Document ID: SEC-2011-1112-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-08-03T04:00Z

[Federal Register Volume 76, Number 149 (Wednesday, August 3, 2011)]
[Notices]
[Pages 46870-46889]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19645]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64984; File No. SR-FINRA-2011-035]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change 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

July 28, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 14, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by FINRA. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    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. The proposed rule change would renumber NASD Rules 2210 and 2211 
and NASD Interpretive Materials 2210-1 and 2210-4 as FINRA Rule 2210, 
NASD Interpretive Material 2210-3 as FINRA Rule 2212, NASD Interpretive 
Material 2210-5 as FINRA Rule 2213, NASD Interpretive Material 2210-6 
as FINRA Rule 2214, NASD Interpretive Material 2210-7 as FINRA Rule 
2215, and NASD Interpretive Material 2210-8 as FINRA Rule 2216.
    The text of the proposed rule change is 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.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\

[[Page 46871]]

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.
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    \3\ 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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Current Rules Governing Communications With the Public
    NASD Rules 2210 and 2211, and the Interpretive Materials that 
follow Rule 2210, generally govern all FINRA members' communications 
with the public. Incorporated NYSE Rule 472 governs communications with 
the public of members that also are members of the New York Stock 
Exchange.
    NASD Rule 2210 divides communications into six separate categories, 
as follows:

    [rtarr8] Advertisement generally includes written (including 
electronic) retail communications that do not have a limited audience, 
such as newspaper, magazine, television and radio advertisements, 
billboards and Web sites.
    [rtarr8] Sales literature generally includes written (including 
electronic) retail communications that have a more targeted audience, 
such as brochures, performance reports, telemarketing scripts, seminar 
scripts and form letters.
    [rtarr8] Correspondence includes written letters, electronic mail, 
instant messages and market letters sent to: (i) One or more existing 
retail customers; and (ii) fewer than 25 prospective retail customers 
within a 30 calendar-day period.
    [rtarr8] Institutional sales material includes communications that 
are distributed or made available only to institutional investors. NASD 
Rule 2211 defines the term ``institutional investor'' generally to 
include registered investment companies, insurance companies, banks, 
registered broker-dealers, registered investment advisers, certain 
retirement plans, governmental entities, and individual investors and 
other entities with at least $50 million in assets.
    [rtarr8] Independently prepared reprint includes reprints of 
articles from independent publications, as well as reports published by 
independent research firms.
    [rtarr8] Public appearance includes unscripted participation in 
live events, such as interviews, seminars and call-in television and 
radio shows.

    These definitions are important because the principal approval, 
filing and content standards apply differently to each category. For 
example, members generally must have a principal approve all 
advertisements, sales literature and independently prepared reprints 
prior to use. This pre-use approval requirement does not apply to: (1) 
Institutional sales material or (2) correspondence, unless it is sent 
to 25 or more existing retail customers within a 30 calendar-day period 
and includes an investment recommendation or promotes a product or 
service of the member. While such communications do not require 
principal pre-use approval, members still must establish and maintain 
policies and procedures to supervise them for compliance with 
applicable standards.
    Members must file with the FINRA Advertising Regulation Department 
(``Department'') for review certain advertisements and sales 
literature. For example, advertisements and sales literature concerning 
investment companies, variable insurance products and public direct 
participation programs, and advertisements concerning government 
securities, must be filed within 10 business days of first use, but 
members are not required to file independently prepared reprints, 
correspondence or institutional sales material. The filing requirements 
also differ based on the member using the material and its content.
    Members that previously have not filed advertisements with the 
Department must file all advertisements at least 10 business days prior 
to first use for a one-year period following the date the first 
advertisement was filed. Additionally, under NASD Rule 2210 and related 
Interpretive Materials, all members must file advertisements concerning 
collateralized mortgage obligations (``CMOs'') and security futures, 
and advertisements and sales literature concerning registered 
investment companies that include unpublished or self-created rankings 
or performance comparisons, at least 10 business days prior to first 
use, and must withhold them from publication until any changes 
specified by the Department have been made.
    Incorporated NYSE Rule 472 requires an ``allied member, supervisory 
analyst or qualified person'' to approve prior to use each 
advertisement, sales literature or other similar type of 
communication.\4\ The NYSE Rule 472 definitions of ``advertisement'' 
and ``sales literature'' are similar to those used in NASD Rule 2210.
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    \4\ NYSE Rule 472(a)(1).
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    The communications rules include both general and specific content 
standards. Certain general standards apply to all communications, such 
as requirements that communications be fair and balanced, and provide a 
sound basis for evaluating the facts in regard to any particular 
security, industry or service, and prohibitions on omitting material 
facts whose absence would make the communication misleading. More 
particular content standards apply to specific issues or securities.
Proposed Rule Change
Reorganization of Rules
    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 FINRA Rule 2210.\5\
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    \5\ Proposed FINRA Rule 2211 (Communications with the Public 
About Variable Insurance Products), which would replace 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).
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Communication Categories
    The proposed rule change would reduce the number of current 
communication categories from six to three, as follows:
    [rtarr8] Institutional communication would include communications 
that fall within the current definition of ``institutional sales 
material'' under NASD Rule 2211(a)(2): Written (including electronic) 
communications that are distributed or made available only to 
institutional investors. ``Institutional investor'' generally would 
have the same definition as under NASD Rule 2211(a)(3).\6\
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    \6\ FINRA has modified the definition of ``institutional 
investor'' in proposed FINRA Rule 2210 to clarify that the term 
includes multiple employee benefit plans and multiple qualified 
plans offered to employees of the same employer, provided that the 
plans in the aggregate have at least 100 participants. FINRA also 
has added a Supplementary Material 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 pursuant to paragraph (a)(3) of proposed FINRA Rule 
2210. See proposed FINRA Rule 2210.01. Accordingly, such internal 
communications are subject to both the provisions of proposed FINRA 
Rule 2210 and NASD Rule 3010(d) (Review of Transactions and 
Correspondence). See also Securities Exchange Act Release No. 64736 
(June 23, 2011), 76 FR 38245 (June 29, 2011) (Notice of Filing File 
No. SR-FINRA-2011-028) (proposing, among other things, to adopt NASD 
Rule 3010(d) as FINRA Rule 3110(b)(4), subject to certain changes).

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[[Page 46872]]

    [rtarr8] Retail communication would include any written (including 
electronic) communication that is distributed or made available to more 
than 25 retail investors within any 30 calendar-day period. ``Retail 
investor'' would include any person other than an institutional 
investor, regardless of whether the person has an account with the 
member.
    [rtarr8] Correspondence would include any written (including 
electronic) communication that is distributed or made available to 25 
or fewer retail investors within any 30 calendar-day period.
    The proposal would eliminate the current definitions of 
``advertisement,'' ``sales literature,'' ``institutional sales 
material,'' ``public appearance'' and ``independently prepared 
reprint'' in NASD Rule 2210, as well as all of the definitions in NASD 
Rule 2211.\7\ The proposal also would eliminate the definitions of 
``communication,'' ``advertisement,'' ``market letter'' and ``sales 
literature'' in Incorporated NYSE Rule 472.
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    \7\ NASD Rule 2211 currently defines the terms 
``correspondence,'' ``institutional sales material,'' 
``institutional investor,'' ``existing retail customer,'' 
``prospective retail customer'' and ``market letter.''
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    Communications that currently qualify as advertisements and sales 
literature generally would fall under the definition of ``retail 
communication.'' In addition, to the extent that a member distributed 
or made available a communication that currently qualifies as an 
independently prepared reprint to more than 25 retail investors within 
a 30 calendar-day period, the communication also would fall under the 
definition of ``retail communication.'' Communications that currently 
qualify as ``institutional sales material'' would fall within the 
definition of ``institutional communication.'' Some communications that 
currently qualify as ``correspondence'' would continue to fall within 
that definition. However, communications sent to more than 25 retail 
investors within a 30 calendar-day period in all cases would be 
considered retail communications.\8\
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    \8\ The definition of ``correspondence'' in NASD Rule 2211 
currently includes market letters as well as written letters and 
electronic mail messages that are sent to one or more existing 
retail customers and fewer than 25 prospective retail customers 
within a 30 calendar-day period. ``Market letter'' is defined to 
include any communication excepted from the definition of ``research 
report'' pursuant to NASD Rule 2711(a)(9)(A). See NASD Rule 
2211(a)(5). FINRA revised the definition of ``correspondence'' to 
include market letters in February 2009 in order to allow members to 
send market letters to traders and other investors who base their 
decisions on timely market analysis without having to have a 
principal approve them in advance. Previously, members were required 
to approve market letters prior to use. See Regulatory Notice 09-10 
(February 2009). Proposed FINRA Rule 2210 would continue to allow 
members to send retail communications that are excepted from the 
definition of ``research report'' pursuant to NASD Rule 
2711(a)(9)(A) without having a registered principal approve the 
communication prior to use, provided that a member supervises and 
reviews such communications in the same manner as correspondence. 
See proposed FINRA Rule 2210(b)(1)(D).
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    Although the proposal would eliminate the terms ``public 
appearance'' and ``independently prepared reprint,'' as discussed 
below, the proposal would retain with respect to these communication 
categories much of the substance of the exceptions from the filing 
requirements and limited application of the content standards.
Approval, Review and Recordkeeping Requirements
    Currently NASD Rule 2210(b)(1)(A) requires a registered principal 
of the member to approve each advertisement, item of sales literature 
and independently prepared reprint before the earlier of its use or 
filing with the Department. Proposed FINRA Rule 2210(b)(1)(A) would 
require an appropriately qualified registered principal of the member 
to approve each retail communication before the earlier of its use or 
filing with the Department. The principal registration required to 
approve particular communications would depend upon the permissible 
activities for each principal registration category.\9\ The proposed 
rule change would eliminate Incorporated NYSE Rule 472(a)(1), which 
requires an ``allied member, supervisory analyst, or qualified person'' 
to approve in advance each advertisement, sales literature or other 
similar type of communication by an NYSE member firm.\10\
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    \9\ Currently NASD Rule 1022(g) permits a General Securities 
Sales Supervisor to approve sales literature as defined in NASD Rule 
2210, but does not permit persons within this category to approve 
advertisements. FINRA separately sought comment on a proposal that 
would amend the General Securities Sales Supervisor registration 
category to remove the restriction on approving advertisements, and 
to permit persons within this registration category to approve 
retail communications as defined in proposed FINRA Rule 2210. See 
Regulatory Notice 09-70 (December 2009).
    \10\ The term ``allied member'' was largely deleted from the 
Incorporated NYSE Rules in 2008, and thus is not being carried over 
as part of proposed FINRA Rule 2210(b)(1)(A). See Regulatory Notice 
08-64 (October 2008).
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    NASD Rule 2210(b)(1)(B) permits a Series 16 supervisory analyst 
approved pursuant to Incorporated NYSE Rule 344 to approve research 
reports on debt and equity securities.\11\ Proposed FINRA Rule 
2210(b)(1)(B) would continue this provision without substantive 
change.\12\
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    \11\ FINRA separately sought comment on a proposal that would 
adopt a stand-alone permissive registration category for Supervisory 
Analysts. See Regulatory Notice 09-70 (December 2009).
    \12\ NASD Rule 2210(b)(1)(C) currently requires a registered 
principal qualified to supervise security futures activities to 
approve each advertisement or item of sales literature concerning 
security futures. This requirement would continue going forward with 
respect to retail communications concerning security futures. 
Nevertheless, this provision is being eliminated as redundant given 
the requirement under proposed FINRA Rule 2210(b)(1)(A) that an 
appropriately qualified principal approve each retail communication.
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    NASD Rule 2210(b)(1)(D) provides an exception from the principal 
approval requirements of NASD Rule 2210(b)(1)(A) for an advertisement, 
item of sales literature, or independently prepared reprint, if at the 
time that a member intends to publish or distribute it: (i) another 
member has filed it with the Department and has received a letter from 
the Department stating that it appears to be consistent with applicable 
standards; and (ii) the member using the communication in reliance on 
this exception has not materially altered it and will not use it in a 
manner that is inconsistent with the conditions of the Department's 
letter. Proposed FINRA Rule 2210(b)(1)(C) would preserve this exception 
for retail communications.
    Proposed FINRA Rule 2210(b)(1)(D) would except from the principal 
approval requirements of proposed FINRA Rule 2210(b)(1)(A) three 
additional categories of retail communications, provided that the 
member supervises and reviews such communications in the same manner as 
required for supervising and reviewing correspondence pursuant to NASD 
Rule 3010(d). These communications include: (i) Any retail 
communication that is excepted from the definition of ``research 
report'' pursuant to NASD Rule 2711(a)(9)(A); (ii) any retail 
communication that is posted on an online interactive electronic forum; 
and (iii) any retail communication that does not make any financial or 
investment

[[Page 46873]]

recommendation or otherwise promote a product or service of the member.
    The first category generally carries forward a current exception 
from the principal pre-use approval requirements for market 
letters.\13\ The second category codifies a current interpretation of 
the rules governing communications with the public that allows members 
to supervise communications posted on interactive electronic forums in 
the same manner as is required for supervising correspondence.\14\ The 
third category broadens a current principal pre-use approval exception 
for correspondence that is sent to 25 or more existing retail customers 
within any 30 calendar-day period and that does not make any financial 
or investment recommendation or otherwise promote a product or service 
of the member.\15\ Unlike the current principal pre-use approval 
exception, this exception would apply to all retail communications.\16\
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    \13\ See NASD Rules 2211(a)(1), (a)(5) and (b)(1)(A); see also 
Regulatory Notice 09-10 (February 2009).
    \14\ See Regulatory Notice 10-06 (January 2010).
    \15\ See NASD Rule 2211(b)(1)(A).
    \16\ Thus, the current rules require firms to make the 
determination of whether correspondence that is sent to 25 or more 
existing retail customers within a 30 calendar-day period requires 
principal pre-use approval because it makes a financial or 
investment recommendation or otherwise promotes a product or service 
of the member. FINRA would expect firms to apply the same analysis 
going forward regarding principal pre-use approval with respect to 
all retail communications. FINRA generally considers this exception 
to cover communications that are more administrative or 
informational in nature, such as communications that inform 
investors that their account statement is available online, or the 
date on which a security in an investor's portfolio is expected to 
pay a dividend. Communications that are intended to educate 
investors about products or services, however, do not fall within 
this exception.
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    Proposed FINRA Rule 2210(b)(1)(E) would allow FINRA, pursuant to 
the FINRA Rule 9600 Series, to grant an exemption from the principal 
approval requirements of paragraph (b)(1)(A) for good cause shown after 
taking into consideration all relevant factors, provided that the 
exemption is consistent with the purposes of FINRA Rule 2210, the 
protection of investors, and the public interest.
    Proposed FINRA Rule 2210(b)(1)(F) would provide that, 
notwithstanding any other provision of FINRA Rule 2210, a registered 
principal must approve a communication prior to the member filing it 
with the Department. Currently NASD Rule 2210(b)(1)(A) requires a 
principal to approve an advertisement, item of sales literature or 
independently prepared reprint before the earlier of its use or filing 
with the Department. Proposed FINRA 2210(b)(1)(F) is intended to 
clarify that an appropriately qualified principal must approve any 
communication that is filed with the Department, even if a 
communication otherwise would come under an exception to the principal 
approval requirements of proposed FINRA Rule 2210(b)(1)(A).
    NASD Rule 2211(b)(1) and NASD Rule 3010(d) impose certain 
supervisory and review requirements with regard to a member's 
correspondence and institutional sales material.\17\ Proposed FINRA 
Rules 2210(b)(2) and (3) generally would maintain the supervision and 
review standards for correspondence and institutional communications 
that are currently found in NASD Rules 2211 and 3010(d).
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    \17\ These rules require each member to establish written 
procedures that are appropriate to its business, size, structure and 
customers for the review by a registered principal of correspondence 
and institutional sales material. The procedures must be in writing 
and be designed to reasonably supervise each registered 
representative. Where such procedures do not require review of all 
such communications prior to use or distribution, they must include 
provision for the education and training of associated persons as to 
the member's procedures, documentation of such education and 
training, and surveillance and follow-up to ensure that such 
procedures are implemented and adhered to. Evidence of such 
implementation must be maintained and made available to FINRA upon 
request.
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    Currently NASD Rule 2210(b)(2) requires members to maintain all 
advertisements, sales literature and independently prepared reprints in 
a separate file for a period beginning on the date of first use and 
ending three years from the date of last use. The file must include: 
(i) A copy of the communication and the dates of first and last use; 
(ii) the name of the registered principal who approved the 
communication and the date approval was given, unless such approval was 
not required pursuant to NASD Rule 2210(b)(1)(D);\18\ and (iii) for any 
communication for which principal approval was not required pursuant to 
NASD Rule 2210(b)(1)(D), the name of the member that filed the 
communication with the Department and a copy of the corresponding 
Department review letter. NASD Rule 2211(b)(2) requires members to 
maintain records of institutional sales material for a period of three 
years from the date of last use, including the name of the person who 
prepared each such communication. NASD Rules 3010(d)(3)\19\ and 
3110(a)\20\ require members to retain correspondence of registered 
representatives as prescribed by SEA Rule 17a-4.
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    \18\ As noted above, NASD Rule 2210(b)(1)(D) creates an 
exception from the principal approval requirements of NASD Rule 
2210(b)(1)(A) for any advertisement, item of sales literature or 
independently prepared reprint if, at the time that a member intends 
to publish or distribute it: (i) Another member has filed it with 
the Department and has received a letter from the Department stating 
that it appears to be consistent with applicable standards; and (ii) 
the member using it in reliance on this exception has not materially 
altered it and will not use it in a manner that is inconsistent with 
the conditions of the Department's letter.
    \19\ FINRA is proposing to adopt NASD Rule 3010(d)(3) as FINRA 
Rule 3110.11 (Retention of Correspondence and Internal 
Communications), subject to certain changes, in the Consolidated 
FINRA Rulebook. See Securities Exchange Act Release No. 64736 (June 
23, 2011), 76 FR 38245 (June 29, 2011) (Notice of Filing File No. 
SR-FINRA-2011-028 (Proposed Rule Change to Adopt the Consolidated 
FINRA Supervision Rules).
    \20\ The SEC has approved the adoption of the general 
recordkeeping requirements of NASD Rule 3110(a) as FINRA Rule 4511, 
subject to certain changes. FINRA Rule 4511 becomes effective on 
December 5, 2011. See Securities Exchange Act Release No. 63784 
(January 27, 2011), 76 FR 5850 (February 2, 2011) (Order Approving 
File No. SR-FINRA-2010-052); Regulatory Notice 11-19 (April 2011).
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    Proposed FINRA Rule 2210(b)(4)(A) would set forth the record-
keeping requirements for retail and institutional communications; 
generally, these requirements would mirror current record-keeping 
requirements. This provision incorporates by reference the record-
keeping format, medium and retention period requirements of SEA Rule 
17a-4.\21\
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    \21\ SEA Rule 17a-4(b) requires broker-dealers to preserve 
certain records for a period of not less than three years, the first 
two in an easily accessible place. Among these records, pursuant to 
SEA Rule 17a-4(b)(4), are ``[o]riginals of all communications 
received and copies of all communications sent (and any approvals 
thereof) by the member, broker or dealer (including inter-office 
memoranda and communications) relating to its business as such, 
including all communications which are subject to rules of a self-
regulatory organization of which the member, broker or dealer is a 
member regarding communications with the public. As used in this 
paragraph (b)(4), the term communications includes sales scripts.'' 
SEA Rule 17a-4(f) permits broker-dealers to maintain and preserve 
these records on ``micrographic media'' or by means of ``electronic 
storage media,'' as defined in the rule and subject to a number of 
conditions.
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    Proposed FINRA Rule 2210(b)(4)(A) specifies that such records would 
have to include:
     A copy of the communication and the dates of first and (if 
applicable) last use;
     The name of any registered principal who approved the 
communication and the date that approval was given;
     In the case of a retail communication or institutional 
communication that is not approved prior to first use by a registered 
principal, the name of the person who prepared or distributed the 
communication;\22\
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    \22\ To the extent clerical staff is employed in the preparation 
or distribution of the communication, the records should include the 
name of the person on whose behalf the communication was prepared or 
distributed.

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[[Page 46874]]

     Information concerning the source of any statistical 
table, chart, graph or other illustration used in the communication; 
and
     For retail communications that rely on the exception under 
proposed FINRA Rule 2210(b)(1)(C), the name of the member that filed 
the retail communication with the Department and a copy of the 
Department's review letter.
    Proposed FINRA Rule 2210(b)(4)(B) cross-references NASD Rules 
3010(d)(3) \23\ and 3110(a) \24\ with respect to correspondence record-
keeping requirements.
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    \23\ See supra note 18.
    \24\ See supra note 19.
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Filing Requirements and Review Procedures
    Proposed FINRA Rule 2210(c) generally incorporates the filing 
requirements in NASD Rule 2210(c), subject to certain changes.
    NASD Rule 2210(c)(5)(A) currently requires a member that previously 
has not filed advertisements with the Department or another self-
regulatory organization to file its initial advertisement with the 
Department at least 10 business days prior to use. This filing 
requirement continues for a year after the initial filing. Proposed 
FINRA Rule 2210(c)(1)(A) would trigger the new member one-year filing 
requirement beginning on the date reflected in the Central Registration 
Depository (CRD[reg]) system that the firm's FINRA membership became 
effective, rather than on the date a member first files an 
advertisement with the Department. Although proposed FINRA Rule 2210 no 
longer defines the term ``advertisement,'' this new member filing 
requirement would only apply to retail communications that currently 
fall under the ``advertisement'' definition, such as generally 
accessible Web sites, print media communications, and television and 
radio commercials.
    NASD Rule 2210(c)(5)(B) currently authorizes the Department to 
require a member to file all of its advertisements and/or sales 
literature, or the portion of the member's material relating to 
specific types or classes of securities or services, with the 
Department at least 10 business days prior to use, if the Department 
determines that the member has departed from NASD Rule 2210's 
standards. Proposed FINRA Rule 2210(c)(1)(B) would carry forward this 
authority and apply it to all of a member's communications (rather than 
just advertisements or sales literature).
    NASD Rule 2210(c)(4) currently requires members to file certain 
communications at least 10 business days prior to first use and to 
withhold them from use until any changes specified by the Department 
have been made. These communications include advertisements and sales 
literature for certain registered investment companies that include 
self-created rankings, advertisements concerning CMOs, and 
advertisements concerning security futures.
    Proposed FINRA Rule 2210(c)(2) would revise the categories of 
communications that fall within this pre-use filing requirement. These 
include retail communications concerning any registered investment 
company that include self-created rankings, retail communications 
concerning security futures, and retail communications that include 
bond mutual fund volatility ratings. The requirement to file retail 
communications concerning security futures prior to first use would not 
apply to: (i) Retail communications that are submitted to another self-
regulatory organization having comparable standards pertaining to such 
communications, and (ii) retail communications in which the only 
reference to security futures is contained in a listing of the services 
of a member.
    Proposed FINRA Rule 2210(c)(3) would revise the categories of 
communications that must be filed within 10 business days of first use 
or publication. Similar to NASD Rule 2210(c)(2), proposed FINRA Rule 
2210(c)(3) would require retail communications concerning registered 
investment companies and public direct participation programs to be 
filed within 10 business days of first use. However, the proposal for 
the first time would require that all retail communications concerning 
closed-end registered investment companies be filed with FINRA. 
Currently NASD Rule 2210 requires members to file within 10 business 
days of first use advertisements and sales literature concerning 
closed-end funds that are distributed during the fund's initial public 
offering (``IPO'') period, as well as all advertisements and sales 
literature concerning continuously offered (interval) closed-end 
funds.\25\ The proposed filing requirement also would apply to retail 
communications that are distributed after a closed-end fund's IPO 
period. FINRA believes that investors deserve the same protections 
concerning retail communications about closed-end funds that are 
distributed after the IPO period as those that are distributed during 
the IPO period.
---------------------------------------------------------------------------

    \25\ See ``Ask the Analyst,'' Regulatory & Compliance Alert 
(Winter 1999) p. 13.
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    Proposed FINRA Rule 2210(c)(3)(C) would require members to file 
within 10 business days of first use all retail communications 
concerning government securities. Currently this requirement only 
applies to advertisements concerning such securities.\26\ Consistent 
with current requirements, proposed FINRA Rule 2210(c)(3)(D) would 
require members to file within 10 business days of first use templates 
for written reports produced by, or retail communications concerning an 
investment analysis tool, as such term is defined in proposed FINRA 
Rule 2214.\27\
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    \26\ See NASD Rule 2210(c)(2)(C).
    \27\ See NASD Rule 2210(c)(2)(D).
---------------------------------------------------------------------------

    Proposed FINRA Rule 2210(c)(3)(E) would require members to file 
within 10 business days of first use retail communications concerning 
CMOs that are registered under the Securities Act of 1933 (``Securities 
Act''). Currently members are required only to file advertisements 
concerning CMOs, but must file them at least 10 business days prior to 
first use.\28\
---------------------------------------------------------------------------

    \28\ See NASD Rule 2210(c)(4)(B).
---------------------------------------------------------------------------

    Under proposed FINRA Rule 2210(c)(3)(F), members would have to file 
within 10 business days of first use all retail communications 
concerning any security that is registered under the Securities Act and 
that is derived from or based on a single security, a basket of 
securities, an index, a commodity, a debt issuance or a foreign 
currency, not included within the requirements of paragraphs (c)(1), 
(c)(2) or sub-paragraphs (A) through (E) of paragraph (c)(3). The 
purpose of this provision is to require the filing of retail 
communications concerning publicly offered structured products, such as 
exchange-traded notes or registered grantor trusts that currently are 
not required to be filed. This provision excludes retail communications 
that are already subject to a separate filing requirement found 
elsewhere in proposed paragraph (c), such as retail communications 
concerning registered investment companies or public direct 
participation programs.
    Consistent with current rules, proposed FINRA Rule 2210(c)(4) 
provides that, if a member has filed a draft version or ``story board'' 
of a television or video retail communication pursuant to a filing 
requirement, then the member also must file the final filmed version 
within 10 business days of first use or broadcast.\29\
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    \29\ See NASD Rule 2210(c)(6).

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[[Page 46875]]

    Proposed FINRA Rule 2210(c)(5) specifies that a member must provide 
with each filing the actual or anticipated date of first use, the name, 
title and CRD[reg] number of the registered principal who approved the 
communication, and the date of approval. These requirements generally 
carry forward the current requirements of NASD Rule 2210(c)(1).
    Proposed FINRA Rule 2210(c)(6) provides that each member's written 
communications may be subject to a spot-check procedure, and that 
members must submit requested material within the time frame specified 
by the Department. This provision is consistent with current rules.\30\
---------------------------------------------------------------------------

    \30\ See NASD Rule 2210(c)(7).
---------------------------------------------------------------------------

    Proposed FINRA Rule 2210(c)(7) generally duplicates the current 
exclusions from the filing requirements under NASD Rule 2210(c)(8), 
with certain modifications. Proposed paragraph (c)(7)(A) would continue 
the current filing exclusion for retail communications that previously 
have been filed with the Department and that are to be used without 
material change.\31\ Proposed paragraph (c)(7)(B) would add an 
exclusion for 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.\32\ Proposed paragraph (c)(7)(C) would exclude retail 
communications that do not make any financial or investment 
recommendation or otherwise promote a product or service of the 
member.\33\
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    \31\ See NASD Rule 2210(c)(8)(A).
    \32\ This exclusion is based in part on an earlier staff 
interpretation concerning how NASD Rule 2210's approval, record-
keeping and filing requirements apply to statistical updates 
contained in pre-existing templates. See Letter from Thomas M. 
Selman, NASD, to Forrest R. Foss, T. Rowe Price Associates, Inc., 
dated January 28, 2002. If a member changed the template's 
presentation in any material respect, however, this exclusion would 
not apply.
    \33\ This filing exception would have the same scope as the 
proposed exception from the principal pre-use approval requirements 
for retail communications that do not make any financial or 
investment recommendation or otherwise promote a product or service 
of the member. See proposed FINRA Rule 2210(b)(1)(D)(iii).
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    Proposed paragraphs (c)(7)(D), (E), (G) and (H) would preserve for 
retail communications the current filing exclusions for advertisements 
and sales literature that do no more than identify a national 
securities exchange symbol of the member or identify a security for 
which the member is a registered market maker; advertisements and sales 
literature that do no more than identify the member or offer a specific 
security at a stated price; certain ``tombstone'' advertisements 
governed by Securities Act Rule 134 and press releases that are made 
available only to members of the media.\34\
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    \34\ See NASD Rules 2210(c)(8)(C), (D), (F) and (G).
---------------------------------------------------------------------------

    Proposed paragraph (c)(7)(F) would modify the current filing 
exclusion for prospectuses and other documents that have been filed 
with the SEC or any state.\35\ The current filing exclusion does not 
cover investment company omitting prospectuses published pursuant to 
Securities Act Rule 482. As modified, this filing exclusion also would 
not cover free writing prospectuses that are filed with the SEC 
pursuant to Securities Act Rule 433(d)(1)(ii).\36\ As discussed in 
Regulatory Notice 10-52, FINRA is concerned that broadly disseminated 
free writing prospectuses present the same investor protection concerns 
as communications regulated by NASD Rules 2210 and 2211. Accordingly, 
FINRA interprets NASD Rules 2210 and 2211 to apply to free writing 
prospectuses distributed by a broker-dealer in a manner reasonably 
designed to lead to broad unrestricted dissemination.\37\ This proposed 
modification would codify the guidance provided in that Regulatory 
Notice.
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    \35\ See NASD Rule 2210(c)(8)(E).
    \36\ Securities Act Rule 433(d)(1)(ii) requires any offering 
participant, other than the issuer, to file with the SEC a free 
writing prospectus if it is used or referred to by such offering 
participant and distributed by or on behalf of such person in a 
manner reasonably designed to lead to its broad unrestricted 
dissemination.
    \37\ See Regulatory Notice 10-52 (October 2010).
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    Proposed paragraph (c)(7)(I) would maintain the filing exclusion 
for reprints of independently prepared articles or reports currently 
found in NASD Rule 2210(c)(8)(H).\38\
---------------------------------------------------------------------------

    \38\ The filing exclusion for reprints of independently prepared 
articles or reports incorporates the conditions currently included 
in the definition of ``independently prepared reprint.'' See NASD 
Rule 2210(a)(6)(A). This filing exclusion would also cover 
independently prepared investment company reports described in NASD 
Rule 2210(a)(6)(B).
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    Proposed paragraphs (c)(7)(J) and (K) would maintain the current 
filing exclusions for correspondence and institutional sales 
material.\39\ Proposed paragraph (c)(7)(L) would exclude from filing 
communications that refer to types of investments solely as part of a 
listing of products or services offered by the member.\40\
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    \39\ See NASD Rules 2210(c)(8)(I) and (J).
    \40\ NASD Rule 2210(c)(9) similarly excludes from the filing 
requirements material that refers to investment company securities, 
direct participation programs, or exempted securities solely as part 
of a listing of products or services offered by the member.
---------------------------------------------------------------------------

    Proposed paragraph (c)(8) would provide that communications 
excluded from the filing requirements pursuant to paragraphs (c)(7)(H) 
through (K) would be deemed filed with FINRA for purposes of Section 
24(b) of the Investment Company Act of 1940 and Rule 24b-3 thereunder. 
This provision is consistent with NASD Rule 2210(c)(8).
    Proposed FINRA Rule 2210(c)(9)(A) would allow FINRA to exempt 
pursuant to the FINRA Rule 9600 Series, a member from the pre-use 
filing requirements of paragraph (c)(1)(A) for good cause shown.\41\ 
Proposed paragraph (c)(9)(B) would allow FINRA to grant an exemption 
from the filing requirements of paragraph (c)(3) for good cause shown 
after taking into consideration all relevant factors, provided that the 
exemption is consistent with the purposes of Rule 2210, the protection 
of investors, and the public interest. Generally this relief would be 
limited to the same extent as in proposed paragraph (b)(1)(E), which 
would authorize FINRA to grant exemptive relief from the principal 
approval requirements in proposed FINRA Rule 2210(b)(1)(A) for retail 
communications, subject to the same standards.
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    \41\ This provision is consistent with NASD Rule 2210(c)(10).
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Content Standards
    Proposed FINRA Rule 2210(d) reorganizes but largely incorporates 
the current content standards applicable to communications with the 
public that are found in NASD Rule 2210(d), NASD IM-2210-1, NASD IM-
2210-4 and Incorporated NYSE Rules 472(i) and (j), subject to certain 
changes. Content standards that currently apply to advertisements and 
sales literature generally would apply to retail communications.
    Proposed FINRA Rule 2210(d)(1)(A) incorporates the current 
standards of NASD Rule 2210(d)(1)(A) without substantive change.
    Proposed FINRA Rule 2210(d)(1)(B) incorporates the current 
standards of NASD Rule 2210(d)(1)(B) largely without change, except 
that it would expressly prohibit promissory statements or claims. The 
Department staff already interprets NASD Rule 2210(d)(1)(B) to prohibit 
promissory language in member communications, and Incorporated NYSE 
Rule 472(i) specifically prohibits promissory statements.
    Proposed FINRA Rule 2210(d)(1)(C) incorporates the current 
standards of

[[Page 46876]]

NASD Rule 2210(d)(1)(C) without change.
    Proposed FINRA Rule 2210(d)(1)(D) generally incorporates the 
standards currently found in NASD IM-2210-1(1), with only minor, non-
substantive changes.
    Proposed FINRA Rule 2210(d)(1)(E) generally incorporates the 
standards currently found in NASD IM-2210-1(2), although in a more 
abbreviated fashion.
    NASD Rule 2210(d)(1)(D) currently prohibits communications from 
predicting or projecting performance, implying that past performance 
will recur or making any exaggerated or unwarranted claim, opinion or 
forecast. This provision permits, however, a hypothetical illustration 
of mathematical principles, provided that it does not predict or 
project the performance of an investment or investment strategy.
    Proposed FINRA Rule 2210(d)(1)(F) would carry forward the current 
prohibition of performance predictions and projections, as well as, the 
allowance for hypothetical illustrations of mathematical principles. 
The proposal also would clarify that FINRA allows two additional types 
of projections of performance in communications with the public that 
are not reflected in the text of NASD Rule 2210(d)(1)(D). First, FINRA 
allows projections of performance in reports produced by investment 
analyst tools that meet the requirements of NASD IM-2210-6.\42\ Second, 
FINRA has permitted research reports on debt or equity securities to 
include price targets under certain circumstances.\43\
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    \42\ See NASD IM-2210-6 (Requirements for the Use of Investment 
Analysis Tools). NASD IM-2210-6 would be codified as FINRA Rule 2214 
under the proposed rule change.
    \43\ See NASD Rule 2711(h)(7).
---------------------------------------------------------------------------

    Accordingly, proposed FINRA Rule 2210(d)(1)(F) would clarify that 
it does not prohibit an investment analysis tool, or a written report 
produced by such a tool that meets the requirements of FINRA Rule 2214. 
Proposed FINRA Rule 2210(d)(1)(F) also would clarify that it does not 
prohibit a price target contained in a research report on debt or 
equity securities, provided that the price target has a reasonable 
basis, the report discloses the valuation methods used to determine the 
price target, and the price target is accompanied by disclosure 
concerning the risks that may impede achievement of the price 
target.\44\
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    \44\ These standards mirror those required for price targets 
contained in research reports on equity securities under NASD Rule 
2711(h)(7).
---------------------------------------------------------------------------

    Proposed FINRA Rule 2210(d)(2) incorporates the standards currently 
found in NASD Rule 2210(d)(2)(B) without substantive change.
    NASD Rule 2210(d)(2)(C) requires all advertisements and sales 
literature to: (i) prominently disclose the name of the member, and 
allows a fictional name by which the member is commonly recognized or 
which is required by any state or jurisdiction; (ii) reflect any 
relationship between the member and any non-member or individual who is 
also named in the communication; and (iii) if the communication 
includes other names, reflect which products and services are offered 
by the member. Proposed FINRA Rule 2210(d)(3) would apply these 
standards to correspondence as well as to retail communications. 
Members would be permitted to use the name under which a member's 
broker-dealer business is conducted as disclosed on the member's Form 
BD, as well as a fictional name by which a member is commonly 
recognized or which is required by any state or jurisdiction.
    NASD IM-2210-1(5) specifies that in advertisements and sales 
literature, references to tax-free or tax-exempt income must indicate 
which income taxes apply, or which do not, unless income is free from 
all applicable taxes, and provides an example of income from an 
investment company investing in municipal bonds that is free from 
federal income tax but subject to state or local income taxes. Proposed 
FINRA Rule 2210(d)(4)(A) would carry forward this rule for all retail 
communications and correspondence.
    NASD IM 2210-1(4) prohibits communications with the public from 
characterizing income or investment returns as tax-free or exempt from 
income tax when tax liability is merely postponed or deferred, such as 
when taxes are payable upon redemption. Proposed FINRA Rule 
2210(d)(4)(B) would carry forward this prohibition for all 
communications.
    Proposed FINRA Rule 2210(d)(4)(C) would add new language concerning 
comparative illustrations of the mathematical principles of tax-
deferred versus taxable compounding.
    First, the illustration would have to depict both the taxable 
investment and the tax-deferred investment using identical investment 
amounts and identical assumed gross investment rates of return, which 
may not exceed 10 percent per annum. Second, the illustration would 
have to use and identify actual federal income tax rates. Third, the 
illustration would be permitted (but not required) to reflect an actual 
state income tax rate, provided that the communication prominently 
discloses that the illustration is applicable only to investors that 
reside in the identified state. Fourth, the tax rates used in the 
illustration that is intended for a target audience would have to 
reasonably reflect its tax bracket or brackets as well as the tax 
character of capital gains and ordinary income. Fifth, if the 
illustration covers an investment's payout period, the illustration 
would have to reflect the impact of taxes during this period. Sixth, 
the illustration could not assume an unreasonable period of tax 
deferral.
    Seventh, the illustration would have to include the following 
disclosures, as applicable:

     The degree of risk in the investment's assumed rate of 
return, including a statement that the assumed rate of return is not 
guaranteed;
     The possible effects of investment losses on the relative 
advantage of the taxable versus tax-deferred investments;
     The extent to which tax rates on capital gains and 
dividends would affect the taxable investment's return;
     Its underlying assumptions; \45\
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    \45\ These assumptions may include, for example, the age at 
which an investor may begin withdrawing funds from a tax-deferred 
account, the actual federal tax rates applied in the hypothetical 
taxable illustration, any state income tax rate applied in the 
illustration, and the charges associated with the hypothetical 
investment.
---------------------------------------------------------------------------

     The potential impact resulting from federal or state tax 
penalties (e.g., for early withdrawals or use on non-qualified 
expenses); and
     That an investor should consider his or her current and 
anticipated investment horizon and income tax bracket when making an 
investment decision, as the illustration may not reflect these factors.

    Much of this language reflects previous guidance that FINRA has 
provided regarding tax-deferral illustrations.\46\ By placing this rule 
language in proposed FINRA Rule 2210, FINRA is clarifying that these 
standards apply to any illustration of tax-deferred versus taxable 
compounding, regardless of whether it appears in a communication 
promoting variable insurance products or some other communication, such 
as one discussing the benefits of investing through a 401(k) retirement 
plan or individual retirement account. Of course, any communication 
concerning variable insurance products also must comply with standards 
specifically applicable to such communications.\47\
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    \46\ See ``NASD Reminds Members of Their Responsibilities 
Regarding Hypothetical Tax-Deferral Illustrations in Variable 
Annuity Illustrations,'' NASD Member Alert (May 10, 2004).
    \47\ See NASD IM-2210-2; see also Securities Exchange Act 
Release No. 61107 (December 3, 2009), 74 FR 65180 (December 9, 2009) 
(Notice of Filing File No. SR-FINRA-2009-070) (Proposed Rule Change 
To Adopt FINRA Rule 2211 (Communications With the Public About 
Variable Insurance Products)).

---------------------------------------------------------------------------

[[Page 46877]]

    NASD Rule 2210(d)(3) currently requires communications with the 
public, other than institutional sales material and public appearances, 
that present the performance of a non-money market mutual fund, to 
disclose the fund's maximum sales charge and operating expense ratio as 
set forth in the fund's current prospectus fee table. Proposed FINRA 
Rule 2210(d)(5) would maintain this standard for retail communications 
and correspondence.
    NASD Rule 2210(d)(1)(E) currently provides that, if any testimonial 
in a communication with the public concerns a technical aspect of 
investing, the person making the testimonial must have the knowledge 
and experience to form a valid opinion. Proposed FINRA Rule 
2210(d)(6)(A) carries forward this standard for communications.
    NASD Rule 2210(d)(2)(A) requires any advertisement or sales 
literature that includes a testimonial concerning the investment advice 
or investment performance of a member or its products to prominently 
disclose: (i) The fact that the testimonial may not be representative 
of the experience of other customers; (ii) the fact that the 
testimonial is no guarantee of future performance or success; and (iii) 
if more than a nominal sum is paid, the fact that it is a paid 
testimonial. Proposed FINRA Rule 2210(d)(6)(B) carries forward these 
disclosure requirements for retail communications and correspondence, 
and requires disclosure regarding payment if more than $100 in value 
(rather than a ``nominal sum'') is paid for the testimonial.
    Proposed FINRA Rule 2210(d)(7) would revise in several ways the 
standards currently found in NASD IM-2210-1(6) applicable to 
communications that contain a recommendation.
    First, the proposal would apply these standards to retail 
communications and public appearances. Currently the standards apply 
only to advertisements and sales literature.
    Second, NASD IM-2210-1(6)(A) requires disclosure of certain 
specified conflicts of interest to the extent applicable. These 
disclosures include: (i) If the member was making a market in the 
recommended securities, or the underlying security if the recommended 
security is an option or security future, or that the member or 
associated person will sell to or buy from customers on a principal 
basis; (ii) if the member and/or its officers or partners have a 
financial interest in the securities of the recommended issuer and the 
nature of the financial interest, unless the extent of the financial 
interest is nominal; and (iii) if the member was manager or co-manager 
of a public offering of any securities of the recommended issuer in the 
past 12 months. Proposed FINRA Rule 2210(d)(7)(A) would carry forward 
the first and third disclosures, but would modify the second disclosure 
to limit it to financial interests of the member or any associated 
person with the ability to influence the content of the communication, 
unless the extent of the financial interest is nominal. This change 
would substantially narrow the number of parties whose financial 
interests have to be disclosed, particularly for large members with 
numerous officers and partners.\48\
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    \48\ FINRA has found that the current rules governing 
disclosures of financial interests in connection with 
recommendations contained in advertisements and sales literature, 
which apply to financial interests of all officers and partners, do 
not lead to useful disclosure when a firm has a large number of 
officers or partners. See NASD IM-2210-1(6)(A)(ii).
---------------------------------------------------------------------------

    Proposed FINRA Rule 2210(d)(7)(B) would require a member to 
provide, or offer to furnish upon request, available investment 
information supporting the recommendation, and if the recommendation is 
for an equity security, to provide the price at the time the 
recommendation is made. This provision would carry forward the current 
requirements of NASD IM-2210-6(B).
    Third, proposed FINRA Rule 2210(d)(7)(C) would amend the provisions 
governing communications that include past recommendations, which are 
currently found in NASD IM-2210-1(6)(C) and (D) and Incorporated NYSE 
Rule 472(j)(2). The new proposed standards mirror those found in Rule 
206(4)-1(a)(2) under the Investment Advisers Act of 1940, which apply 
to investment adviser advertisements that contain past 
recommendations.\49\
---------------------------------------------------------------------------

    \49\ Proposed FINRA Rule 2210(d)(7)(C), like Rule 206(4)-
1(a)(2), generally would prohibit retail communications from 
referring to past specific recommendations of the member that were 
or would have been profitable to any person. The rule would allow, 
however, a retail communication or correspondence to set out or 
offer to furnish a list of all recommendations as to the same type, 
kind, grade or classification of securities made by the member 
within the immediately preceding period of not less than one year. 
The list would have to provide certain information regarding each 
recommended security and include a prescribed cautionary legend 
warning investors not to assume that future recommendations will be 
profitable.
---------------------------------------------------------------------------

    Fourth, proposed FINRA Rule 2210(d)(7)(D) expressly would exclude 
from its coverage communications that meet the definition of ``research 
report'' or that are public appearances by a research analyst for 
purposes of NASD Rule 2711 and that include all of the applicable 
disclosures required by that rule. Proposed FINRA Rule 2210(d)(7)(D) 
also would exclude any communication that recommends only registered 
investment companies or variable insurance products.\50\
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    \50\ FINRA is proposing to exclude communications that recommend 
only registered investment companies or variable insurance products 
because it believes that recommendations of these products do not 
raise the same kinds of conflicts of interest as recommendations of 
other types of securities, since they are pooled investment vehicles 
rather than securities of a single issuer. Nevertheless, there may 
be other types of sales-related conflicts of interest raised when 
members recommend such securities. FINRA has addressed these types 
of conflicts through its rules governing sales of these products. 
See NASD Rule 2830 (Investment Companies Securities) and FINRA Rule 
2320 (Variable Contracts of an Insurance Company); see also 
Securities Exchange Act Release No. 64386 (May 3, 2011), 76 FR 26779 
(May 9, 2011) (Notice of Filing File No. SR-FINRA-2011-018).
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    Currently, a ``public appearance'' is defined as ``participation in 
a seminar, forum (including an interactive electronic forum), radio or 
television interview, or other public appearance or public speaking 
activity.'' \51\ Public appearances are a separate category of 
communications within the broader term ``communications with the 
public.'' As such, public appearances must meet the same standards that 
apply to all communications with the public, such as the requirements 
that they be fair and balanced and not include false or misleading 
statements. However, public appearances are not subject to the 
principal pre-use approval requirements of NASD Rule 2210(b)(1)(A), nor 
must a member file a public appearance with the Department.
---------------------------------------------------------------------------

    \51\ NASD Rule 2210(a)(5).
---------------------------------------------------------------------------

    In the interest of simplification, the term ``public appearance'' 
is no longer a separate communication category. Nevertheless, proposed 
FINRA Rule 2210(f) sets forth many of the same general standards that 
would apply to public appearances that exist currently. Public 
appearances would have to meet the general ``fair and balanced'' 
standards of proposed paragraph (d)(1). Unlike the current rules 
governing public appearances, the disclosure requirements applicable to 
recommendations in proposed paragraph (d)(7) also would apply if the 
public appearance included a recommendation of a security. The proposal 
also would require members to establish appropriate written policies 
and procedures to supervise public appearances, and makes clear that 
scripts, slides, handouts or other written (including electronic) 
materials used in connection with public appearances are

[[Page 46878]]

considered communications for purposes of proposed FINRA Rule 2210.\52\
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    \52\ The requirement to establish supervisory policies and 
procedures for public appearances is consistent with NASD Rule 
3010(b) and Incorporated NYSE Rule 472(l).
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Use of Investment Company Rankings in Retail Communications
    Proposed FINRA Rule 2212 would replace NASD IM-2210-3 with regard 
to standards applicable to the use of investment company rankings in 
communications. The standards generally would remain the same. FINRA 
has revised the standards applicable to investment company rankings for 
more than one class of an investment company with the same portfolio. 
Such rankings also must be accompanied by prominent disclosure of the 
fact that the investment companies or classes have different expense 
structures. The proposal would add a new paragraph (h) that would 
exclude from the proposed rule's coverage reprints or excerpts of 
articles or reports that are excluded from the Department's filing 
requirements pursuant to proposed FINRA Rule 2210(c)(7)(I).
Requirements for the Use of Bond Mutual Fund Volatility Ratings
    Proposed FINRA Rule 2213 would replace NASD IM-2210-5 with regard 
to standards applicable to the use of bond mutual fund volatility 
ratings in communications. The standards would remain the same as in 
NASD IM- 2210-5.
Requirements for the Use of Investment Analysis Tools
    Proposed FINRA Rule 2214 would replace NASD IM-2210-6 with regard 
to standards applicable to the use of investment analysis tools. The 
standards generally would remain the same with some minor changes. 
Currently NASD IM-2210-6 requires a member that offers or intends to 
offer an investment analysis tool, within 10 days of first use, to 
provide the Department access to the tool and file with the Department 
any template for written reports produced by, or advertisements and 
sales literature concerning, the tool. Proposed FINRA Rule 2214(a) 
would require members to provide the Department with access to the tool 
and to file any template for written reports produced by, or any retail 
communication concerning, the tool within 10 business days of first 
use. This revision makes the access and filing requirement time frame 
consistent with other filing requirements under proposed FINRA Rule 
2210(c).
    The proposal also would move some language that is currently 
contained either in NASD IM-2210-6's text or in footnotes to 
Supplementary Material that follows the Rule. Proposed Supplementary 
Material 2214.06 would provide that a retail communication that 
contains only an incidental reference to an investment analysis tool 
would not have to include the disclosures otherwise required for retail 
communications that advertise an investment analysis tool, and would 
not have to be filed with FINRA unless otherwise required by FINRA Rule 
2210.\53\ In addition, the Supplementary Material would provide that, 
if a retail communication refers to an investment analysis tool in more 
detail but does not provide access to the tool or the results generated 
by the tool, the communication would only have to include the 
disclosures required by paragraphs (c)(2) and (c)(4) of proposed Rule 
2214. Proposed Supplementary Material 2214.07 provides additional 
detail regarding disclosure required by paragraph (c)(3) of Rule 2214. 
This language is currently found in footnote 4 to IM-2210-6. However, 
FINRA has added a specific requirement to disclose whether the 
investment analysis tool is limited to searching, analyzing or in any 
way favoring securities in which the member serves as an underwriter.
---------------------------------------------------------------------------

    \53\ This provision is consistent with footnote 3 to NASD IM-
2210-6.
---------------------------------------------------------------------------

Communications With the Public Regarding Security Futures
    Proposed FINRA Rule 2215 would replace NASD IM-2210-7 with regard 
to standards applicable to communications concerning security futures. 
Proposed FINRA Rule 2215 would revise the current standards in several 
respects.
    First, portions of NASD IM-2210-7 apply only to advertisements. 
Proposed FINRA Rule 2215 would apply these provisions to all retail 
communications.
    Second, NASD IM-2210-7(a)(1) requires members to submit all 
advertisements concerning security futures to the Department at least 
10 days prior to use. Proposed FINRA Rule 2215(a)(1) would require 
members to submit all retail communications concerning security futures 
to the Department at least 10 business days prior to first use. Both 
the current and the proposed filing provisions would require a member 
to withhold the communication from publication or circulation until any 
changes specified by the Department have been made.
    Third, the proposal would amend the provisions that require 
communications concerning security futures to be accompanied or 
preceded by the security futures risk disclosure document under certain 
circumstances.\54\ As revised, a communication concerning security 
futures would have to be accompanied or preceded by the risk disclosure 
document if it contained the names of specific securities.
---------------------------------------------------------------------------

    \54\ See NASD IM-2210-7(b).
---------------------------------------------------------------------------

    Fourth, proposed FINRA Rule 2214(b)(4)(D) would clarify that 
communications that contain the historical performance of security 
futures must disclose all relevant costs, which must be reflected in 
the performance.
Communications With the Public About Collateralized Mortgage 
Obligations
    Proposed FINRA Rule 2216 would replace NASD IM-2210-8 with regard 
to standards applicable to retail communications concerning CMOs. The 
standards would remain the same as in IM-2210-8.
    As noted above, FINRA will announce the implementation date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 90 days following Commission approval. The implementation date 
will be no later than 365 days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\55\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will help 
ensure that investors are protected from potentially false or 
misleading communications with the public distributed by FINRA member 
firms.
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    \55\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 46879]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In September 2009, FINRA published Regulatory Notice 09-55 (the 
``Notice'', requesting comment on the rules as proposed therein (the 
``Notice proposal''). A copy of the Notice was filed with the 
Commission as Exhibit 2a. The comment period expired on November 20, 
2009. FINRA received 23 comments in response to the Notice. A list of 
the commenters in response to the Notice was filed with the Commission 
as Exhibit 2b, and copies of the comment letters received in response 
to the Notice were filed with the Commission as Exhibit 2c.\56\ The 
text of Exhibits 2a, 2b and 2c 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. A summary of the comments and 
FINRA's response is provided below.
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    \56\ See Exhibit 2b for a list of abbreviations assigned to 
commenters.
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Communication Categories
Interactive Electronic Communications
    Cornell, Cutter, PIABA, SIFMA, StockCross, Vanguard and Wells Fargo 
generally supported the proposed consolidation of the six current 
communication categories under NASD Rule 2210 into three categories 
under proposed FINRA Rule 2210(a). Fidelity and the ICI suggested that 
FINRA add a new separate communication category for ``interactive 
electronic communications,'' which would include real-time interactive 
electronic communications made through social media Web sites, and that 
FINRA allow this communication to be supervised in a manner similar to 
the supervision of correspondence.
    FINRA does not believe adding a fourth communication category for 
interactive electronic communication categories is necessary. However, 
as discussed below, FINRA has modified the principal review and 
approval requirements under proposed paragraph (b) to allow retail 
communications that are posted on online interactive electronic forums 
to be supervised in the same manner as correspondence.\57\ FINRA 
believes that this modification of the principal review and approval 
requirements achieves the same result sought by Fidelity and the ICI.
---------------------------------------------------------------------------

    \57\ See proposed FINRA Rule 2210(b)(1)(D)(ii).
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Definition of Correspondence
    The Notice proposal defined ``correspondence'' as any written 
(including electronic) communication that is distributed or made 
available to 25 or fewer retail investors. The Notice proposal likewise 
defined ``retail communication'' as any written (including electronic) 
communication that is distributed or made available to more than 25 
retail investors.
    The proposed definition of ``correspondence'' generated a number of 
comments. The CAI, the ICI, TLGI, MBSC, NPHI, TD Ameritrade, Vanguard 
and WilmerHale objected to treating communications to more than 25 
retail investors as retail communications rather than correspondence. 
These commenters argued that the 25-investor cutoff is arbitrary, and 
that given the challenges in monitoring whether a communication is 
limited to 25 or fewer recipients, members would be forced to treat all 
letters and emails as retail communications. These commenters 
recommended that FINRA revise the proposal to include within the 
definition of ``correspondence'' emails to existing retail customers, 
regardless of the number of recipients.
    NASD Rule 2211(a)(1) defines ``correspondence'' as ``any written 
letter or electronic mail message and any market letter distributed by 
a member to: (A) One or more of its existing retail customers; and (B) 
fewer than 25 prospective retail customers within any 30 calendar-day 
period.'' However, NASD Rule 2211 also requires a member to have a 
registered principal approve prior to use correspondence that is 
distributed to 25 or more existing retail customers within any 30 
calendar-day period and makes any financial or investment 
recommendation or otherwise promotes a product or service of the 
member.\58\
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    \58\ See NASD Rule 2211(b)(1)(A).
---------------------------------------------------------------------------

    FINRA is not revising the definition of ``correspondence'' to 
include e-mails or written letters to existing retail customers without 
limit as to the number of recipients. However, to address the concern 
raised by the commenters, FINRA has revised the proposed principal 
approval requirements to exclude communications to retail investors 
that do not make any financial or investment recommendation or 
otherwise promotes a product or service of the member.\59\ This 
revision will continue to allow members to distribute non-promotional 
e-mails and other communications to retail investors without having a 
principal approve them prior to use.
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    \59\ See proposed FINRA Rule 2210(b)(1)(D)(iii).
---------------------------------------------------------------------------

    Unlike the current definition of ``correspondence'' under NASD Rule 
2211, the Notice proposal's definition of ``correspondence'' did not 
reference a 30 calendar-day window within which to count the number of 
recipients. Cutter, the ICI, Morgan, SIFMA, WGSI and WilmerHale all 
objected to the elimination of the 30 calendar-day period. In response 
to these comments, FINRA has revised the definition of 
``correspondence'' to include written communications distributed or 
made available to 25 or fewer retail investors within any 30 calendar-
day period. FINRA likewise has revised the definition of ``retail 
communication'' to include written communications that are distributed 
or made available to more than 25 retail investors within any 30 
calendar-day period.
    The current definition of ``correspondence'' includes ``market 
letters,'' which are defined as ``any written communication excepted 
from the definition of `research report' pursuant to NASD Rule 
2711(a)(9)(A).'' \60\ The Notice proposal's definition of 
``correspondence'' did not include market letters. Forefield and Wells 
Fargo opposed the elimination of market letters from the definition of 
correspondence. These commenters requested that FINRA either revise the 
definition to include market letters, or provide an exception from the 
principal approval requirements for market letters.
---------------------------------------------------------------------------

    \60\ See NASD Rule 2211(a)(5).
---------------------------------------------------------------------------

    In the interest of keeping the definition of ``correspondence'' as 
straightforward as possible, FINRA is not revising the definition to 
include market letters. However, FINRA has revised the principal 
approval requirements to allow members to supervise any retail 
communication that is excepted from the definition of ``research 
report'' pursuant to NASD Rule 2711(a)(9)(A) in the same manner as 
correspondence.\61\ FINRA believes that the same rationale it used to 
provide members with more flexibility in supervising market letters 
continues to exist, and thus has made this change to the principal 
approval requirements.\62\
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    \61\ See proposed FINRA Rule 2210(b)(1)(D)(i).
    \62\ See Notice to Members 09-10 (February 2009).
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Definitions of Institutional Communication and Institutional Investor
    The Notice proposal defined ``institutional communication'' as 
``any written (including electronic) communication that is distributed 
or made available only to institutional investors.'' TD Ameritrade 
commented that ``or made available to'' should be deleted from the 
definition and replaced

[[Page 46880]]

with ``intended for an audience of.'' With this change, TD Ameritrade 
noted that members could post to Web sites that are intended for 
institutional investors without having to make it password-protected.
    FINRA disagrees with this comment. If members were merely required 
to ``intend'' that a communication reach institutional investors, they 
could effectively distribute the communication to anyone simply by 
including a disclaimer regarding its intended audience. This rule 
change would make the distinction between institutional communications 
and retail communications virtually meaningless.
    The Notice proposal defined ``institutional investor'' to include 
persons described in NASD Rule 3110(c)(4) (definition of 
``institutional account''), government entities and subdivisions, 
certain employee benefit and qualified plans that have at least 100 
participants, members and their registered personnel, and persons 
acting on behalf of institutional investors. Fidelity requested that 
FINRA clarify that if an employer offers multiple employee benefit 
plans, the plans may be aggregated for purposes of calculating the 
number of participants. FINRA has revised the definition of 
``institutional investor'' to allow aggregation of multiple plans 
offered by a single employer.
    Fidelity, SIFMA and WilmerHale argued for expanding the definition 
of ``institutional investor'' to include non-retail entities with 
assets under $50 million.\63\ FINRA believes that the definition is 
already sufficiently broad, and that entities that have assets of less 
than $50 million often require the same investor protections regarding 
sales material as a retail investor.
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    \63\ Under NASD Rule 3110(c)(4), a person who does not fall 
within one of the enumerated categories must have total assets of at 
least $50 million to be considered an institutional account. The SEC 
recently approved the adoption of NASD Rule 3110(c)(4) as FINRA Rule 
4512(c) without material change. See Securities Exchange Act Release 
No. 63784 (January 27, 2011), 76 FR 5850 (February 2, 2011) (Order 
Approving File No. SR-FINRA-2010-052). FINRA Rule 4512 becomes 
effective on December 5, 2011. See Regulatory Notice 11-19 (April 
2011).
---------------------------------------------------------------------------

    SIFMA and TD Ameritrade argued that the rule should make clear that 
if a member provides an institutional communication to another member, 
the first member is not responsible if the second member forwards the 
communication to retail investors. FINRA believes that, while one 
member generally is not responsible for the actions of another, such a 
determination will be subject to the facts and circumstances. Moreover, 
a member may not provide an institutional communication to another if 
the member has reason to believe that it will be forwarded to retail 
investors. Accordingly, FINRA declines to make this change.
    FINRA has added a Supplementary Material to FINRA Rule 2210 to 
clarify the extent to which a member's internal communications would be 
considered institutional communications. The Supplementary Material 
provides 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 pursuant to paragraph (a)(3) of proposed 
FINRA Rule 2210. Accordingly, such internal communications are subject 
to both the provisions of proposed FINRA Rule 2210 and NASD Rule 
3010(d).
Definition of Retail Communication
    The Notice proposal defined ``retail communication'' as ``any 
written (including electronic) communication that is distributed or 
made available to more than 25 retail investors.'' ``Retail investor'' 
was defined as ``any person other than an institutional investor.'' 
Generally ``retail communication'' would include communications that 
currently fall under the definitions of ``advertisement'' and ``sales 
literature.''
    The CAI and NPHI both expressed concern that combining 
advertisements and sales literature into a single category might lead 
FINRA staff to apply the same standards to all retail communications 
regardless of the intended audience. These commenters recommended that 
FINRA provide guidance that it will continue to take into account the 
anticipated audience for a proposed retail communication when 
determining what disclosures and other content standards to apply.
    FINRA notes that proposed FINRA Rule 2210(d)(1)(E) provides that 
``[m]embers must consider the nature of the audience to which the 
communication will be directed and must provide details and 
explanations appropriate to the audience.'' While proposed FINRA Rule 
2210's content standards apply to all retail communications, the level 
of detail and explanation required for a particular retail 
communication will depend on the audience to which it is directed.
    It may be unclear whether the definition of ``retail investor'' 
includes persons who are not customers of a member. Accordingly, FINRA 
has revised the definition to add at its end ``regardless of whether 
the person has an account with a member.'' \64\
---------------------------------------------------------------------------

    \64\ As noted above, FINRA also revised the definition of 
``retail communication'' to add at its end ``within any 30 calendar-
day period.''
---------------------------------------------------------------------------

Approval and Recordkeeping
Review and Approval of Retail Communications
    FINRA Rule 2210(b)(1)(A) in the Notice proposal provided that ``an 
appropriately qualified registered principal'' must approve each retail 
communication before the earlier of its use or filing with the 
Department. SIFMA and Wells Fargo commented that the proposal should 
provide greater guidance as to which principal registration category is 
required to approve different categories of retail communications. 
FINRA believes that this issue is already addressed in the registration 
rules for principals and supervisors.\65\ Accordingly, FINRA does not 
believe that it would be appropriate or useful to restate those rules' 
provisions in the rules governing communications with the public.
---------------------------------------------------------------------------

    \65\ See NASD Rules 1020 et seq.
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    In a similar vein, Morgan, SIFMA and WilmerHale requested 
clarification as to whether a Series 9/10 general securities sales 
supervisor would be permitted to review and approve retail 
communications and correspondence. Currently, Series 9/10 supervisors 
are qualified to review and approve correspondence and sales 
literature, but are not qualified to approve advertisements as defined 
in NASD Rule 2210.\66\ While the scope of a Series 9/10 supervisor's 
activities are not part of this rule proposal, FINRA notes that it has 
separately proposed to adopt new FINRA rules that would allow a general 
securities sales supervisor to approve both correspondence and retail 
communications.\67\
---------------------------------------------------------------------------

    \66\ See NASD Rule 1022(g)(2)(C)(iii).
    \67\ See Regulatory Notice 09-70 (December 2009), Attachment B 
(proposed FINRA Rule 1230(a)(10)) (eliminates current restriction on 
Series 9/10 supervisors approving advertisements).
---------------------------------------------------------------------------

    The ICI requested confirmation that the principal approval 
requirements do not apply to the updating of templates contained in 
retail communications. FINRA does not intend to revise its earlier 
interpretive position with regard to the updating of templates as 
stated in a 2002 interpretive letter to T. Rowe Price Associates, 
Inc.\68\ Moreover, proposed paragraph (c)(7)(B) would add an exclusion 
from the filing

[[Page 46881]]

requirements for 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.
---------------------------------------------------------------------------

    \68\ See Letter from Thomas M. Selman, NASD, to Forrest Foss, T. 
Rowe Price Associates Inc., dated January 28, 2002 (interpreting the 
approval, filing and recordkeeping requirements of NASD Rule 2210 as 
generally not applying to statistical updates contained in pre-
existing templates).
---------------------------------------------------------------------------

    SIFMA recommended that FINRA reiterate its previous interpretive 
guidance regarding the supervision of electronic communications as set 
forth in Regulatory Notice 07-59.\69\ FINRA is separately addressing 
the staff guidance contained in Regulatory Notice 07-59 regarding the 
supervision of electronic communications as part of its proposal to 
adopt new FINRA Rule 3110.\70\
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    \69\ See Regulatory Notice 07-59 (December 2007).
    \70\ See Securities Exchange Act Release No. 64736 (June 23, 
2011), 76 FR 38245 (June 29, 2011) (Notice of Filing File No. SR-
FINRA-2011-028).
---------------------------------------------------------------------------

    The CAI, Cornell, Fidelity, the FSI, MBSC, NPHI, SIFMA, Vanguard, 
and WGSI commented that FINRA should address the supervision 
requirements for social networking sites and include them in the 
revised proposal filed with the SEC. After Regulatory Notice 09-55 was 
published for comment, but before this filing with the SEC, FINRA 
published Regulatory Notice 10-06, which provides guidance on blogs and 
social networking Web sites.\71\ Among other things, that Notice 
addressed the supervision of social media sites and specified that 
members may adopt supervisory procedures similar to those outlined for 
electronic correspondence in Regulatory Notice 07-59. FINRA is now 
codifying this guidance as part of proposed FINRA Rule 2210. Proposed 
paragraph (b)(1)(D)(ii) specifies that the requirements of paragraph 
(b)(1)(A), which require a principal to approve retail communications 
prior to use, will not apply to retail communications that are posted 
on an online interactive electronic forum, provided that the member 
supervises and reviews such communications in the same manner as 
required for supervising and reviewing correspondence pursuant to NASD 
Rule 3010(d).
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    \71\ See Regulatory Notice 10-06 (January 2010).
---------------------------------------------------------------------------

    In addition, given the rapid changes to technology used to 
communicate with customers, FINRA believes it will be useful going 
forward to have exemptive authority with regard to the principal pre-
use approval requirements applicable to retail communications in 
certain circumstances. Accordingly, FINRA has added a new proposed 
paragraph (b)(1)(E) that would authorize FINRA to grant an exemption 
from the principal approval requirements of paragraph (b)(1)(A) for 
good cause shown and to the extent that such exemption is consistent 
with the purposes of Rule 2210, the protection of investors, and the 
public interest.
Review and Approval of Research-Related Retail Communications
    FINRA Rule 2210(b)(1)(B) in the Notice proposal provided that, 
``[w]ith respect to research reports on debt and equity securities, the 
requirements of paragraph (b)(1)(A) may be met by a Supervisory Analyst 
approved pursuant to NYSE Rule 344.'' This language duplicated an 
identical provision in NASD Rule 2210(b)(1)(B). SIFMA and WilmerHale 
requested that FINRA clarify that a supervisory analyst also may review 
and approve research-related communications that are not research 
reports, such as market letters, research notes and economic analyses.
    FINRA does not believe such a clarification is necessary. Proposed 
paragraph (b)(1)(D)(i) would except from the requirements of paragraph 
(b)(1)(A) any retail communication that is excepted from the definition 
of ``research report'' pursuant to NASD Rule 2711(a)(9)(A), provided 
that the member supervises and reviews such communications in the same 
manner as required for supervising and reviewing correspondence. NASD 
Rule 2711(a)(9)(A) excludes from the definition of ``research report'' 
a broad range of research-related communications, such as discussions 
of broad-based indices, commentaries on economic, political or market 
conditions, and certain other research-related communications.\72\ By 
allowing firms to supervise and review these communications in the same 
manner as firms supervise and review correspondence, FINRA believes 
that firms will have sufficient flexibility to address the concerns 
raised by SIFMA and WilmerHale.
---------------------------------------------------------------------------

    \72\ Currently NASD Rule 2211(a)(1) includes within the 
definition of ``correspondence'' any ``market letter.'' ``Market 
letter'' is defined as any written communication excepted from the 
definition of ``research report'' pursuant to NASD Rule 
2711(a)(9)(A). See NASD Rule 2211(a)(5). Thus, the proposal would 
allow members to continue to supervise market letters in the same 
manner as they supervise correspondence.
---------------------------------------------------------------------------

Administrative Communications
    FINRA Rule 2210(b)(1)(D) in the Notice proposal excluded from the 
principal approval requirements of paragraph (b)(1)(A) ``any retail 
communication that is solely administrative in nature.'' The CAI, 
Cutter, Fidelity, the FSI, Invesco, the ICI, MBSC, Morgan and SIFMA 
noted that currently NASD Rule 2211 does not require principal pre-use 
approval of e-mails and written letters to existing retail customers 
(without limit) as long as the communication does not make an 
investment recommendation or promote a product or service of the 
member.\73\ These commenters argued that FINRA should make clear that 
these communications are included within the ``solely administrative'' 
exception. PIABA expressed concern that this exception could be used by 
members as a loophole to avoid principal review, and recommended that 
FINRA better define which communications fall within this exception.
---------------------------------------------------------------------------

    \73\ See NASD Rule 2211(b)(1)(A).
---------------------------------------------------------------------------

    In response to these comments, FINRA has revised paragraph 
(b)(1)(D) to eliminate the reference to ``solely administrative'' 
retail communications, and instead to exclude ``any retail 
communication that does not make any financial or investment 
recommendation or otherwise promote a product or service of the 
member.'' This language is currently used in NASD Rule 2211(b)(1)(A) 
with regard to the requirements for supervising correspondence that is 
sent to 25 or more existing retail clients, and thus maintains the same 
standard members face today with regard to such correspondence. In 
addition, FINRA believes the revised text better defines the scope of 
this exclusion. Members would still be required to supervise such 
retail communications in the same manner as required for supervising 
and reviewing correspondence pursuant to NASD Rule 3010(d).
    FINRA is also adding a new paragraph (b)(1)(F) to clarify that, 
notwithstanding any other provision of proposed FINRA Rule 2210, an 
appropriately qualified principal must approve a communication prior to 
a member filing the communication with the Department.
Recordkeeping Requirements
    FINRA Rule 2210(b)(4) in the Notice proposal set forth members' 
recordkeeping obligations with respect to each communication category. 
Proposed paragraph (b)(4)(A)(ii) provided that, with respect to 
institutional communications, records must include ``the name of the 
person who prepared or distributed the communication.'' Fidelity, the 
ICI and MBSC supported the requirement to maintain records of the 
person who prepared a communication, but opposed a requirement to keep 
records of the person who distributed the communication, which they 
believed would be difficult to implement. TD Ameritrade recommended 
that members be required to keep records of the person who prepared an 
institutional

[[Page 46882]]

communication only where a registered principal has not approved it.
    In response to these comments, FINRA has revised the recordkeeping 
provisions. As revised, a member's records must include the name of any 
registered principal who approved a communication and the date approval 
was given.\74\ In the case of a retail communication or institutional 
communication that is not approved prior to first use by a registered 
principal, the records must include the name of the person who prepared 
or distributed the communication. Thus, a member would not have to keep 
records of the person who distributed a retail communication or 
institutional communication, if the records included either the 
registered principal who approved the communication, or the person who 
prepared the communication.
---------------------------------------------------------------------------

    \74\ See proposed FINRA Rule 2210(b)(4)(A)(ii).
---------------------------------------------------------------------------

    FINRA Rule 2210(b)(4)(A)(iv) in the Notice proposal required 
records to include ``the source of any statistical table, chart, graph 
or other illustration used in the communication.'' Fidelity and the FSI 
requested that FINRA clarify what is required regarding sources of 
statistical tables or charts. For example, is it sufficient to have a 
citation to a study, or must a record include a copy of the study 
itself? In response to these comments, FINRA has revised proposed FINRA 
Rule 2210(b)(4)(A)(iv) to require ``information concerning'' the source 
of the table or chart. This revision reflects the current recordkeeping 
requirements for sources of statistical tables or charts.\75\
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    \75\ See NASD Rule 2210(b)(2)(B).
---------------------------------------------------------------------------

Filing Requirements
Filing Requirements for New Members and Certain Rule Violators
    FINRA Rule 2210(c)(1)(A) in the Notice proposal required a new 
member to file with the Department all of its retail communications for 
a one-year period beginning on the effective date a member becomes 
registered with FINRA. This new member filing requirement differs from 
NASD Rule 2210(c)(5)(A), which applies only to advertisements and 
commences on the first date a new member files an advertisement with 
the Department. Proposed paragraph (c)(1)(B) provided that, if the 
Department determines that a member has departed from proposed FINRA 
Rule 2210's standards, it may require the member to file all or part of 
its communications at least 10 business days prior to use.
    Cornell opposed the commencement date of the new member filing 
period, arguing that this will decrease the time during which the 
Department will monitor a new member's communications. FINRA disagrees 
that the new filing period is insufficient. Members are still subject 
to a filing requirement during their first year of operation and are 
required to file certain retail communications thereafter. In addition, 
members are always subject to spot-check procedures. Nevertheless, to 
ensure that the starting date for this filing requirement is clear, 
FINRA has revised this provision to specify that the one-year filing 
period begins on the date reflected in the CRD[supreg] system as the 
date the firm's FINRA membership became effective.
    WilmerHale opposed the breadth of this expanded filing requirement, 
which would cover communications that currently qualify as sales 
literature and thus do not have to be filed. WilmerHale argued that 
this expanded filing requirement would substantially hinder new firms' 
operations. SIFMA similarly argued that this filing requirement should 
exclude password-protected Web sites, since they are considered sales 
literature rather than advertisements under current rules.
    FINRA recognizes that it may be burdensome for new firms to file 
all of their retail communications, including form letters and group e-
mails sent to 25 or more retail investors within a 30 calendar-day 
period. Accordingly, FINRA has narrowed the scope of this filing 
requirement to cover only retail communications that are published or 
used in any electronic or other public media, including any generally 
accessible Web site, newspaper, magazine or other periodical, radio, 
television, telephone or audio recording, video display, signs or 
billboards, motion pictures or telephone directories (other than 
routine listings). This narrowing of the filing requirement would 
require new firms to file only retail communications that currently 
fall within the definition of ``advertisement'' under NASD Rule 2210, 
thus not changing the scope of this filing requirement as compared to 
current standards. The filing requirements of proposed paragraph 
(c)(1)(A) would not apply to password-protected Web sites.
    Fidelity commented that FINRA should be required to delineate the 
administrative process that must be followed before it can impose a 
pre-use filing requirement on members that have violated the 
communications rules. FINRA believes that proposed paragraph (c)(1)(B) 
specifies the steps FINRA must take before it may impose this 
requirement. The paragraph states that the Department must notify the 
member in writing of the types of communications to be filed and the 
length of time the requirement is to be in effect. The paragraph also 
states that any such filing requirement will take effect 21 calendar 
days after service of the written notice, during which time the member 
may request a hearing under FINRA Rules 9551 and 9559.
Retail Communications Concerning Structured Products
    FINRA Rule 2210(c)(2)(B) in the Notice proposal required members to 
file at least 10 business days prior to use, retail communications 
concerning publicly offered CMOs, options, security futures, and any 
other publicly offered securities derived from or based on a single 
security, a basket of securities, an index, a commodity, a debt 
issuance or a foreign currency (``structured products''). These pre-use 
filing requirements would not apply to retail communications concerning 
options or security futures that are submitted to another self-
regulatory organization having comparable standards, retail 
communications in which the only reference to options or security 
futures is contained in a listing of the member's services, and retail 
communications that are subject to a separate filing requirement in 
paragraph (c) of the proposed rule.
    Cornell, the ICI, PIABA and Vanguard supported the pre-use filing 
requirement for retail communications concerning structured products. 
Fidelity commented that FINRA should list which products fall within 
this requirement, and clarify that investment company products do not 
fall within this requirement. Fidelity also recommended that this 
filing requirement exclude factual material about structured products, 
such as research reports and fact sheets, and that FINRA should allow a 
member to use retail communications that are filed with the Department 
if the member does not receive a response from FINRA within 10 business 
days.
    Invesco and SIFMA commented that the proposal should be revised to 
eliminate the pre-use filing requirement for retail communications 
concerning structured products, and instead allow members to file such 
communications within 10 business days of first use. SIFMA also 
recommended that the reference to retail communications concerning 
options be stricken, since these communications are separately 
regulated under FINRA Rule 2220. In addition, SIFMA requested that 
FINRA exempt from this filing requirement retail communications 
concerning structured products for which there is a

[[Page 46883]]

registration exemption under the Securities Act.
    StockCross argued that the pre-use filing requirement for retail 
communications concerning structured products will hinder business 
since often these products have a limited offering period. Wells Fargo 
suggested that retail investors will be put at a disadvantage relative 
to institutional investors since retail investors will not be able to 
receive sales material concerning structured products until after the 
member receives Department staff's comments to filed communications.
    WilmerHale also opposed the pre-use filing requirement for retail 
communications concerning structured products. WilmerHale argued that 
the burdens on members will strongly outweigh any benefit to investors. 
For example, members would be prevented from sending group e-mails to 
clients reminding them that their options are in the money without 
first filing such an e-mail with FINRA at least 10 business days prior 
to transmission. WilmerHale and SIFMA both expressed concern that FINRA 
lacks the resources necessary to review such communications. WilmerHale 
also recommended that FINRA exclude all research from the requirements 
of proposed FINRA Rule 2210 and address any specific concerns under 
NASD Rule 2711.
    In response to these comments, FINRA is revising the filing 
requirements for retail communications concerning options, CMOs and 
structured products. FINRA agrees that FINRA Rule 2220 separately 
imposes a filing requirement for advertisements and sales literature 
concerning options; accordingly, it is unnecessary to include a 
separate filing requirement for retail communications concerning 
options under proposed FINRA Rule 2210. Thus, the reference to retail 
communications concerning options has been deleted.
    FINRA also agrees that there may be situations in which a pre-use 
filing requirement would prevent members from distributing time-
sensitive retail communications concerning CMOs and structured products 
in a timely manner. Accordingly, FINRA has revised the proposal to 
permit members to file retail communications concerning CMOs and 
structured products within 10 business days of first use, instead of at 
least 10 business days prior to use.\76\
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    \76\ See proposed FINRA Rules 2210(c)(3)(E) and (F).
---------------------------------------------------------------------------

    FINRA does not believe it is appropriate to attempt to list all 
products that are derived from or based on a single security, a basket 
of securities, an index, a commodity, a debt issuance or a foreign 
currency. Members frequently develop new types of retail structured 
products that would not be included in any list that FINRA created 
today. Thus, FINRA believes that it is better to leave open the 
possibility that retail communications concerning new products also 
will fall under this filing requirement.
    FINRA agrees that retail communications concerning registered 
investment companies are not subject to the filing requirement covering 
structured products communications, since they are already subject to a 
separate filing requirement under proposed paragraphs (c)(2)(A), 
(c)(2)(C) and (c)(3)(A). FINRA has added language to proposed paragraph 
(c)(3)(F) to make this more clear.
    FINRA does not agree that retail communications that only present 
``factual information'' about structured products should be excluded. 
Arguably all sales material is ``factual,'' and the determination of 
which communications are not factual would be highly subjective. In 
addition, the proposal already excludes from filing retail 
communications whose only reference to investments is solely as part of 
a listing of products and services offered by the member.\77\
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    \77\ See proposed FINRA Rule 2210(c)(7)(L).
---------------------------------------------------------------------------

    FINRA agrees that the filing requirement should not apply to retail 
communications concerning structured products that are not registered 
under the Securities Act. As a general matter, the filing requirements 
under NASD Rule 2210 do not apply to communications concerning 
privately placed securities, since typically these securities are not 
widely advertised. Accordingly, FINRA has added language to proposed 
paragraph (c)(3)(F) to clarify that the filing requirement only applies 
to retail communications concerning structured products that are 
registered under the Securities Act.
    FINRA disagrees with the assertion that it lacks the resources to 
review retail communications concerning structured products. FINRA will 
ensure that the Department has the necessary staffing to review such 
material in a timely manner. Additionally, by allowing members to file 
such communications concurrent with use, this revision takes some of 
the time pressure off members that seek to distribute retail 
communications prior to receiving staff comments.
    FINRA also disagrees that proposed FINRA Rule 2210 should not apply 
to research. While NASD Rule 2711 does impose some content standards on 
research reports, it does not include the more general standards of 
proposed FINRA Rule 2210 that require communications to be fair and 
balanced. In addition, proposed FINRA Rule 2210 requires certain non-
independent research, such as research prepared by a member or its 
affiliate on mutual funds or exchange-traded funds (``ETFs''), to be 
filed with the Department.
Retail Communications Concerning Closed-End Funds
    FINRA Rule 2210(c)(3)(A) in the Notice proposal required members to 
file all retail communications concerning registered closed-end 
investment companies. Currently, FINRA only requires members to file 
such communications during a closed-end fund's IPO period.
    Cornell, the ICI, PIABA and Vanguard supported this expanded filing 
requirement. The ICI requested that FINRA clarify that its rules only 
reach members that prepare closed-end fund communications, and not the 
fund itself or its adviser. The ICI also requested that FINRA clarify 
that a fund underwriter is not responsible for communications 
concerning a closed-end fund prepared by an unaffiliated member.
    FINRA rules apply to communications used by FINRA member firms. 
While its rules do not apply to non-member firms, such as investment 
companies and investment advisers that are not registered as broker-
dealers, they do apply to any communications used by a member, 
regardless of which entity prepared the communications. Generally, 
FINRA does not hold one member responsible for the actions of another 
member, but considers each case separately based on the facts and 
circumstances.
    Wells Fargo opposed the requirement to file retail communications 
concerning closed-end funds after the IPO period has expired, arguing 
that trading closed-end funds on the secondary market does not raise 
the same concerns as during the IPO period. FINRA disagrees with this 
argument. FINRA currently requires members to file retail 
communications concerning other types of investment company securities 
that are traded on the secondary market, such as ETFs. In addition, 
FINRA believes that investor protection concerns can arise from any 
retail communication concerning a closed-end fund, regardless of when 
it is distributed.

[[Page 46884]]

Filing Exclusions for Non-Material Changes and Templates
    FINRA Rule 2210(c)(7)(A) in the Notice proposal excluded from the 
filing requirements of proposed paragraphs (c)(1) through (c)(4) 
``retail communications that previously have been filed and that are 
used without material change, including 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.'' NASD Rule 2210(c)(8)(A) includes the 
same filing exclusion for previously filed advertisements and sales 
literature that are used without material change, but does not contain 
any express filing exclusion for templates.
    The CAI, Fidelity, the ICI and MBSC expressed concern that proposed 
paragraph (c)(7)(A) would narrow the current filing exclusion for 
communications used without material change. By including the template 
filing exclusion in the same paragraph, these commenters feared that 
this filing exception would not allow non-material changes to narrative 
information. FINRA did not intend to narrow the current filing 
exclusion for retail communications that are used without material 
change. Accordingly, FINRA has separated the filing exclusion for 
previously filed retail communications that are used without material 
change from the exclusion for certain previously filed templates.\78\
---------------------------------------------------------------------------

    \78\ See proposed FINRA Rules 2210(c)(7)(A) and (B).
---------------------------------------------------------------------------

Filing Exclusion for Administrative Communications
    FINRA Rule 2210(c)(1)(B) in the Notice proposal excluded from the 
filing requirements retail communications ``that are solely 
administrative in nature.'' This filing exclusion replaced a current 
exclusion for advertisements and sales literature ``solely related to 
recruitment or changes in a member's name, personnel, electronic or 
postal address, ownership, offices, business structure, officers or 
partners, telephone or teletype numbers, or concerning a merger with, 
or acquisition by, another member.'' \79\
---------------------------------------------------------------------------

    \79\ See NASD Rule 2210(c)(8)(B).
---------------------------------------------------------------------------

    SIFMA requested that FINRA clarify that this exclusion covers 
generic documents or excerpts describing a member's products or 
services, even if they reference a product subject to the filing 
requirements. Vanguard requested that this filing exclusion 
specifically reference the list of items that is excluded under current 
rules. Wells Fargo argued that this exclusion should not be limited to 
the administrative items that are excluded under current rules.
    SIFMA's interpretation of this filing exclusion is broader than 
FINRA intended. However, FINRA acknowledges that ``solely 
administrative in nature'' may be unclear to some members. Accordingly, 
FINRA is revising this exclusion to cover retail communications that do 
not make any financial or investment recommendation or otherwise 
promote a product or service of the member. In this regard, the filing 
exclusion covers the same retail communications that are excepted from 
the principal approval requirements under proposed FINRA Rule 
2210(b)(1)(D).
Other Filing Exclusions
    FINRA Rule 2210(c)(7)(G) of the Notice proposal excluded from the 
filing requirements reprints and excerpts of certain articles and 
reports produced by independent third parties. SIFMA requested that 
FINRA clarify whether that filing exclusion covered independent third-
party research reports concerning registered investment companies, 
which are currently excluded from filing under NASD Rule 2210(c)(8)(H). 
FINRA does intend this filing exclusion also to cover independent 
research reports on registered investment companies which are excluded 
from filing under the current rules.
    FINRA Rule 2210(c)(7)(J) of the Notice proposal excluded from the 
filing requirements communications that refer to investment company 
securities, direct participation programs or exempted securities solely 
as part of a listing of products or services offered by the member. TD 
Ameritrade requested that FINRA expand this exclusion to allow members 
to discuss the types of securities that can be traded through a member, 
to include general descriptions of these securities, to explain the 
functionality of online tools and trading platforms, and to present 
related fees and commissions, as long as no actual security is named. 
Cutter requested that this exclusion permit a listing of any type of 
investment a member offers, not just the securities described in the 
paragraph.
    FINRA does not believe TD Ameritrade's proposed expansion would be 
appropriate, since it would cover many types of retail communications 
that normally require review by Department staff. FINRA agrees, 
however, that a communication that refers to an investment solely as 
part of a listing of a member's products and services should be 
excluded from filing. FINRA has modified this filing exclusion 
accordingly.\80\
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    \80\ See proposed FINRA Rule 2210(c)(7)(L).
---------------------------------------------------------------------------

    The Notice proposal would have eliminated a current filing 
exclusion for press releases that are made available only to members of 
the media.\81\ The Notice proposal stated that FINRA staff found that 
members almost always post press releases on their Web sites, thus 
making them available to the general public, and making this filing 
exclusion inapplicable. Fidelity, the ICI and MBSC commented that 
members still rely on this filing exclusion, and thus objected to its 
elimination. Based on these representations, FINRA has reinstated the 
filing exclusion for press releases made available only to members of 
the media.\82\
---------------------------------------------------------------------------

    \81\ See NASD Rule 2210(c)(8)(G).
    \82\ See proposed FINRA Rule 2210(c)(7)(H).
---------------------------------------------------------------------------

    In 2006, FINRA published an interpretive letter stating that free 
writing prospectuses are excluded from the provisions of NASD Rules 
2210 and 2211.\83\ Based on this 2006 letter, Morgan, SIFMA and 
WilmerHale requested that FINRA include a filing exclusion for free 
writing prospectuses. In October 2010, FINRA published a Regulatory 
Notice that withdrew, in part, the guidance provided in the 2006 
interpretive letter.\84\ In the 2010 Notice, FINRA stated that broadly 
disseminated free writing prospectuses present the same investor 
protection concerns as communications governed by NASD Rules 2210 and 
2211. Accordingly, FINRA announced that it now interprets FINRA Rules 
2210 and 2211 to apply to free writing prospectuses distributed by a 
broker-dealer in a manner reasonably designed to lead to broad 
unrestricted dissemination. Based on this new guidance, rather than 
exclude free writing prospectuses, FINRA is modifying the current 
filing exclusion for SEC-filed documents not to cover broadly 
disseminated free writing prospectuses filed with the SEC pursuant to 
Securities Act Rule 433(d)(1)(ii).\85\ Thus, such free writing 
prospectuses must be filed with FINRA to the extent that they 
constitute a retail communication covered by another filing requirement 
(such as a free writing prospectus concerning a structured product 
registered under the Securities Act).
---------------------------------------------------------------------------

    \83\ See Letter from Lisa C. Horrigan, Assistant General 
Counsel, NASD, to Eileen Ryan, Securities Industry Association, and 
Sarah Starkweather, The Bond Market Association, dated August 1, 
2006.
    \84\ See Regulatory Notice 10-52 (October 2010).
    \85\ See proposed FINRA Rule 2210(c)(7)(F).

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[[Page 46885]]

    SIFMA recommended that FINRA add a filing exclusion for general 
investment pieces that discuss an investment strategy but do not 
recommend or promote a particular product or service of a member. FINRA 
has revised the proposal to exclude retail communications that do not 
make investment recommendations or promote a member's products or 
services. However, depending on the facts and circumstances, a retail 
communication that discusses investment strategies may in fact be 
making investment recommendations or promoting a member's products or 
services.
Filing Exemptions
    NASD Rule 2210(c)(10) and FINRA Rule 2210(c)(9) of the Notice 
proposal permitted FINRA to exempt a member from the pre-use filing 
requirements of paragraph (c)(1)(A) for good cause shown. As discussed 
above, FINRA has revised the principal review and approval requirements 
to authorize FINRA to grant an exemption from the principal approval 
requirements of paragraph (b)(1)(A) for retail communications for good 
cause shown after taking into consideration all relevant factors, to 
the extent such exemption is consistent with the purposes of Rule 2210, 
the protection of investors, and the public interest. FINRA is 
similarly revising proposed paragraph (c)(9) to authorize FINRA to 
exempt a specific category of retail communications from the filing 
requirements under the same circumstances described with respect to the 
principal approval exemptive authority.
Other Filing Issues
    NPHI requested that FINRA revise its filing requirements to be 
triggered off the date a registered principal approves a communication, 
rather than the date a member first uses the communication, since a 
member may not know the exact date of first use. FINRA disagrees with 
this recommendation since such a standard would allow members to delay 
filing a communication indefinitely until a principal approved it. 
Moreover, FINRA believes that it is important for members to keep 
records of when a communication is used.
    T. Rowe commented that members should be allowed to file retail 
communications within 15 business days of first use, rather than 10 
business days. FINRA disagrees with this recommendation since allowing 
members to file 15 business days after the date of first use would 
create too long a period between the first date a member distributes 
its communication and the first date FINRA has an opportunity to review 
the communication.
    Proposed FINRA Rule 2210(c)(3)(A) requires a member that files a 
retail communication that includes an investment company performance 
ranking or comparison to include a copy of the ranking or comparison 
used in the communication. T. Rowe recommended that members be allowed 
to submit one performance ranking backup document and refer to that 
document in future filings. FINRA does not agree with this comment, 
since Department staff need the ranking or comparison used in a retail 
communication when conducting their review, and reference to a ranking 
document contained in a prior filing would slow the process.
Content Standards
General Comments
    FINRA Rule 2210(d)(1)(F) in the Notice proposal generally 
prohibited communications from predicting or projecting performance, 
but permitted a hypothetical illustration of mathematical principles as 
long as it does not predict or project performance. TD Ameritrade 
commented that this provision should be revised to permit examples of 
hypothetical transactions (such as the maximum gain or loss that would 
occur based on an assumed change in market price), as long as the 
assumptions are disclosed. FINRA does not believe the provisions should 
be changed in this regard. If a hypothetical example is an illustration 
of mathematical principles, it would be permitted. If, however, it is 
really a projection of performance of a particular investment, FINRA 
believes this practice should not be allowed.
    FINRA does believe, however, that proposed paragraph (d)(1)(F) 
needs to be clarified to indicate the circumstances under which a 
projection of performance is permitted: in an investment analysis tool, 
or a written report produced by such a tool, as permitted under 
proposed FINRA Rule 2214, and a price target in a research report on 
debt or equity securities, subject to certain conditions. FINRA has 
revised proposed paragraph (d)(1)(F) to reflect these exceptions.
    FINRA Rule 2210(d)(3)(B) in the Notice proposal required all retail 
communications and correspondence to reflect any relationship between 
the member and any non-member or individual who is also named. TD 
Ameritrade recommended that this provision be revised to require such a 
disclosure only where a relationship exists. FINRA believes no change 
is necessary, since the paragraph requires a communication to ``reflect 
any relationship between the member and any non-member or individual 
who is also named.'' If no relationship exists, no disclosure is 
required.
    FINRA Rule 2210(d)(4)(C)(iii) in the Notice proposal provided that, 
in a comparative illustration of the mathematical principles of tax-
deferred versus taxable compounding, the illustration may reflect an 
actual state income tax rate, provided that the communication is used 
only with investors that reside in the identified state. TD Ameritrade 
commented that this provision should be revised to allow the use of an 
actual state income tax rate as long as the material clearly discloses 
that the rate only applies to residents of a particular state. FINRA 
has revised this provision to allow illustrations to reflect an actual 
state income tax rate if it prominently discloses that the illustration 
is applicable only to investors that reside in the identified state.
    FINRA also has revised the disclosure requirements in proposed 
FINRA Rule 2210(d)(4)(vii) for such comparative illustrations. 
Illustrations additionally must disclose the degree of risk in the 
investment's assumed rate of return, including a statement that the 
assumed rate of return is not guaranteed, and the possible effect of 
investment losses on the relative advantage of the taxable versus tax-
deferred investments.
Disclosure of Expenses in Fund Performance Advertising
    FINRA Rule 2210(d)(5) in the Notice proposal required retail 
communications that present non-money market fund performance data to 
disclose, among other things, the fund's maximum front-end or back-end 
sales charges and total annual fund operating expense ratio, gross of 
any fee waivers or expense reimbursements, as stated in the fee table 
of the fund's prospectus or annual report, whichever is more current. 
Currently NASD Rule 2210(d)(3) requires the sales charges and expense 
ratio simply to reflect the current prospectus, and not a fund's annual 
report.
    Fidelity, the ICI and MBSC opposed the requirement to show the 
expense ratio from either the prospectus or annual report, whichever is 
more current. These commenters argued such a requirement would be too 
burdensome and confusing to investors. American Funds argued that a 
fund should be allowed to show current expenses based on a fund's 
annualized monthly expense ratio, and not have to refer to the

[[Page 46886]]

prospectus. Vanguard supported the proposed change, but recommended 
that the rule allow members to show the expense ratio from a fund's 
prospectus if it reflects the fund's reasonable expectation of the 
current year's expenses.
    FINRA had made this proposed change based on earlier industry input 
that members should be allowed to show expenses from an annual report 
if it is more current than the prospectus. However, in light of 
comments received on the Notice proposal and the importance for expense 
disclosure to be comparable among funds, FINRA is retaining the 
standard reflected in NASD Rule 2210(d)(3), and requiring sales charges 
and expense ratios to reflect a fund's current prospectus.
    The CAI requested confirmation that this disclosure requirement 
does not apply to the presentation of performance of an underlying 
investment option contained in a variable insurance product 
communication. FINRA agrees the provision does not apply to such 
communications.
    FINRA Rule 2210(d)(5)(B) in the Notice proposal required a print 
advertisement to disclose standardized performance and expense-related 
information in a prominent text box. Fidelity, the ICI and MBSC 
requested confirmation that this requirement only applies to print 
advertisements and not other forms of retail communications, such as 
Web sites. The ICI and MBSC also recommended that FINRA eliminate the 
text box requirement and replace it with a prominence requirement 
applicable to all retail communications.
    Consistent with its application of NASD Rule 2210(d)(3), FINRA 
confirms that the text box requirement only applies to print 
advertisements. FINRA disagrees however, with the recommendation to 
eliminate the text box requirement for print advertisements. FINRA 
created this requirement due to past abuses in which non-standardized 
performance was prominently displayed in print advertisements, while 
disclosures regarding standardized performance and expenses were placed 
in footnotes. FINRA believes that this requirement has helped to 
prevent this kind of misleading presentation since the rule was 
adopted.

Recommendations

    FINRA Rule 2210(d)(7)(A) in the Notice proposal required retail 
communications, correspondence and public appearances to contain 
certain disclosures if the communication included a recommendation of 
securities. The communication would have to disclose if the member was 
making a market in the security (or an underlying option or future), if 
the member or its associated person will sell or buy the security from 
customers on a principal basis, that the member or any associated 
person with the ability to influence the substance of the communication 
has a financial interest in the recommended security, and if the member 
was manager or co-manager of a public offering of any securities of the 
recommended issuer in the past 12 months.
    Cornell and PIABA both opposed limiting disclosures of financial 
interests to the member and associated persons with the ability to 
influence the substance of the communication. These commenters felt the 
associated person standard was too narrow and vague. Fidelity 
recommended that the disclosure standard for associated persons should 
be limited to persons who are direct employees of the member or are 
registered with the member, and who are directly and materially 
involved in the preparation of the communication. Fidelity and Morgan 
commented that disclosure should not be required unless an employee has 
a direct and material financial interest in the recommended security. 
This would exclude small investments and investments through mutual 
funds.
    Morgan, SIFMA and WilmerHale commented that it would be impossible 
for a member to track which associated persons have the ability to 
influence the substance of a communication, and that FINRA must provide 
more guidance as to which associated persons the disclosure 
requirements would apply. The FSI inquired as to whether the disclosure 
standard would apply to a supervisor of a registered representative who 
emails a securities recommendation to a customer. SIFMA commented that 
the disclosure requirement should be limited to the member and its 
officers and partners, and that the rule permit generic, non-specific 
disclosures regarding financial interests, market making and 
underwriting activities.
    Morgan, SIFMA and WilmerHale commented that the provision not apply 
to correspondence. WilmerHale also urged that the proposed rule exclude 
retail communications and public appearances by research analysts, 
since these situations are already covered by NASD Rule 2711.
    In response to these comments, FINRA has revised proposed paragraph 
(d)(7)(A). First, paragraph (d)(7)(A) no longer applies to 
correspondence. Given that correspondence may not be delivered to more 
than 25 retail investors within a 30-calendar-day period, FINRA 
believes that it is not necessary to include the extensive disclosure 
required for retail communications in communications sent to a more 
limited audience.
    Second, FINRA has added a requirement that a recommendation of 
securities have a reasonable basis. This requirement is consistent with 
NASD IM-2210-1(6)(A).
    Third, FINRA has modified the requirement to disclose the financial 
interests of any associated person with the ability to influence the 
substance of the communication. Instead, the disclosure requirement 
will apply to any associated person with the ability to influence the 
``content'' of the communication. While this modification is minor, 
FINRA believes that it will help clarify which associated persons must 
disclose their financial interests. FINRA continues to believe that 
persons who influence the content of a communication that includes a 
recommendation have a material conflict of interest that should be 
disclosed if the person also has a financial interest in the 
recommended security.
    Fourth, the disclosure requirement excludes financial interests 
that are ``nominal.'' This revision makes the rule consistent with the 
current disclosure requirements for advertisements and sales literature 
that include securities recommendations under NASD IM 2210-1(6)(A)(ii).
    Fifth, FINRA has excluded from this disclosure requirement public 
appearances by research analysts, since they are already covered under 
NASD Rule 2711. The proposed language also excludes research reports 
for the same reason.
    Proposed FINRA Rules 2210(d)(7)(C) revised the current disclosure 
requirements for communications that contain past specific 
recommendations.\86\ The revised provisions more closely reflect the 
disclosure standards applicable to advertisements of investment 
advisers that contain past specific recommendations. Wells Fargo 
supported this change, but urged FINRA also to adopt the SEC's 
interpretations of the Investment Advisers Act regarding 
recommendations. While FINRA may look to past SEC interpretations of 
its rules for guidance, FINRA declines to adopt any of the SEC 
interpretations of the Investment Advisers Act regarding

[[Page 46887]]

recommendations for purposes of this filing.
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    \86\ See NASD IM-2210-6(C) and (D).
---------------------------------------------------------------------------

Other Comments
    Fidelity, the ICI and Vanguard requested clarification as to 
whether a member is responsible for content posted by third parties on 
a member's Web site. These commenters also recommended that FINRA 
develop interpretive guidance concerning the principles that members 
should follow when developing communications intended for customers' 
mobile electronic devices. For example, FINRA should address how 
members may meet various disclosure requirements, such as the 
requirement to disclose a member's name, fees, expenses and 
standardized performance information.
    FINRA previously addressed the issue of third-party content in 
Regulatory Notice 10-06. FINRA also agrees that issues related to 
communications intended for mobile electronic devices is important and 
will consider further guidance or rulemaking as issues arise, but does 
not believe this proposed rulemaking is the appropriate vehicle to 
address all issues raised by new technologies. In the past, when FINRA 
has reviewed a member's advertisement or sales literature that includes 
a bond fund's 30-day yield, and the fund's affiliates have subsidized 
or reimbursed the fund's expenses, FINRA staff has required the member 
also to disclose the fund's yield that would have occurred had expenses 
not been subsidized (the ``unsubsidized yield''). FINRA has imposed 
this requirement based on language contained in the SEC's 1988 adopting 
release for Rule 482 under the Securities Act.\87\ The ICI and T. Rowe 
both objected to this requirement and requested that FINRA clarify that 
disclosure of the unsubsidized yield is unnecessary in such 
circumstances. Because this issue involves an interpretation of Rule 
482 under the Securities Act, FINRA declines to provide guidance 
through the proposed rule change.
---------------------------------------------------------------------------

    \87\ See Securities Act Release No. 6753 (February 2, 1988), 53 
FR 3868 (February 10, 1988) (Order Approving File No. S7-23-86), p. 
37.
---------------------------------------------------------------------------

Public Appearances
    Proposed FINRA Rule 2210(f) in the Notice proposal sets forth the 
content and supervision requirements for members and associated persons 
that participate in seminars, forums or radio or television interviews. 
Paragraph (f)(1) specifies that the member or associated person must 
follow the content standards of paragraph (d)(1), and if the member or 
associated person recommends a security, paragraph (d)(7).
    Fidelity, Invesco, the ICI and Morgan opposed requiring associated 
persons that make recommendations in public appearances to meet the 
content standards of paragraph (d)(7). These commenters argued that it 
would be impossible to monitor or supervise. Invesco also argued that 
this requirement creates an uneven playing field between broker-dealers 
and investment advisers, since investment advisers do not have a 
similar disclosure requirement.
    FINRA disagrees with the comments that the disclosure requirements 
regarding recommendations would be impossible to monitor or supervise. 
Members that employ research analysts already must meet similar 
requirements under NASD Rule 2711. Members could impose similar 
policies and procedures for their associated persons who intend to 
recommend securities in public appearances. The ICI requested 
clarification that, if a member sponsors a seminar or forum, the member 
is responsible only for its own presentation and not those of others. 
This issue will be a matter of facts and circumstances, but generally a 
member is only responsible for the communications of the member or its 
associated persons, unless the member or its associated persons are 
entangled with or adopt others' communications.
    NPHI requested clarification as to whether a discussion of a 
general product category constitutes a recommendation for purposes of 
the public appearance disclosure requirements. If a member or 
associated person merely discusses a general product category without 
recommending a particular security, the disclosure requirements would 
not apply. Similarly, T. Rowe asked whether the mere reference to a 
security is a recommendation. Generally the mere reference to a 
security is not a recommendation, but this issue will be a matter of 
facts and circumstances.
    Under NASD Rule 2210, ``public appearance'' is a separate category 
of communications with the public.\88\ Proposed FINRA Rule 2210 does 
not retain ``public appearance'' as a separate category of 
``communications with the public.'' T. Rowe suggested that FINRA retain 
its definition of ``public appearance,'' since otherwise an email to a 
member of the media or private conversation might be viewed as a public 
appearance. FINRA does not believe this is necessary. Proposed 
paragraph (f)(1) makes clear that it applies only to ``a seminar, 
forum, radio or television interview or * * * public appearances or 
speaking activities * * *'' An email or private conversation would not 
fall within this description.\89\ In addition, the language used to 
describe a public appearance in proposed paragraph (f)(1) is similar to 
the current definition of ``public appearance'' under NASD Rule 
2210(a)(5).
---------------------------------------------------------------------------

    \88\ See NASD Rule 2210(a)(5).
    \89\ Moreover, proposed paragraph (f)(1) expressly excludes 
correspondence from the description of a public appearance.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2) would require members to adopt written 
procedures that are appropriate to a member's business, size, 
structure, and customers to supervise its associated persons' public 
appearances. The procedures must include, among other things, 
surveillance and follow-up to ensure that such procedures are 
implemented and adhered to. T. Rowe requested clarification as to what 
level of surveillance and follow-up is required, particularly for one-
time appearances. T. Rowe also commented that there should be an 
exception if a member approves appearances in advance. FINRA does not 
believe it would be appropriate to pre-determine how a member must 
supervise its associated persons' public appearances, since this will 
vary depending on a member's business model, size, and the type of 
public appearance involved. FINRA also does not agree that a member 
should have no obligation to review public appearances after the fact 
for compliance with applicable rules as long as it approves the 
appearance in advance.
    FINRA is making one additional change to the proposed paragraph (f) 
in light of other changes to the proposed rule. Paragraph (f)(1) of the 
Notice proposal also covered ``interactive electronic forums'' within 
its description of a public appearance. To the extent participation in 
an interactive electronic forum takes the form of a written 
communication disseminated through an interactive Web site, FINRA 
considers such a communication to be a retail communication rather than 
a public appearance. However, as discussed above, proposed FINRA Rule 
2210(b)(1)(D)(ii) allows a member to supervise and review retail 
communications that are posted on online interactive electronic forums 
in the same manner as required for supervising and reviewing 
correspondence. Accordingly, FINRA has deleted ``(including an 
interactive electronic forum)'' from proposed paragraph (f)(1).

[[Page 46888]]

Investment Analysis Tools
    Proposed FINRA Rule 2214 of the Notice proposal codifies largely 
without change current NASD IM-2210-6 (Requirements for the Use of 
Investment Analysis Tools).\90\ Fidelity, the ICI, MBSC and T. Rowe 
commented that Rule 2214 should be revised to allow members to present 
projections of performance in retail communications even in cases where 
the tool is not interactive with customers. These commenters argue that 
a firm should be permitted to show projected performance of an 
investment in a communication that is not based on information provided 
by a customer independently or with the assistance of the member firm. 
T. Rowe also commented that members should be allowed to use the data 
generated by an investment analysis tool in sales material for target 
date funds provided that these illustrations are limited to a 
discussion of a fund's investment strategy and not used to project 
performance.
---------------------------------------------------------------------------

    \90\ Certain of NASD IM-2210-6's text that appears either in the 
Interpretive Material itself or in footnotes to the Interpretive 
Material have been moved to Supplementary Material.
---------------------------------------------------------------------------

    FINRA disagrees with the comment that proposed Rule 2214 should be 
revised to eliminate the requirement that an investment analysis tool 
be interactive. The purpose of NASD IM-2210-6 and proposed FINRA Rule 
2214 is to allow members to use interactive tools with customers to 
show the likelihood of various investment outcomes under different 
scenarios, thereby serving as an additional resource to investors to 
evaluate their specific investment choices. It is not to allow the use 
of performance projections in retail communications in all 
circumstances as long as an investment analysis tool is used to create 
the projections. In the case of retail communications concerning target 
date funds that do not include projections, reliance on the proposed 
rule is unnecessary, since it only applies to retail communications 
that contain projections.
    Supplementary Material 2214.06 provides that a retail communication 
that contains only an incidental reference to an investment analysis 
tool need not include the disclosures required by the proposed rule and 
would not need to be filed with the Department. Vanguard commented that 
proposed Rule 2214 should be revised to allow members not to include 
all of the proposed rule's required disclosures as long as the 
communication does not include the tool itself or any data or results 
produced by the tool.
    FINRA agrees that, under these circumstances, some of the proposed 
rule's required disclosures, such as those required by paragraph (c)(1) 
(a description of the tool's methodology) or paragraph (c)(3) (certain 
disclosures in situations in which the tool analyzes only a limited 
range of investments), are unnecessary. FINRA believes however, that a 
retail communication that refers to an investment analysis tool in more 
detail than an incidental reference but does not provide access to the 
tool or the results generated by the tool must disclose that results 
may vary with each use (as required by paragraph (c)(2)) and the 
warning required by paragraph (c)(4) that the projections generated by 
the tool are hypothetical and are not guarantees of future results. 
FINRA has revised proposed Rule 2214.06 accordingly.
Security Futures
    Proposed FINRA Rule 2215 (Guidelines for Communications with the 
Public Regarding Security Futures) is the successor to current NASD IM-
2210-7. TD Ameritrade commented that paragraph (b)(1)(A)(iii), which 
prohibits projections of performance in communications used prior to 
the delivery of a security futures risk disclosure statement, should be 
modified to permit examples of hypothetical transactions. This comment 
is similar to another TD Ameritrade comment on proposed FINRA Rule 
2210(d)(1)(F) (which also prohibits performance projections), and 
FINRA's response is the same as discussed above.
    Proposed paragraph (b)(2)(A)(iv) requires any communication 
concerning a security future to include a statement that supporting 
documentation for any claims, comparisons, recommendations, statistics 
or other technical data will be supplied upon request. TD Ameritrade 
commented that FINRA should clarify that this disclosure requirement 
only applies if a communication actually includes a claim, comparison, 
recommendation, statistics or other technical data. While this issue 
will be a matter of facts and circumstances, FINRA agrees that no such 
disclosure would be required if a communication does not contain any 
statement or data that requires supporting documentation.
Transition Period
    Fidelity, Invesco and NPHI requested that FINRA allow members at 
least six months before having to comply with the new rules. The ICI 
suggested a compliance date of 10 business days after the second 
quarter ending following adoption of the final rule changes. PSD 
requested nine months' lead time, and suggested that members should be 
permitted to ``grandfather'' and continue to use communications that 
were filed under the current rules. Alternatively, members should have 
a minimum of two years from the date the new rules become effective to 
continue to use communications filed under the existing rules.
    FINRA plans on publishing a Regulatory Notice no later than 90 days 
following SEC approval of the rule changes. The implementation date 
will be no later than 365 days following SEC approval. In establishing 
the implementation schedule, FINRA will consider members' need to adopt 
and implement new policies and procedures necessary to comply with the 
new rules.
    In most cases, FINRA expects that communications that are in 
compliance with the current communication rules will continue to be in 
compliance with the new rules, and thus ``grandfathering'' of past 
filed material will be unnecessary. To the extent a member has 
questions about whether a previously filed communication continues to 
be compliant under the new rules, the member should discuss this issue 
with its assigned Department advertising analyst.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File

[[Page 46889]]

Number SR-FINRA-2011-035 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2011-035. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of FINRA. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2011-035 
and should be submitted on or before August 24, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\91\
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    \91\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19645 Filed 8-2-11; 8:45 am]
BILLING CODE 8011-01-P