Document ID: SEC-2007-1771-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-12-28T05:00Z

[Federal Register: December 28, 2007 (Volume 72, Number 248)]
[Notices]               
[Page 73928-73930]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de07-189]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57010; File No. SR-FINRA-2007-020]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Create 
Exception to Principal Approval Requirements for Certain Filed Sales 
Material

December 20, 2007.
    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 November 1, 2007, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially 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 amend NASD Rule 2210 (Communications with the 
Public) to create an exception from the principal approval requirements 
for certain filed sales material. Below is the text of the proposed 
rule change. Proposed new language is in italics; proposed deletions 
are in brackets.
* * * * *

2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC

2210. Communications With the Public

    (a) No Change.
    (b) Approval and Recordkeeping.
(1) Registered Principal Approval for Advertisements, Sales Literature 
and Independently Prepared Reprints
    (A) A registered principal of the member must approve by signature 
or initial and date each advertisement, item of sales literature and 
independently prepared reprint before the earlier of its use or filing 
with NASD's Advertising Regulation Department (``Department'').
    (B) With respect to debt and equity securities that are the subject 
of research reports as that term is defined in Rule 472 of the New York 
Stock Exchange, [this requirement] the requirements of paragraph (A) 
may be met by the signature or initial of a supervisory analyst 
approved pursuant to Rule 344 of the New York Stock Exchange.
    (C) A registered principal qualified to supervise security futures 
activities must approve by signature or initial and date each 
advertisement or item of sales literature concerning security futures.
    (D) The requirements of paragraph (A) shall not apply with regard 
to any advertisement, item of sales literature, or independently 
prepared reprint if, at the time that a member intends to publish or 
distribute it:

[[Page 73929]]

    (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 upon this paragraph has not 
materially altered it and will not use it in a manner that is 
inconsistent with the conditions of the Department's letter.
(2) Recordkeeping
    (A) Members must 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 advertisement, item of sales literature or 
independently prepared reprint, and the dates of first and (if 
applicable) last use of such material;
    (ii) the name of the registered principal who approved each 
advertisement, item of sales literature, and independently prepared 
reprint and the date that approval was given, unless such approval is 
not required pursuant to paragraph (b)(1)(D); and
    (iii) for any advertisement, item of sales literature or 
independently prepared reprint for which principal approval is not 
required pursuant to paragraph (b)(1)(D), the name of the member that 
filed the advertisement, sales literature or independently prepared 
reprint with the Department, and a copy of the corresponding review 
letter from the Department.
    (B) No Change.
    (c) through (e) No Change.
* * * * *

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
    NASD Rule 2210 (Communications with the Public) requires that a 
registered principal of a FINRA member firm approve in writing all 
advertisements, sales literature, and independently prepared reprints 
(collectively, ``sales material'') prior to use. Certain types of sales 
material, such as advertisements and sales literature concerning mutual 
funds or variable insurance products must be filed with the FINRA 
Advertising Regulation Department (``Department'').
    For funds and variable products that are sold through intermediary 
firms, a registered principal at the fund's or variable product's 
underwriter typically approves sales material internally and files the 
material with the Department. FINRA rules require registered principals 
at each of the intermediary firms that use the underwriter's sales 
material to re-approve in writing each of these items used by their 
firms. (The intermediary firm is not required to re-file the sales 
material with the Department so long as it is used without material 
change.) If firms have selling agreements with multiple fund families 
and insurance companies, the number of items that require re-approval 
can easily be in the hundreds, and often thousands, per firm annually.
    Based on recommendations made by its Small Firms Rules Impact Task 
Force,\3\ and to eliminate what FINRA regards as a compliance 
redundancy, FINRA is proposing to create an exception to Rule 2210's 
registered principal approval requirements for intermediary firms that 
use the sales material of another firm. The exception would apply only 
to sales material that another firm has filed with the Department, and 
for which the Department has issued a review letter finding that the 
material appears to be consistent with applicable standards.
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    \3\ NASD established the Small Firms Rules Impact Task Force in 
September 2006 to examine how existing NASD rules impact smaller 
firms. In particular, the Task Force focuses on possible 
opportunities to amend or modernize certain conduct rules that may 
be particularly burdensome for small firms, where such changes are 
consistent with investor protection and market integrity.
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    The intermediary firm that relies on this exception could not 
materially alter the sales material or use it in a manner that is 
inconsistent with any conditions stated in the Department's review 
letter. For example, if the Department's review letter was based in 
part upon the representation by the filing firm that the sales material 
would be accompanied by a fund prospectus, the intermediary firm would 
be subject to a similar constraint.
    Although FINRA anticipates that firms will utilize the exception 
primarily with respect to mutual fund and variable insurance product 
sales material, the exception is not limited to sales material for 
particular products. Thus, the exception also would apply to sales 
material for other products, such as real estate investment trusts or 
direct participation programs, provided the sales material meets the 
exception's requirements.
    If this exception were adopted, FINRA believes it would save 
intermediary firms' compliance personnel numerous hours that are 
currently spent reviewing sales material that has already been approved 
by a registered principal at the product underwriter, and that the 
Department staff also has reviewed and found to be consistent with 
applicable standards. Of course, some firms may want to continue to 
review this sales material, and the proposal would allow them to do 
so.\4\
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    \4\ The proposed rule change would not affect the contractual 
obligations that exist between underwriters and intermediary firms. 
Some dealer agreements may, for example, restrict the ability of 
underwriters and product wholesalers to send their sales material 
directly to a retail firm's sales force. These restrictions can 
facilitate the intermediary firm's ability to supervise its sales 
force. The proposed rule change would not alter the underwriter's 
obligations to comply with these contractual restrictions.
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    The proposed rule change would also revise certain of the 
advertising recordkeeping requirements. Today, Rule 2210(b)(2)(A) 
states that firms must maintain a copy of all sales material for a 
period of three years from the date of last use. Existing practice has 
been to assume that the record-keeping requirement begins on the date 
of first use. The proposal would codify this position. For sales 
material subject to the principal approval exception, firms would have 
to keep a record of the name of the firm that filed the sales material 
and a copy of the related FINRA review letter.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be the date FINRA 
publishes the Regulatory Notice announcing 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,\5\ 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 creation of an exception that 
eliminates

[[Page 73930]]

the requirement for firms to re-approve sales material in limited 
circumstances where a registered principal of a firm has previously 
approved the sales material and the Department has previously supplied 
a favorable review letter is 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. This exception from the principal approval requirements of 
Rule 2210 will eliminate a current compliance redundancy and will 
continue to protect investors, since the initial firm creating all 
sales material subject to this exception will still have to obtain 
approval from its registered principal, file it for review with the 
Department, and obtain a favorable review letter from the Department.
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    \5\ 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, as amended.

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date 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 such proposed rule change; or
    (B) Institute proceedings to determine whether such 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 Number SR-FINRA-2007-020 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2007-020. 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 inspection 
and copying 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-2007-020 and should be 
submitted on or before January 18, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-25191 Filed 12-27-07; 8:45 am]

BILLING CODE 8011-01-P