate the reasonableness of the targeted investment returns.
For example, FINRA explains that some of the sales material included
hypothetical results that were combined with the hedge fund's actual
performance, giving the misimpression that the fund had actually
achieved the combined performance record. Id. at footnote 24 and
accompanying text (citing to Citigroup Global Markets, Inc., AWC No.
CAF040077 (Oct. 4, 2004)).
    FINRA also provides an example of a recently litigated case, in
which a member distributed emails to investors that qualified as
accredited investors that contained predictions or projections of
performance, including claims of returns of up to 100 percent
annually and ``comfortable'' returns of 25-50 percent. FINRA notes
that aside from violating FINRA rules prohibiting such projections
of performance, these claims also lacked any historical support, and
the emails lacked risk disclosures. Id. at footnote 25 and
accompanying text (citing to Dep't of Enforcement v. Hedge Fund
Capital Partners LLC, Complaint No.<PHONE_NUMBER>402 FINRA Discip.
LEXIS 20 (Jan. 26, 2011), appeal docketed, Feb. 7, 2011).
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    FINRA stated that there would be no more reason to lower the
threshold than to raise it to a higher one, such as the threshold for a
``qualified institutional buyer'' (certain institutions holding $100
million in securities) under Rule 144A of the Securities Act of
1933.\48\ Similarly, in response to the comments suggesting the
Regulation D standard as an alternative, FINRA pointed to various
observations about the accredited investor standard under Regulation D:
some have asserted that the net worth, income or asset size may not be
an indication of an investor's ability to bear the risk of loss \49\
and that the definition may be both under-inclusive (by excluding
financially sophisticated investors who do not meet the definition's
wealth tests) and over-inclusive (by including wealthy financial
novices).\50\ FINRA concludes that the same criticisms can be made for
any test of investor sophistication that is based upon measures of
wealth, such as ``qualified investor'' or ``qualified purchaser.''
---------------------------------------------------------------------------

    \48\ See 17 CFR 230.144A(a)(1).
    \49\ See December Response Letter at footnote 20 and
accompanying text (citing to, e.g., Manning Gilbert Warren III, A
Review of Regulation D: The Present Exemption Regimen for Limited
Offerings Under the Securities Act of 1933, 33 a.m. U.L. Rev. 355,
382 (1984)).
    \50\ Id. at footnote 21 and accompanying text (citing, e.g.,
Stephen Choi, Regulating Investors Not Issuers: A Market-Based
Proposal, 88 Cal. L. Rev. 279, 310 (2000)).
---------------------------------------------------------------------------

    Moreover, FINRA indicates that it is seeking to harmonize, where
appropriate, the definitions related to institutional investors under
its rules; creating a different asset threshold for the definition of
institutional investor under Rule 2210 would run counter to this
goal.\51\ Yet, FINRA acknowledged that the definition of institutional
investor differs from the definition of ``institutional account'' under
FINRA Rule 4512(c), as well as from the definitions of other terms such
as ``accredited investor'' or ``qualified purchaser'' under the federal
securities laws.
---------------------------------------------------------------------------

    \51\ See October Response Letter.
---------------------------------------------------------------------------

    FINRA recognized that while it could narrow the definition of
institutional investor under proposed FINRA Rule 2210(a)(4) to match
the definition of ``institutional account'' under FINRA Rule 4512(c),
regardless of which standard FINRA adopts for the proposed rule, the
inconsistency with federal statutes and rules will remain. FINRA
believes that the current broader definition establishes an appropriate
standard for institutional communications and that narrowing the
definition for purposes of consistency with FINRA Rule 4512(c) could
adversely impact members that are relying on the current definition of
institutional investor under NASD Rule 2211(a)(3). Accordingly, FINRA
declined to revise the definition of institutional investor for the
purpose of making it consistent with FINRA Rule 4512.
    FINRA asked the Commission to consider that, unlike the accredited
investor definition, the ``institutional investor'' definition does not
prevent investors from investing in particular funds or products.
Rather, FINRA explains that it simply requires members to exercise a
greater degree of supervision with respect to sales material if it
intends to distribute the material to individuals and certain entities
that have less than $50 million in assets.
    FINRA noted that Section 415 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the ``Dodd-Frank Act'') instructed the
Government Accountability Office (``GAO'') to conduct a study on the
appropriate criteria for determining the financial thresholds or other
criteria needed to qualify for accredited investor status to invest in
private funds--and to report back to Congress within three years after
the date of enactment of the Dodd-Frank Act. In light of the GAO study,
FINRA stated that in its view it would make little sense to adopt a
standard that Congress has questioned and that potentially could become
obsolete in a few years.\52\
---------------------------------------------------------------------------

    \52\ See December Response Letter.
---------------------------------------------------------------------------

    FINRA noted that regardless of which definition FINRA chooses to
adopt for the communication with the public rules, inconsistencies will
remain, because FINRA cannot alter definitions contained in either
federal statutes or Commission rules.\53\
---------------------------------------------------------------------------

    \53\ See December Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA responded adequately to
commenter concerns by providing, among other things, a detailed
explanation of its reasoning for maintaining a $50 million minimum
asset threshold, as described above. The Commission recognizes that the
institutional investor standard in the proposed rule is not intended to
stand as a bar to investment activity; it determines what types of
supervisory, filing and content requirements will apply to
communications.
c. The Reason To Believe Standard
    A commenter stated that FINRA needs to interpret ``the reason to
believe'' standard because it is subject to a variety of
interpretations.\54\ Another commenter recommended that FINRA replace
this standard with a requirement that a member establish policies and
procedures (such as the use of legends that prohibit the forwarding of
material to retail investors) that are reasonably designed to limit the
distribution of

communications to institutional investors.\55\
---------------------------------------------------------------------------

    \54\ See FSI August Letter.
    \55\ See SIFMA August Letter.
---------------------------------------------------------------------------

    In response, FINRA indicated that a firm's policies and procedures
are among the factors FINRA will consider in determining whether a firm
has reason to believe an institutional communication will be forwarded
to retail investors. However, FINRA disagreed that the mere existence
of policies and procedures designed to prevent the forwarding of
communications to retail investors (such as legends placed on
communications) is sufficient to meet the reason to believe standard.
For example, FINRA indicated that it would not consider a firm to have
met the standard if it merely placed a legend on a communication
warning the recipient not to forward it to retail investors, but a
registered representative then orally told the recipient to distribute
the communication as he pleased. In addition, FINRA indicated that a
firm should not be able to treat a communication as an institutional
communication in circumstances where, notwithstanding policies and
procedures, the firm becomes aware that previous similar communications
have been routinely redistributed to retail investors.\56\
---------------------------------------------------------------------------

    \56\ See October Response Letter.
---------------------------------------------------------------------------

    Following publication of the Notice and Proceedings Order, one
commenter reiterated its concern that the ``reason to believe''
standard creates substantial ambiguity, and urged FINRA to provide more
guidance regarding member obligations under this standard.\57\ In
particular, the commenter inquired whether FINRA expects members to be
proactive in obtaining information regarding the ultimate use of
communications designed for institutional investors or whether members
may satisfy their obligations by relying on assurances provided by
financial advisors that such communications have not been forwarded to
retail investors.
---------------------------------------------------------------------------

    \57\ See FSI December Letter.
---------------------------------------------------------------------------

    In response to the additional request for guidance, FINRA
reiterated that it does not intend to impose an affirmative obligation
on members to inquire whether an institutional communication will be
forwarded to retail investors every time such a communication is
distributed. Rather, FINRA stated that members should have policies and
procedures in place reasonably designed to ensure that institutional
communications are not forwarded to retail investors, and make
appropriate efforts to implement such policies and procedures.\58\
---------------------------------------------------------------------------

    \58\ See December Response Letter.
---------------------------------------------------------------------------

    FINRA further clarified that while the use of legends on
institutional communications that are intended to limit a
communication's distribution can be part of such policies and
procedures, the use of legends by themselves is not sufficient. For
example, as one commenter suggested,\59\ FINRA noted that firms may
wish to get periodic assurances from institutional investors that they
will not forward institutional communications to retail investors.
FINRA also clarified that to the extent a member or associated person
becomes aware that an institutional investor is forwarding or making
available institutional communications to retail investors, it must
treat future communications sent to such institutional investors as
retail communications, until it reasonably concludes that the improper
practice has ceased.\60\
---------------------------------------------------------------------------

    \59\ See FSI December Letter.
    \60\ See December Response Letter.
---------------------------------------------------------------------------

    Following the publication of Amendment No. 2, an additional
commenter expressed concern about the ``reason to believe standard.''
\61\ The commenter argued that many funds are sold through intermediary
broker-dealer firms, and an intermediary firm may use institutional
communications prepared by a fund's underwriter with its associated
persons. The commenter believed that, in these circumstances, it would
be the recipient broker-dealer that would be responsible for assuring
that its associated persons' limit use of the communication to
institutional investors.
---------------------------------------------------------------------------

    \61\ See ICI January Letter.
---------------------------------------------------------------------------

    FINRA agreed with the commenter that the ``reason to believe''
standard does not make the fund underwriter responsible for supervising
the associated persons of recipient broker-dealers (unless the person
is also associated with the underwriter). Accordingly, FINRA noted that
the recipient broker-dealer is responsible for assuring that its
associated persons do not forward institutional communications to
retail investors. FINRA reiterated that the fund underwriter should
take appropriate steps to ensure that institutional communications are
appropriately labeled so that there is no confusion as to their status.
FINRA also noted that, if red flags indicate that a recipient broker-
dealer has used or intends to use an institutional communication
provided by the underwriter with retail investors, the underwriter must
follow up on those red flags and, if it determines that this is the
case, discontinue distribution of the communication to that recipient
broker-dealer until the underwriter reasonably concludes that the
broker-dealer has adopted appropriate measures to prevent future
redistribution. FINRA stated that it intended to further clarify the
issue in a Regulatory Notice announcing adoption of the rule.\62\
---------------------------------------------------------------------------

    \62\ See March Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
commenter concerns regarding the ``reason to believe'' standard by
providing the guidance and clarifications described above.
d. Internal Communications
    Numerous commenters opposed including internal written (including
electronic) communications that are intended to educate or train
registered persons about the products or services offered by a member
as types of internal communications within the definition of
``institutional communication,'' arguing that it would impose new
compliance and supervisory requirements on internal communications that
do not exist under current FINRA rules.\63\ Following publication of
the Notice and Proceedings Order, the commenters reiterated opposition
to proposed Supplementary Material 2010.01.\64\
---------------------------------------------------------------------------

    \63\ See Fidelity; ICI August Letter; SIFMA August Letter; and
Vanguard August Letter.
    \64\ See Fidelity December Letter; ICI December Letter; SIFMA
December Letter; Vanguard December Letter; and Schwab December
Letter.
---------------------------------------------------------------------------

    One commenter stated that internal education and training materials
are not sales material created for public distribution, and as such,
not all of Rule 2210's policy concerns apply to such materials.\65\ The
commenter acknowledged that internal materials should be fair, balanced
and accurate to support appropriate sales practices by registered
representatives, but stated that this goal could be achieved by having
such communications subject only to NASD Rule 3010. In particular, the
commenter noted that Rule 3010 ``provides a sufficient regulatory basis
for requiring member firms to develop policies, procedures and
supervisory controls to support the development of training materials
that are accurate and balanced in describing a firm's products and
services.''
---------------------------------------------------------------------------

    \65\ See Schwab December Letter.
---------------------------------------------------------------------------

    Three commenters argued that a reasonable reading of the definition
of institutional investor under NASD Rule 2211 might lead to the
conclusion that it is intended to include external

parties, including third-party broker-dealers and their associated
persons, but not the FINRA member firm or its associated persons
creating an internal communication.\66\ The commenters argued that the
term ``institutional sales material'' under NASD Rule 2211 could be
read to exclude internal communications. The commenters also argued
that the additional costs that would be imposed on firms by including
internal communications within the term ``institutional communication''
would far exceed any incremental benefits to investors, given the
protection investors already receive under NASD Rule 3010.\67\ One
commenter indicated that, should this requirement be retained, it
should also cover internal communications to associated persons who are
not registered persons.\68\
---------------------------------------------------------------------------

    \66\ See Fidelity December Letter; ICI December Letter; and
SIFMA December Letter.
    \67\ Id. See also Vanguard December Letter.
    \68\ See Fidelity August Letter.
---------------------------------------------------------------------------

    FINRA disagreed with the commenters who suggested that internal
communications are not included within the term ``institutional sales
material,'' indicating that the current definition of ``institutional
sales material'' under NASD Rule 2211 includes any communication that
is distributed or made available only to any NASD member or registered
associated person of such a member.\69\ FINRA noted that the plain
language of the definition of the term ``institutional investor''
includes any broker-dealer and its associated persons and contains no
express exception for a firm's internal communications to its
associated persons. FINRA stated that it believes that treatment of
internal educational or training material that relate to a member's
products or services as institutional communications is consistent with
current FINRA rules and FINRA's current and past interpretations of
those rules. FINRA indicated that it has previously issued public
guidance making clear that the content standards of the rules governing
member communications with the public apply to a member's internal
communications.\70\ FINRA also indicated that it settled a number of
enforcement actions against members involving misleading internal
educational and training materials that alleged violations of NASD
Rules 2210 and 2211.\71\
---------------------------------------------------------------------------

    \69\ See December Response Letter (citing, NASD Rule 2211(a)(2)
and (a)(3)(E)).
    \70\ See December Response Letter (citing, e.g., NASD Regulatory
& Compliance Alert, ``Ask the Analyst'' (September 1998), available
at www.finra.org).
    \71\ See December Response Letter (citing, e.g., NASD Letter of
Acceptance, Waiver and Consent No. EAF0401000001 (MML Distributors,
LLC) (Oct. 2005); NASD Letter of Acceptance, Waiver and Consent No.
EAF0401240001 (AFSG Securities Corp.) (Oct. 2005); FINRA Letter of
Acceptance, Waiver and Consent No.<PHONE_NUMBER>1 (US Bancorp
Investments, Inc.) (Feb. 12, 2010); and FINRA Letter of Acceptance,
Waiver and Consent No.<PHONE_NUMBER>301 (UBS Financial Services, Inc.)
(April 8, 2011)).
---------------------------------------------------------------------------

    FINRA further noted that a similar comment was raised in response
to FINRA's proposed amendments to its communications with the public
rules in 2000. FINRA stated, in response to a commenter that asserted
that a member firm's internal communications are not communications
with the public, that while Rule 2210 excepts internal-use only
communications from the filing requirements, FINRA had long taken the
position that broker-dealer-only materials must meet the rule's content
and record-keeping requirements.\72\ FINRA further pointed out that, at
that time, the Commission acknowledged the comment and FINRA's response
in approving the proposed rule change.\73\
---------------------------------------------------------------------------

    \72\ See December Response Letter (citing letter from Barbara Z.
Sweeney, NASD, to Katherine A. England, Assistant Director, SEC,
dated November 4, 2002 (re: File No. SR-NASD-00-12)).
    \73\ See December Response Letter (citing Securities Exchange
Act Release No. 47820 (May 9, 2003), 68 FR 27116 (May 19, 2003)
(Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendments No. 3 and 4 to the
Proposed Rule Change by the National Association of Securities
Dealers, Inc. Concerning Amendments to Rules Governing Member
Communications With the Public (File No. SR-NASD-00-12))).
---------------------------------------------------------------------------

    To address commenters concerns, FINRA revised the proposed rule
change in Amendment No. 2 so that going forward, internal
communications would no longer be governed by proposed FINRA Rule 2210,
and instead would be governed by NASD Rule 3010 (and any successor
FINRA Rule), as well as other applicable rules. FINRA indicated that it
believes these other existing rule requirements effectively lead to the
same review and content standards as is set forth in proposed
Supplementary Material 2210.01. Therefore, FINRA determined not to
include internal educational and training materials within the term
``institutional communication'' for purposes of FINRA Rule 2210, and
proposed, in Amendment No. 2, to delete Supplementary Material
2210.01.\74\ FINRA also amended the definition of ``institutional
communication'' (proposed FINRA Rule 2210(a)(3)) to specifically
exclude a member's internal communications.
---------------------------------------------------------------------------

    \74\ See December Response Letter.
---------------------------------------------------------------------------

    FINRA reiterated that, as the commenters noted, NASD Rule 3010
requires firms to supervise internal communications, including internal
communications that train or educate registered representatives. Under
NASD Rule 3010, firms must establish, maintain and enforce written
procedures to supervise the types of business in which they engage and
to supervise associated persons' activities that are reasonably
designed to achieve compliance with applicable securities laws and
regulations and with applicable FINRA Rules, including the suitability
rule \75\ and just and equitable principles of trade.\76\ FINRA said
that it believes, with respect to internal communications for training
and education that a firm's supervisory scheme would be deficient
unless its policies and procedures are reasonably designed to ensure
that such communications are fair, balanced and accurate.
---------------------------------------------------------------------------

    \75\ See NASD Rule 2310 (Recommendations to Customers
(Suitability)). Effective July 9, 2012, this rule is superceded by
new FINRA Rule 2111. See FINRA Regulatory Notice 11-25, ``New
Implementation Date for and Additional Guidance on the Consolidated
FINRA Rules Governing Know-Your-Customer and Suitability
Obligations,'' May 2011 available at www.finra.org.
    \76\ See FINRA Rule 2010.
---------------------------------------------------------------------------

    FINRA further noted that firms also must determine the extent to
which the review of internal communications is necessary in accordance
with the supervision of their business \77\ and maintain records of all
internal communications relating to their business as a broker-
dealer.\78\
---------------------------------------------------------------------------

    \77\ See December Response Letter (citing Regulatory Notice 07-
59 (FINRA Provides Guidance Regarding the Review and Supervision of
Electronic Communications) (December 2007)). FINRA explained that
Regulatory Notice 07-59 further makes clear that a member must have
reasonably designed procedures for the supervisory review of those
internal communications that are of a subject matter that require
review under FINRA rules and the federal securities laws.
    \78\ See December Response Letter (citing Exchange Act Rule 17a-
4(a)(4); FINRA Rule 4511(a)).
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
comments regarding internal communications, including by amending the
proposal to remove Supplementary Material 2210.01. and revising the
definition of institutional communication to specifically exclude a
member's internal communications. The Commission notes that FINRA
cautioned firms that their supervisory policies and procedures should
be structured to ensure that internal communications are fair, balanced
and accurate.

B. Approval, Review and Recordkeeping

    Proposed FINRA Rule 2210(b)(1)(A) generally requires an
appropriately

qualified registered principal to approve each retail communication
before the earlier of its use or filing with the Department. The rule
also includes a number of exceptions and modifications to this
requirement for certain types of retail communications. For example,
proposed FINRA Rule 2210(b)(1)(D)(iii) would allow a member to
supervise in a manner similar to correspondence any retail
communication that does not make any financial or investment
recommendation or otherwise promote a product or service of the member.
In addition, proposed paragraph (b)(1)(E) authorizes FINRA to grant an
exemption from paragraph (b)(1)(A) for good cause shown, to the extent
the exemption is consistent with the purposes of the Rule, the
protection of investors, and the public interest.
    Commenters raised a number of concerns regarding the approval
process and supervision of retail communications. The comments focused
on who should be a principal qualified to approve certain
communications (the ``qualified principal approval standard'') and
whether communications that do not recommend specific securities should
be excepted from the principal pre-use approval requirements.
1. Approval
a. Qualified Principal Approval Standard
    Paragraph (b)(1)(B) in the Original Proposal would have permitted a
Supervisory Analyst (as defined in NYSE Rule 344) approved pursuant to
NYSE Rule 344 to approve research reports on debt and equity
securities. One commenter recommended that the qualified principal
approval standard be revised to permit Supervisory Analysts to review
and approve any communication produced by a firm's research department,
including communications that are not research reports on debt or
equity securities.\79\ The commenter gave as examples macroeconomic
research or research on commodities.
---------------------------------------------------------------------------

    \79\ See Wilmer August Letter.
---------------------------------------------------------------------------

    The commenter alternatively argued that FINRA should exclude from
the requirement to obtain pre-use principal approval all communications
produced by a firm's research department. Another commenter recommended
that FINRA exclude all research reports from proposed FINRA Rule 2210,
on the ground that NASD Rule 2711 \80\ sufficiently regulates these
communications.\81\
---------------------------------------------------------------------------

    \80\ NASD Rule 2711 (Research Analysts and Research Reports) is
designed to address conflicts of interest that are raised when
research analysts recommend securities in public communications by
implementing structural reforms designed to increase analysts'
independence and further manage conflicts of interest, and require
increased disclosure of conflicts in research reports and public
appearances. Securities Exchange Act Release No. 45908 (May 10,
2002); 67 FR 34968 (May 16, 2002).
    \81\ See SIFMA August Letter.
---------------------------------------------------------------------------

    In a subsequent letter, one of the commenters argued that proposed
paragraph (b)(1)(B) would have a negative effect on the review and
distribution of materials prepared by research department personnel,
since it would not permit Supervisory Analysts to review research notes
and other materials if those materials do not meet the definition of
``research report.'' \82\ Instead, the proposed rule would require a
registered principal to review and approve these materials. The
commenter expressed the view that Supervisory Analysts are more
qualified to review and approve research materials prepared by research
department personnel than associated persons who have only taken a
general securities principal examination.
---------------------------------------------------------------------------

    \82\ See Wilmer January Letter.
---------------------------------------------------------------------------

    The Commenter argued further that requiring registered principals
rather than Supervisory Analysts to review these materials would
disrupt well-established practices and processes that firms have
developed for publishing content produced by research department
personnel that does not fall within the definition of ``research
report.'' Accordingly, the commenter urged that ``a Supervisory Analyst
should be permitted to review materials that are not defined as
``research reports'' because they are excepted from the definition in
NASD Rule 2711(a)(9), regardless of whether these materials contain a
financial or investment recommendation.'' \83\
---------------------------------------------------------------------------

    \83\ See Wilmer January Letter.
---------------------------------------------------------------------------

    In its October Response Letter, FINRA disagreed and declined to
revise the qualified principal approval standard. FINRA noted that
proposed paragraph (b)(1)(D)(i) already would allow members to
supervise certain types of retail communications in the same manner as
correspondence and that these communications include any retail
communication that is excepted from the definition of ``research
report'' pursuant to NASD Rule 2711(a)(9)(A), which includes
``commentaries on economic, political or market conditions.'' FINRA
asserted that to the extent a research department produces
communications concerning other types of investments, such as
commodities, FINRA believed that a principal with appropriate
expertise, rather than a Supervisory Analyst, should review such
communications.
    FINRA also declined to exclude all communications produced by a
firm's research department and/or all research reports. FINRA noted
that the fact that a particular department within a firm produces a
communication generally should not alter the manner in which the
communication is reviewed and supervised. FINRA indicated that while
NASD Rule 2711 does include certain required disclosures for research
reports, it lacks other important content standards, such as the
requirement that a communication be based on principles of fair dealing
and good faith, and be fair and balanced. FINRA further indicated that
proposed FINRA Rule 2210 includes important supervisory and
recordkeeping standards that are not found in NASD Rule 2711. FINRA
also noted that it altered the application of proposed FINRA Rule
2210's content standards to research reports where appropriate.\84\ For
example, it would exclude research reports from the disclosure
requirements set forth in proposed FINRA Rule 2210(d)(7) for retail
communications that include a securities recommendation.\85\ Thus,
FINRA stated its belief that the current rules and proposal
appropriately focus on the nature of the communication, not its
department of origin.
---------------------------------------------------------------------------

    \84\ See October Response Letter.
    \85\ Proposed FINRA Rule 2210(d)(7) requires retail
communications that include a recommendation of securities to have a
reasonable basis for the recommendation and to include disclosures
regarding the member's market-making activities in the security,
financial interests in the recommended securities by the firm or any
associated person that is directly and materially involved in the
preparation of the communication, the member's role as manager or
co-manager of a public offering of the recommended securities during
the past 12 months. The proposed rule also requires members to make
information available regarding the recommendation and generally
prohibits reference to past specific recommendations, unless certain
requirements are met.
---------------------------------------------------------------------------

    In Amendment No. 1, FINRA proposed one modification to proposed
FINRA Rule 2210(b)(1)(D)(i), in order to clarify that a member would be
required to have a principal approve a retail communication that is
excepted from the definition of ``research report'' pursuant to NASD
Rule 2711(a)(9)(A) if the retail communication makes any financial or
investment recommendation. To accommodate commenter concerns, in its
March Response Letter, in addition to permitting Supervisory Analysts
to review and approve research reports on debt or equity securities (as
provided in the Original Proposal), FINRA determined that Supervisory
Analysts

could also review and approve retail communications that are described
in NASD Rule 2711(a)(9)(A) \86\ and other research that does not fall
within the definition of ``research report'' under NASD Rule
2711(a)(9), provided that they have technical expertise in the
particular product area. FINRA noted, however, that this revision is
not intended to alter current requirements that certain types of retail
communications, such as retail communications concerning options,
municipal securities or security futures, be approved by a principal
with a specific qualification. Accordingly, FINRA amended proposed
FINRA Rule 2210(b)(1)(B) as set forth in this Order.
---------------------------------------------------------------------------

    \86\ NASD Rule 2711(a)(9)(A) defines the term ``Research
Report.''
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
comments regarding the principal pre-use approval requirement through
its statements summarized above, and its modification of proposed FINRA
Rule 2210(b)(1)(B) as set forth in this Order.
b. Supervision of Retail Communication Without Financial or Investment
Recommendation
    One commenter argued that the exception from the qualified
principal pre-use approval standard for retail communications that do
not make any financial or investment recommendation or otherwise
promote a product or service of the member needs further
clarification.\87\ In contrast, another commenter recommended that the
exception include only retail communications that are solely
administrative in nature.\88\ Another commenter requested confirmation
that research-authored educational pieces, such as primers on certain
asset classes that do not recommend specific securities, are excepted
from the principal pre-use approval requirements under this
provision.\89\
---------------------------------------------------------------------------

    \87\ See TLGI August Letter.
    \88\ See PIABA August Letter.
    \89\ See Wilmer August Letter.
---------------------------------------------------------------------------

    FINRA declined to revise the standard, suggesting that it viewed
the proposed standard as a clearer alternative to the standard FINRA
had originally proposed to its members in Regulatory Notice 09-55 (for
retail communications that are solely administrative in nature). FINRA
explained that numerous commenters had argued that the standard was
unclear and insufficient, and that in response to those comments, FINRA
had revised the standard to explicitly exclude retail communications
that do not make any financial or investment recommendation or
otherwise promote a product or service of the member.\90\
---------------------------------------------------------------------------

    \90\ See December Response Letter.
---------------------------------------------------------------------------

    FINRA does not agree that so-called ``educational'' pieces are or
should be generally excepted from the principal pre-use approval
requirements under this provision. FINRA indicated that while this
determination will always depend on the facts and circumstances, the
purpose of such pieces may be to draw investor interest to a member's
products and services, and accordingly would be viewed as promotional
in nature.\91\
---------------------------------------------------------------------------

    \91\ See October Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
comments regarding supervision of retail communications without
financial or investment recommendations by, for example, highlighting
the changes it had made in response to comments on a prior version of
the standard as proposed in Regulatory Notice 09-55.
c. Other Comments Relating to Principal Pre-Use Approval
    One commenter noted that many closed-end funds are listed on the
New York Stock Exchange (``NYSE'').\92\ Section 202.06 of the NYSE
Listed Company Manual encourages listed issuers to disseminate
``quickly to the public any news or information which might reasonably
be expected to materially affect the market for its securities.'' The
commenter maintained that, in the case of listed closed-end funds, this
information would include, among other things, dividend announcements,
and typically would be disseminated through press releases. The
commenter asked that FINRA clarify that closed-end funds' press
releases issued pursuant to Section 202.06 of the NYSE Listed Company
Manual are excluded from the pre-use principal approval requirement.
The commenter also requested that FINRA exclude these press releases
from the filing requirement, as discussed below.
---------------------------------------------------------------------------

    \92\ See ICI August Letter and ICI December Letter.
---------------------------------------------------------------------------

    FINRA responded by pointing to proposed FINRA Rule
2210(b)(1)(D)(iii), noting that to the extent a member distributes or
makes available a press release about a closed-end fund that does not
make any financial or investment recommendation or otherwise promote a
product or service of the member, the member would not be required to
have a principal approve it prior to use.\93\ FINRA did not amend the
proposal to specifically exclude these press releases from the pre-use
principal approval requirement.
---------------------------------------------------------------------------

    \93\ See December Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
these comments by identifying the types of press releases issued
pursuant to Section 202.06 of the NYSE Listed Company Manual that would
be excluded from the proposed rule's pre-use principal approval
requirements (i.e., those that do not make any financial or investment
recommendation or otherwise promote a product or service of the
member), and (as discussed below), by amending the proposal to exclude
these press releases from the filing requirement.
2. FINRA's Exemptive Authority
    One commenter recommended that, should FINRA grant exemptive relief
from the principal pre-use approval requirements to a member or a small
number of members pursuant to proposed paragraph (b)(1)(E), FINRA
should announce this relief in a Regulatory Notice and simultaneously
grant this relief to all members.\94\
---------------------------------------------------------------------------

    \94\ See ICI August Letter.
---------------------------------------------------------------------------

    FINRA responded that it generally does not intend to use this
provision to grant relief to firms that have not applied for such
relief. If FINRA determines that similar relief is appropriate for all
members, it generally expects to file a proposed rule change with the
Commission to accomplish such result. However, FINRA indicated that it
will consider the best means to publish any relief granted under this
provision.\95\
---------------------------------------------------------------------------

    \95\ See October Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA, in its statements summarized
above, has responded adequately to this comment. The Commission notes
that FINRA is required, under Exchange Act Section 19(b) and Rule 19b-4
thereunder to file a proposed rule change with the Commission if a
stated policy, practice, or interpretation is not reasonably or fairly
implied by an existing FINRA rule and is not concerned solely with
FINRA's administration (subject to certain exceptions).\96\ In a March
2003 letter to the NASD (as well as all other non-clearing agency self-
regulatory organizations (``SROs'')), the Division of Trading and
Markets (formerly known as the Division of Market Regulation) clarified
the process to be used by SROs when granting exemptions from SRO
rules.\97\ As stated in the letter, the only

circumstance in which exemptive authority of SROs should be exercised
in lieu of employing the notice-and-comment process applicable to
proposed SRO rule changes under Section 19(b) of the Exchange Act is
``where the circumstances are truly unique.'' \98\ The Commission
expects FINRA to maintain records of any exemptions granted.
---------------------------------------------------------------------------

    \96\ See Exchange Act Rule 19b-4.
    \97\ See letter from Annette L. Nazareth, Director, Division of
Market Regulation to T. Grant Callery, Executive Vice President &
General Counsel, National Association of Securities Dealers, re: SRO
Exemption Authority, dated March 27, 2003. A copy of this letter is
available in the Commission's Public Reference Room.
    \98\ Id. The letter states that ``[t]he broad definition of
``proposed rule change'' in Rule 19b-4 means that exemptions of
general applicability that impose substantive binding requirements
should be done through the notice-and-comment rulemaking process.
Similarly relief from the SRO standards or obligations made
generally applicable to members is rulemaking and must be done
through the notice-and-comment rulemaking process.
    Determining when an exemption is of general applicability is in
some cases difficult. It is clear that when an exemption on its face
is a class exemption, or is otherwise generally applicable, the
notice-and-comment process should apply. What is less readily
apparent, however, is when the exemption is not on its face
generally applicable but involves factual circumstances that will be
frequently replicated. In this circumstance, adherence to the
notice-and-comment process will also apply. The fact that the
exemption order may be unpublished or may state that it is limited
to the individual firm or person to whom it is granted, does not
mitigate the need for notice-and-comment procedures if the
circumstances involved are so common that the SRO will in fact be
granting the same exemption to all other persons similarly
situated.''
---------------------------------------------------------------------------

    Commission Chairman Mary Schapiro recently articulated ``that the
uniform dissemination of regulatory positions tends to enhance
compliance, thereby furthering investor protection.'' \99\ The
Commission encourages FINRA to continue to identify means of improving
transparency of regulatory interpretations and positions.
---------------------------------------------------------------------------

    \99\ See letter from Mary L. Schapiro, Chairman, Securities and
Exchange Commission to Ms. Alicia Puente Cackley, Director,
Financial Markets and Community Investment, GAO, dated July 15,
2011, Appendix III, United States Government Accountability Office,
Report to Congressional Committees, ``Mutual Fund Advertising:
Improving How Regulators Communicate New Rule Interpretations to
Industry Would Further Protect Investors,'' July 2011, available at
http://www.gao.gov/assets/330/321961.pdf (``GAO Mutual Fund
Advertising Report''). The Chairman's letter responded to the GAO
Mutual Fund Advertising Report, which recommended that the SEC
should take steps to ensure FINRA develops sufficient mechanisms to
notify all fund companies about changes in rule interpretations for
fund advertising, to help ensure investors are better protected from
misleading advertisements. In a letter from FINRA responding to the
GAO, FINRA described certain steps that it had already taken to
address the issues raised in the report: (1) FINRA's intent to
publish, through a Notice to firms or by other means, any
significant new interpretation of the advertising rules that affect
a broad section of the industry; (2) FINRA's plan to develop one or
more mechanisms to provide a regular summary of advertising issues
and its interpretation, such as through a regular letter to
advertising compliance contacts and regularly scheduled webinars;
and (3) ongoing consideration by FINRA's Advertising Regulation
managers of the means of disseminating important matters. See letter
from Thomas M. Selman, Executive Vice President, Regulatory Policy,
FINRA to Ms. Alicia Puente Cackley, Director, Financial Markets and
Community Investments, GAO, dated July 11, 2011, available at
Appendix II, GAO Mutual Fund Advertising Report.
---------------------------------------------------------------------------

3. Recordkeeping
    One Commenter requested confirmation that the requirement in
proposed paragraph (b)(4)(A)(i) to maintain the date of last use does
not apply to research communications.\100\ FINRA indicated that this
requirement (if applicable) applies to all communications and that
there is no exception for research.\101\
---------------------------------------------------------------------------

    \100\ See Wilmer August Letter.
    \101\ See October Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA has clarified adequately that
there is no exception to the requirement to maintain (if applicable) a
record of the date of last use for any communications under proposed
paragraph (b)(4)(A)(i). For a discussion of comments regarding
recordkeeping requirements for online interactive electronic content,
see Section E. (Other Issues Related to Public Appearances and Online
Interactive Electronic Communications) below.

C. Filing Requirements and Review Procedures

    Proposed FINRA Rule 2210(c)(1) through (c)(3) would require members
to file certain retail communications either at least 10 business days
prior to first use or publication, or within 10 business days of first
use or publication, depending on the communication. Proposed paragraph
(c)(7) includes a number of exclusions from these filing requirements.
    Commenters raised concerns regarding the proposed filing
requirements, focusing on the volume of material that would fall under
the filing requirement and suggesting various possible exclusions to
decrease the filing requirement burden.\102\
---------------------------------------------------------------------------

    \102\ See ICI August Letter; Wilmer August Letter; TLGI August
Letter; SIFMA August Letter; and Fidelity August Letter.
---------------------------------------------------------------------------

1. General
    One commenter expressed concern that the filing requirements of
paragraph (c)(3) would subject almost all member communications to
filing with FINRA.\103\ Another commenter argued that FINRA staff
review of filings on a post-use basis does not enhance investor
protection, since the material has already been distributed.\104\
---------------------------------------------------------------------------

    \103\ See TLGI August Letter.
    \104\ See SIFMA August Letter.
---------------------------------------------------------------------------

    FINRA disagreed with the first concern, indicating that the filing
requirements under this paragraph covers retail communications
concerning registered investment companies, public direct participation
programs, investment analysis tools, collateralized mortgage
obligations, and retail structured products. FINRA stated that the
filing requirements would not cover correspondence or institutional
communications and that they also would not apply to retail
communications concerning many other types of securities that are not
listed in paragraph (c)(3).\105\
---------------------------------------------------------------------------

    \105\ See October Response Letter.
---------------------------------------------------------------------------

    FINRA also disagreed with the argument that post-use review by
FINRA staff fails to protect investors. FINRA indicated that it allows
members to file communications on a post-use basis to prevent filing
requirements from serving as an impediment to distributing sales
material in a timely manner. FINRA suggested that the commenter's
argument, if extended, would require that all retail communications be
filed prior to use.\106\ While FINRA would require pre-use filing for
certain types of retail communications that it believes present
potentially higher risks of being misleading to investors, FINRA
believes that post-use filing is sufficient for many other types of
retail communications. FINRA indicates that the filing requirements
provide a check on firms that may otherwise consider including
misleading statements in sales material, and brings potentially
misleading material to FINRA's attention.\107\
---------------------------------------------------------------------------

    \106\ See SIFMA August Letter.
    \107\ See October Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA responded adequately to these
comments by, among other things, clarifying the scope of the filing
requirement in proposed paragraph (c)(3) and by explaining that post-
use filing permits a firm to distribute sales material in a timely
manner, while bringing potentially misleading material to FINRA's
attention.
2. Communications Concerning Government Securities
    A commenter argued that the proposed filing requirements for retail
communications concerning government securities, as set forth in the
Original Proposal, would greatly expand the filing obligations with
regard to many types of research communications, with little benefit to
investors.\108\ Another commenter argued

that FINRA should maintain the current filing requirements for
government securities on the basis that principal pre-use approval is
sufficient.\109\
---------------------------------------------------------------------------

    \108\ See Wilmer August Letter.
    \109\ See SIFMA August Letter.
---------------------------------------------------------------------------

    In response to comments, FINRA eliminated the proposed filing
requirement for retail communications concerning government
securities.\110\ FINRA indicates that NASD Rule 2210, which requires
members to file advertisements concerning government securities, has
generated relatively few filings over the past few years, and FINRA's
staff has found relatively few problems with the advertisements that
have been filed. Given the potential burden that an expanded filing
requirement for retail communications concerning government securities
may impose on members compared to the relatively lower risk that such
retail communications pose, FINRA believes that it is not necessary to
require members to file these communications. FINRA clarified that it
retains the ability to review such communications through other means,
such as spot checks or targeted examinations, and to take appropriate
actions against members for violations of FINRA rules.\111\
---------------------------------------------------------------------------

    \110\ See Amendment No. 1.
    \111\ See October Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA addressed adequately commenter
concerns by eliminating the proposed filing requirement for
communications concerning government securities contained in the
Original Proposal, on the basis that (i) FINRA can review these
communications through other means; (ii) such communications pose a
lower risk for containing misleading material, and (iii) the filing
requirement may be unduly burdensome.
3. Communications Concerning Structured Products
    A commenter similarly argued that the proposed filing requirements
for retail communications concerning registered structured products
would greatly expand the filing obligations with regard to research
communications, with little benefit to investors.\112\
---------------------------------------------------------------------------

    \112\ See Wilmer August Letter.
---------------------------------------------------------------------------

    FINRA disagreed with the argument that there is no need to file
research concerning retail structured products.\113\ FINRA cited a
recent report summarizing broker-dealer examinations by the staff of
the Commission's Office of Compliance Inspections and Examinations, in
which the Commission staff identified a number of sales-related
problems concerning structured products sold to retail investors.\114\
FINRA concluded that retail communications concerning retail structured
products should be filed for review by FINRA staff to help ensure that
such communications are not misleading.
---------------------------------------------------------------------------

    \113\ See October Response Letter.
    \114\ See October Response Letter (citing to Office of
Compliance Inspections and Examinations, U.S. Securities and
Exchange Commission, ``Staff Summary Report on Issues Identified in
Examinations of Certain Structured Securities Products Sold to
Retail Investors,'' (July 27, 2011), available at http://www.sec.gov/news/studies/2011/ssp-study.pdf. FINRA noted that the
staff found that some free-writing prospectuses concerning principal
protected notes failed to disclose risks that investors could
receive less than the principal investment if these notes were
redeemed prior to maturity and that there were also problems
regarding disclosures of fees for some products.).
---------------------------------------------------------------------------

    The Commission believes that FINRA addressed adequately the comment
regarding registered structured products by, among other things,
explaining that review by FINRA staff may result in discovery of sales-
related disclosure problems, such as failure to disclose fees or
material facts about redemption.
4. Templates
    Proposed paragraph (c)(7)(B) would exclude from the filing
requirements retail communications that are based on templates that
were previously filed with the Department, the changes to which are
limited to updates of more recent statistical or other non-narrative
information. One commenter argued that this exclusion be expanded to
cover updates of narrative information that is sourced from either an
independent data provider or an investment company or its
affiliate.\115\ This commenter later reiterated the request, suggesting
that the narrative information could also be sourced from publicly
available documents filed with the SEC.\116\ Two other commenters
recommended that this filing exclusion be expanded to cover updates of
narrative factual information from an entity that provides general
information about investment companies to the public and is independent
of the investment company and its affiliates.\117\ One of these
commenters later argued that this filing exclusion would reduce member
costs, while still allowing FINRA to review updated templates through
other means, such as spot-checks or examinations.\118\
---------------------------------------------------------------------------

    \115\ See Fidelity August Letter.
    \116\ See Fidelity December Letter.
    \117\ See SIFMA August Letter and ICI August Letter.
    \118\ See ICI December Letter.
---------------------------------------------------------------------------

    FINRA declined the commenters' suggestions, indicating that
adopting such a filing exclusion could potentially encompass almost all
retail communications concerning investment companies, as long as a new
retail communication could be related to a previously filed
communication. FINRA cited concerns about the types of narrative
information that would be updated, such as changes to the description
of a fund's investment objectives, and concluded that in some cases
additional review by Department staff may be warranted for updates of
such narrative information.\119\ FINRA also stated that third-party
data providers often receive their information about a fund from an
affiliate of the fund, and thus, in many cases, this information
ultimately will be generated by either the member firm or one of its
affiliates.\120\ FINRA argued that such information would not be
considered to have come from an independent source and that filing of
updated material is the best way to ensure that members' retail
communications are fair, balanced and accurate.
---------------------------------------------------------------------------

    \119\ See October Response Letter.
    \120\ See December Response Letter.
---------------------------------------------------------------------------

    Following publication of Amendment No. 2, one commenter recommended
that FINRA permit a risk-based principal review process for narrative
updates of templates.\121\ According to the commenter, ``FINRA could
require firms to develop policies and procedures appropriate for their
business structure,'' citing proposed FINRA Rule 2210(b)(1)(D), which
permits members to supervise certain categories of retail
communications in the same manner as required for supervising and
reviewing correspondence.\122\ The commenter argued that this approach
would preserve FINRA's ability to monitor these materials, both through
review via filing and through spot checks and targeted examinations.
---------------------------------------------------------------------------

    \121\ See ICI January Letter.
    \122\ See ICI January Letter.
---------------------------------------------------------------------------

    FINRA reiterated that registered principal approval of narrative
updates to templates prior to use helps to ensure that the narrative is
fair, balanced and not misleading, in the same manner as prior review
by registered principals of other types of mutual fund sales
material.\123\
---------------------------------------------------------------------------

    \123\ FINRA noted that to the extent that such a narrative
constituted a retail communication that would be subject to more
flexible supervision and review standards, then those standards
would apply. See, e.g., proposed FINRA Rule 2210(b)(1)(D) (allowing
certain categories of retail communications to be supervised and
reviewed in the same manner as is required for correspondence).
---------------------------------------------------------------------------

    FINRA also suggested that the commenter's approach would not be
workable as proposed.\124\ FINRA had proposed that an appropriately
qualified

principal approve a communication prior to a member filing the
communication with FINRA.\125\ Accordingly, FINRA believes that review
of narrative updates to templates in a manner similar to correspondence
would not be consistent with this filing requirement.
---------------------------------------------------------------------------

    \124\ See March Response Letter.
    \125\ See proposed FINRA Rule 2210(b)(1)(F).
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
comments regarding templates. For example, FINRA explained, that: (1)
Its review of updated or new narrative information is designed to
achieve fair and balanced communications that are not misleading, (2)
that information provided by third parties may not be truly
independent, and (3) that a risk-based principal review process for
narrative updates of templates would not be consistent with the
requirement to have an appropriately qualified principal approve a
communication prior to a member filing the communication with FINRA.
5. SEC-Filed Documents
    Proposed paragraph (c)(7)(F) would exclude from the filing
requirements prospectuses, preliminary prospectuses, fund profiles,
offering circulars and similar documents that have been filed with the
Commission or any state, or that are exempt from such registration.
Investment company prospectuses published pursuant to Securities Act
Rule 482 and ``free writing prospectuses'' that have been filed with
the Commission pursuant to Securities Act Rule 433(d)(1)(ii)
(prospectuses used by or referred to and distributed by or on behalf of
any offering participant, other than the issuer in a manner reasonably
designed to lead to its broad unrestricted dissemination) (referred to
herein as ``broker-prepared free writing prospectuses'') are not
covered by this exclusion.
    One commenter argued that the exclusion in proposed paragraph
(c)(7)(F) should cover all free writing prospectuses that are widely
distributed, since they are already filed with the Commission.\126\ The
commenter later argued that FINRA should exclude broker-prepared free
writing prospectuses from the filing requirements on the grounds that
the Commission staff already reviews such prospectuses under its filing
program.\127\
---------------------------------------------------------------------------

    \126\ See SIFMA August Letter.
    \127\ See SIFMA December Letter.
---------------------------------------------------------------------------

    FINRA disagreed that the filing exclusion under proposed paragraph
(c)(7)(F) should cover all widely distributed free writing prospectuses
or broker-prepared free writing prospectuses that have been filed with
the Commission and declined to change the proposed provision. FINRA
made clear that the filing requirement only applies to widely
disseminated free writing prospectuses that are prepared by or on
behalf of a broker-dealer, and that it would not apply to free writing
prospectuses that are not widely disseminated, nor would it apply to
widely disseminated free writing prospectuses that are prepared by or
on behalf of an issuer.\128\
---------------------------------------------------------------------------

    \128\ See October Response Letter.
---------------------------------------------------------------------------

    FINRA also cited, as an example of problematic practices, widely
distributed free writing prospectuses for retail structured products
that it has found to have misleading content that merits review by the
Department. FINRA indicated that the additional review of widely
distributed free writing prospectuses would help protect investors from
potentially misleading sales material.\129\ FINRA maintains that while
certain broker-prepared free writing prospectuses must be filed with
the Commission under Securities Act Rule 433, this filing requirement
does not necessarily ensure prompt Commission staff review of all such
prospectuses. Thus, FINRA believes that its review will add a layer of
investor protection that is appropriate under the circumstances.\130\
---------------------------------------------------------------------------

    \129\ See October Response Letter.
    \130\ See December Response Letter.
---------------------------------------------------------------------------

    The commenter also argued that the pre-use filing requirements of
proposed FINRA Rule 2210(c)(2) could delay publication of broker-
prepared free writing prospectuses, which would be contrary to the
Commission's goal of timely release of information.\131\ FINRA
indicated that the concern that proposed FINRA Rule 2210(c)(2)'s pre-
use filing requirements would delay the issuance of free writing
prospectuses is based on a faulty premise. FINRA notes that these pre-
use filing requirements apply to: (A) Retail communications concerning
registered investment companies that include self-created rankings; (B)
retail communications concerning security futures (subject to certain
exceptions); and (C) retail communications concerning bond mutual funds
that include or incorporate bond mutual fund volatility ratings. FINRA
stated its view that--with regard to (A) and (C) above--investment
companies are not permitted to issue free writing prospectuses and--
with regard to (B) above--security futures generally are exempted
securities under the Securities Act.\132\ FINRA maintains that there is
no need for an issuer or broker-dealer to use a free writing prospectus
to advertise security futures. Accordingly, FINRA stated that the pre-
use filing requirements for retail communications concerning investment
companies or security futures would not require a free writing
prospectus to be filed with FINRA.
---------------------------------------------------------------------------

    \131\ FINRA notes that SIFMA cited proposed FINRA Rule
2210(d)(2) in its comment letter; FINRA presumes this citation was a
typographical error, since paragraph (d)(2) does not impose a filing
requirement.
    \132\ See December Response Letter (citing to 15 U.S.C.
77c(a)(14)).
---------------------------------------------------------------------------

    Although the commenter did not specifically cite to the proposed
pre-filing requirement that applies to certain types of retail
communications distributed by a new member during a one-year period
beginning on the date that the member's FINRA membership became
effective,\133\ FINRA recognized that free writing prospectuses could
potentially be subject to pre-filing under that new member requirement.
To address the commenter's underlying concern regarding timely release
of information, FINRA amended the provision governing new member
communications to allow new members to file widely disseminated free
writing prospectuses prepared by or on behalf of a broker-dealer within
10 business days of first use, rather than impose a pre-use filing
requirement on such communications.\134\
---------------------------------------------------------------------------

    \133\ See proposed FINRA Rule 2210(c)(1)(A).
    \134\ See Amendment No. 2; proposed FINRA Rule 2210(c)(1)(A).
---------------------------------------------------------------------------

    The Commission believes that FINRA, in its statements summarized
above, responded adequately to comments regarding SEC-filed documents.
Among other things, FINRA stated its view that additional review by
FINRA of widely distributed free writing prospectuses would help
protect investors from potentially misleading sales material. FINRA
also responded to the comments concerning timely issuance of
information by modifying the provision governing new member
communications as described above and explaining why other provisions
requiring pre-filing would not apply to free writing prospectuses.
6. Communications With the Media
    Two commenters recommended that the exclusion in proposed paragraph
(c)(7)(H), which would exclude from the filing requirements press
releases made available only to members of the media, be expanded to
cover all materials that are provided to the media, such as white
papers, research reports, charts, and

educational materials.\135\ Another commenter alternatively argued that
the proposed rule should treat communications provided solely to the
media as correspondence.\136\
---------------------------------------------------------------------------

    \135\ See Fidelity August Letter and SIFMA August Letter.
    \136\ See ICI August Letter.
---------------------------------------------------------------------------

    FINRA declined to expand the filing exclusion for press releases
made available only to members of the media to include other types of
communications. FINRA indicated that to the extent a member is using a
media outlet to distribute retail communications other than press
releases, FINRA believes that such retail communications should be
filed with the Department for review if they are subject to a separate
filing requirement; otherwise, the media could become a conduit by
which firms could avoid those filing requirements. In addition, FINRA
noted that facts and circumstances surrounding a communication will
determine whether that communication to a member of the media qualifies
as correspondence, a retail communication or an institutional
communication. FINRA does not believe it makes sense to characterize
all such communications as correspondence.
    The Commission believes that FINRA has responded adequately to
comments regarding communications with the media, including by
explaining why providing a communication (other than a press release)
solely to a member of the media would not be a sufficient basis to
exclude such communication from the filing requirements or to
characterize such communication as correspondence.
7. Lists of Products
    One commenter supported the filing exclusion in proposed paragraph
(c)(7)(L), which would exclude from the filing requirements
communications that refer to types of investments solely as part of a
listing of products or services offered by the member, but noted that
``it seemingly would apply to, among other documents, a retirement plan
enrollment guide, which includes a listing of a plan's investment
options.'' \137\
---------------------------------------------------------------------------

    \137\ See ICI August Letter.
---------------------------------------------------------------------------

    FINRA indicated that the commenters' understanding was correct only
to the extent an enrollment guide listed the types of investments
available through the plan. FINRA clarified that to the extent an
enrollment guide mentioned the individual funds or other investment
options available through a plan, the filing exclusion would not be
available. The Commission believes that FINRA has responded adequately
to the issue raised by the commenter under proposed paragraph
(c)(7)(L), including by providing examples of enrollment guides that
would not be eligible for the filing exclusion.
8. Communications Concerning Closed-End Funds
    One commenter argued that FINRA should exclude from the filing
requirements all retail communications concerning closed-end
funds.\138\ The commenter argued that such communications pose lower
risks than communications concerning other products (such as structured
products), and that having a principal review such retail
communications prior to use provides sufficient investor protection.
Another commenter requested that FINRA clarify that closed-end funds'
press releases issued pursuant to Section 202.06 of the NYSE Listed
Company Manual be excluded from the filing requirements.\139\
---------------------------------------------------------------------------

    \138\ See SIFMA August Letter and SIFMA December Letter.
    \139\ See ICI December Letter. As discussed under Section B.1.c.
above, the ICI also requested that FINRA exclude such press releases
from the pre-use approval requirements.
---------------------------------------------------------------------------

    FINRA noted that it does not believe it should exclude from the
filing requirements other types of retail communications concerning
closed-end funds, stating that it is not persuaded by the fact that a
principal must approve such communications prior to use. FINRA
indicated that the same principal approval requirement applies to other
types of retail communications that are subject to a filing
requirement. In addition, FINRA indicated that its staff found through
filings and investigations of closed-end fund communications under the
current rules that such communications frequently require changes in
order to be consistent with applicable advertising rules. For example,
FINRA indicated that its staff has found significant problems with
retail communications used to promote auction-rate securities issued by
closed-end funds.
    FINRA indicated that proposed FINRA Rule 2210(c)(7)(C) would
exclude from the Rule's filing requirements any retail communication
that does not make any financial or investment recommendation or
otherwise promote a product or service of the member. To the extent a
member distributes or makes available a press release about a closed-
end fund that does not make any financial or investment recommendation
or otherwise promote a product or service of the member, FINRA noted
that the member would not be required to have a principal approve it
prior to use. To address one of the commenters' concerns, however,
FINRA amended proposed FINRA Rule 2210(c)(7) to add a separate
exclusion from the filing requirements for press releases concerning
closed-end investment companies listed on the NYSE that are issued
pursuant to Section 202.06 of the NYSE Listed Company Manual (or any
successor provision).\140\
---------------------------------------------------------------------------

    \140\ See Amendment No. 2 Rule 2210(c)(7).
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
comments about communications concerning closed-end funds. For example,
FINRA explained that it seeks to review such communications because it
has found that some communications produced by closed-end funds have
been inconsistent with current regulations governing communications. In
addition, in response to comments concerning press releases issued
pursuant to Section 202.06 of the NYSE Listed Company Manual, the
Commission believes that FINRA appropriately responded to comments by
amending the proposal by adding an exclusion for such press releases as
described above.
9. Communications Posted on Online Interactive Electronic Forums
    A commenter recommended that FINRA add a new filing exclusion for
retail communications posted on an online interactive electronic forum,
similar to the exception from the principal pre-use approval
requirements under proposed FINRA Rule 2210(b)(1)(D)(ii).\141\ FINRA
initially disagreed that there should be a filing exclusion for such
retail communications and declined to make the change.\142\
---------------------------------------------------------------------------

    \141\ See SIFMA August Letter. The commenter also stated that
``the better solution'' would be to revise proposed FINRA Rule
2210(f) to specify that online postings are a type of public
appearance that do not constitute retail communications. This
comment is discussed later in this Order.
    \142\ See October Response Letter.
---------------------------------------------------------------------------

    As discussed in more detail below, commenters raised a number of
additional concerns regarding the treatment of communications on online
interactive electronic forums. In its December Response Letter, FINRA
recognized that a member may face supervisory and operational
difficulties if it is required to file an online forum post given that
the member will be supervising such communications in the same manner
as correspondence. Accordingly, FINRA amended proposed FINRA Rule
2210(c)(7) to add a filing exclusion for retail communications that are
posted on online interactive

electronic forums. FINRA cautioned that members should be aware that
this exception does not apply to any filing requirement that may arise
under either federal law or Commission rules.\143\
---------------------------------------------------------------------------

    \143\ See, e.g., 15 U.S.C. 80a-24(b); 17 CFR 230.497.
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to
comments by, among other things, amending the proposal to add a filing
exclusion for retail communications that are posted on online
interactive electronic forums.
10. Mutual Fund Shareholder Reports
    One commenter argued that FINRA should exempt a mutual fund's
Management's Discussion of Fund Performance (``MDFP'') from filing with
FINRA on the ground that it is already filed with the Commission and
subject to certain control and certification requirements under federal
law and Commission rules.\144\ The commenter also noted that Section
408(c) of the Sarbanes-Oxley Act requires the Commission staff to
review issuers' disclosures, including the MDFP, at least once every
three years.
---------------------------------------------------------------------------

    \144\ See ICI December Letter and ICI January Letter.
---------------------------------------------------------------------------

    FINRA pointed out that it currently requires members to file the
MDFP and sales material portion of a mutual fund annual or semi-annual
report if a member intends to use the report to market the fund to
prospective investors.\145\ FINRA explained that the existing filing
requirement under NASD Rule 2210 is limited to those shareholders
reports that are being provided to prospective investors--and does not
apply to shareholder reports provided only to existing shareholders for
informational purposes. FINRA further highlighted that this limitation
is designed to ensure that a filing requirement can achieve its
purpose, which is to ensure that shareholder reports that the fund uses
to market its shares to retail and other investors are reviewed in the
same manner as other fund marketing material. FINRA stated that it does
not require firms to file financial statements that appear in
shareholder reports since the filing requirement is further tailored to
require the filing only of the sales material and MDFP portions, which
are narrative in form.
---------------------------------------------------------------------------

    \145\ See March Response Letter.
---------------------------------------------------------------------------

    FINRA stated that a mutual fund's sales material and MDFP typically
provide content beyond that which the Commission requires for a
shareholder report, noting that the shareholder report may contain: an
interview with the portfolio manager; a performance chart, such as a
chart depicting how much the investor would have earned had he invested
in the fund many years earlier; or the fund's historical performance
with a comparison to an index. FINRA indicated that the reports
routinely describe the prospects for the fund, opportunities in which
the fund is investing, and the possible effects of market conditions on
the fund's performance: all information designed to appeal to
prospective investors of the mutual fund as well as existing
shareholders.
    FINRA explained that its current review program has found problems
with a significant number of fund shareholder reports. Among those that
were filed with FINRA in 2011, FINRA reports that approximately 7.5
percent required substantive comments to make the shareholder report
fair, balanced and not misleading.\146\ For example, FINRA stated that
it recently commented on a shareholder report that illustrated a fund's
past performance by providing performance concerning other accounts of
the investment adviser, without disclosing the differences between
those accounts and the advertised fund. FINRA cited another recently
filed report that provided an ``overall credit rating'' of ``A-versus
AA3'' for a fund, without disclosing material information necessary to
balance this rating, such as the fact that it was not provided by a
nationally recognized statistical rating organization. FINRA noted yet
another recently filed shareholder report that provided non-
standardized performance without providing the standardized one, five
and ten year performance required by Securities Act Rule 482.
---------------------------------------------------------------------------

    \146\ FINRA stated that its Department staff codes mutual fund
shareholder reports as ``performance reports,'' which includes not
only fund shareholder reports, but also other periodic performance
reports, such as quarterly fund reports and other types of periodic
fund performance updates. The 7.5 percent figure reflects comments
made on all communications coded as performance reports, although
most performance reports are sales material and MDFPs included
within mutual fund shareholder reports. Id.
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    FINRA stated its position that although shareholder reports are
filed with the Commission, they might be reviewed by Commission staff
only on a three-year cycle.\147\ In contrast, FINRA noted that it
reviews all shareholder report sales material and MDFPs that are filed
with the Department and that the Department's comprehensive review
program discourages funds from including content that is misleading or
potentially harmful to investors.
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    \147\ See December Response Letter.
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    FINRA emphasized that it is sensitive to the costs that the
communications rules impose upon the industry, and has agreed to
changes to its existing rules and the proposed amendments to
accommodate these concerns in a manner consistent with investor
protection.\148\ However, FINRA stated that it believed the costs
associated with the shareholder report filing requirement appear to be
substantially less than the amount estimated by the industry. One
commenter estimated that ``a significant number of Institute member
firms pay more than $20,000 in fees annually to file shareholder
reports with FINRA.'' \149\ FINRA noted the commenter's explanation
that this estimate was based upon the assumption that a fund complex
that files 100 shareholder reports twice a year at FINRA's minimum
filing fee would pay $20,000 in filing fees, and that 31 firms that are
members of the commenter have more than 100 funds in their complexes.
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    \148\ See March Response Letter.
    \149\ See ICI January Letter.
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    FINRA argued that this cost estimate appears overstated because
many fund complexes combine multiple funds' shareholder reports into a
single document, which they file one time with FINRA. FINRA noted that
of the 10 fund complexes that filed the highest volume of shareholder
reports in 2011, only two issue a separate shareholder report for each
fund.\150\ For example, FINRA indicated that it is not uncommon for
fund groups to combine shareholder reports for multiple target date
funds, money market funds or municipal bond funds in a single document.
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    \150\ See March Response Letter. FINRA noted that these 10
largest fund complexes filed approximately 30 percent of all mutual
fund performance reports received by FINRA in 2011 (which, as noted
above, includes shareholder reports)--and of these fund complexes,
one creates multiple-fund shareholder report documents for all of
its funds, seven create multiple-fund shareholder report documents
for at least some of their funds, and only two issue a separate
shareholder report document for each fund.
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    In light of the use of mutual fund shareholder reports to market
the fund, and the substantive concerns raised by some shareholder
reports, FINRA stated that it continues to believe that fund
shareholder report sales material and MDFPs that will be used with
prospective investors should be subject to the same filing requirements
as other mutual fund sales material. Consequently, FINRA declined to
exempt a fund shareholder report sales material and MDFP from proposed
FINRA Rule 2210's filing requirements.
    The Commission believes that FINRA has responded adequately to
comments regarding the MDFP filing requirement. For example, FINRA
cited to substantive

concerns that it has identified in some fund shareholder reports,
emphasizing that the Department's review program may serve to
discourage funds from including content that is misleading or
potentially harmful to investors.

D. Content Standards

    Proposed paragraph 2210(d) generally requires all communications to
be based on principles of fair dealing and good faith, be fair and
balanced, and provide a sound basis for evaluating the facts in regard
to any particular security, industry or service. The proposed rule
prohibits the use of false, exaggerated, unwarranted, promissory or
misleading statements or claims in communications. Additionally, the
proposed rule sets forth specific requirements that apply to the use of
comparisons; disclosure of the member's name; tax considerations;
disclosure of fees, expenses, and standardized performance;
testimonials; and recommendations.
    Commenters raised various concerns about FINRA's proposed content
standards.\151\ The comments focused on predictions of future
performance, the detail required of tax consideration disclosure, the
prominence requirement for disclosure of fees and expenses and
requirements applicable to communications concerning recommendations of
securities.
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    \151\ See Wilmer August Letter; TLGI August Letter; and ICI
August Letter.
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1. Projections of Performance
    One commenter requested confirmation that proposed paragraph
(d)(1)(F), which generally would prohibit communications from
predicting or projecting performance, implying that past performance
will recur, or making any exaggerated or unwarranted claim, opinion or
forecast would not apply to communications produced by a member's
research department.\152\
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    \152\ See Wilmer August Letter.
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    FINRA indicated that proposed paragraph (d)(1)(F) would apply to
all communications, including those produced by a member's research
department. However, FINRA indicated that it does not believe that the
provision's restrictions would inhibit the types of content typically
found in research communications. FINRA noted that the provision
includes an exception expressly permitting price targets that meet the
standards of NASD Rule 2711. In addition, FINRA noted that it does not
believe that the type of content described by the commenter, such as
forward-looking statements or earnings estimates commonly provided in
research reports, would be considered projections of performance for
purposes of the provision. FINRA provided additional guidance
indicating that, in general, the provision is intended to prohibit
specific percentage or dollar-based projections of performance of an
investment. Nevertheless, FINRA noted that proposed paragraph (d)(1)(F)
would prohibit research communications from including any exaggerated
or unwarranted claim, opinion or forecast.
    The Commission believes that FINRA has responded adequately to this
comment, including by providing guidance about the types of content
that may or may not be prohibited under proposed paragraph (d)(1)(F).
2. Tax Considerations
    One commenter argued that the disclosure requirements in proposed
FINRA Rule 2210(d)(4) impose complicated content standards and
disclosure requirements on certain retail communications and
correspondence that discuss tax considerations of investments and
investment accounts and should be limited instead to a requirement to
disclose that an investor should seek professional tax advice due to
the complexity and changing nature of the tax code.\153\
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    \153\ See TLGI August Letter.
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    FINRA declined to make the change, indicating that it believes that
the disclosures listed in proposed paragraph (d)(4) are important to
help an investor understand the context and limitations of
communications that discuss tax implications of investments and
investment accounts. Additionally, FINRA cautioned against any member
preparing a communication that it believes may be inaccurate in its
representations of tax considerations due to the complexity of tax laws
and rules.
    In Amendment No. 1, FINRA modified proposed paragraph (d)(4) to
clarify that it intended to require such retail communications to
disclose that ordinary tax rates apply to withdrawals from tax-deferred
investments in illustrations of tax-deferred products or accounts to
the extent withdrawals are subject to ordinary income tax rates.\154\
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    \154\ See Amendment No. 1; proposed FINRA Rule
2010(d)(4)(c)(vii)(d).
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    The Commission believes that FINRA has responded adequately to the
comment regarding tax disclosure requirements under proposed FINRA Rule
2210(d)(4) by, among other things, emphasizing the importance of the
proposed disclosures for facilitating investor comprehension.
3. Standardized Performance Information
    One commenter opposed a requirement in proposed FINRA Rule
2210(d)(5) that sets forth certain disclosure requirements concerning
investment company fees and expenses with respect to retail
communications and correspondence that advertise a fund's
performance.\155\ The commenter suggested that instead of requiring
certain standardized performance and expense information to be included
in a prominent text box with respect to print advertisements that
include fund performance, FINRA should instead revise proposed FINRA
Rule 2210 to require funds to prominently present standardized
performance, maximum sales charges, and expense ratios.
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    \155\ See ICI August Letter.
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    FINRA declined this recommendation, indicating that prior to the
adoption of NASD Rule 2210(d)(3),\156\ FINRA stated that it had found
that some mutual fund print advertisements placed standardized
performance information in footnotes while placing non-standardized
performance information in the body of a print advertisement, despite
equal prominence requirements contained in Securities Act Rule 482.
Additionally, FINRA noted that it found that NASD Rule 2210(d)(3)
helped clarify that placing performance information in footnotes does
not meet the equal prominence requirements of Rule 482, and made print
performance advertisements more fair and balanced.
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    \156\ Proposed FINRA Rule 2210(d)(5) generally carries forward
the requirements of NASD Rule 2210(d)(3).
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    The Commission believes that FINRA has responded adequately to the
comment opposing the disclosure requirements carried forward from NASD
rule 2210(d)(3) by explaining, among other things, why it views the
proposed requirement as an important tool for making print performance
communications more fair and balanced.
4. Recommendations of Securities
    Proposed FINRA Rules 2210(d)(7) and 2210(f)(1) would require retail
communications and public appearances that include a recommendation of