Document ID: SEC-2016-1026-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-06-15T04:00Z

[Federal Register Volume 81, Number 115 (Wednesday, June 15, 2016)]
[Notices]
[Pages 39081-39089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14084]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78026; File No. SR-FINRA-2016-018]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rules 2210 (Communications With the Public), 2213 (Requirements 
for the Use of Bond Mutual Fund Volatility Ratings), and 2214 
(Requirements for the Use of Investment Analysis Tools)

June 9, 2016.
    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 May 25, 2016, 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 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 amendments that would revise the filing 
requirements in FINRA Rule 2210 (Communications with the Public) and 
FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools) 
and the content and disclosure requirements in FINRA Rule 2213 
(Requirements for the Use of Bond Mutual Fund Volatility Ratings).
    The 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
Background
    In April 2014, FINRA launched a retrospective review of its 
communications with the public rules to assess their effectiveness and 
efficiency. In December 2014, FINRA published a report on the 
assessment phase of the review.\3\ The report concluded that, while the 
rules have met their intended investor protection objectives, they 
could benefit from some updating to better align the investor 
protection benefits and the economic impacts. To this end, FINRA 
recommended consideration of a combination of rule proposals, guidance 
and administrative measures, to enhance the efficiency of the rules 
with no reduction in investor protection.
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    \3\ See Retrospective Rule Report, Communications with the 
Public, December 2014.
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    Pursuant to these recommendations, FINRA initially is proposing 
amendments to the filing requirements in FINRA Rule 2210 and FINRA Rule 
2214 and the content and disclosure requirements in FINRA Rule 2213.
Proposed Amendments
New Member Communications
    FINRA Rule 2210(c)(1)(A) currently requires new FINRA members to 
file with FINRA retail communications used in any electronic or other 
public media at least 10 business days prior to use. This requirement 
extends for one year from the effective date of the firm's membership. 
This new firm filing requirement only applies to broadly disseminated 
retail communications, such as generally accessible Web sites, print 
media communications, and television and radio commercials.
    While FINRA believes that the requirement for new members to file 
their broadly disseminated retail communications serves a useful 
purpose, since new members may not be as familiar with the standards 
that apply to retail communications as more established members, the 
requirement to file these communications at least 10 business days 
prior to use can delay members' abilities to communicate with the 
public in a timely manner according to FINRA. For example, if a new 
member wishes to update its public Web site with new information, the 
member must first file the proposed update with FINRA and wait at least 
10 business days before it can post this update on its Web site. FINRA 
believes that such a delay may hinder its ability to communicate 
important information to its existing and prospective customers.
    FINRA believes it can continue to protect investors from potential 
harm without imposing this time delay on new members by reviewing new 
members' communications on a post-use, rather than a pre-use, basis. 
FINRA has found a post-use filing requirement to be an effective 
investor protection approach for retail communications with similar 
risk profiles as FINRA typically sees from new members. Accordingly, 
FINRA proposes to revise the new member filing requirement to require 
new members to file retail communications used in electronic or other 
public media within 10 business days of first use for a one-year 
period, rather than requiring these filings at least 10 business days 
prior to use.\4\
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    \4\ See proposed amendments to FINRA Rule 2210(c)(1)(A). This 
proposed change also would delete as redundant current rule text 
that permits a new member to file a retail communication that is a 
free writing prospectus filed with the SEC pursuant to Securities 
Act Rule 433(d)(1)(ii), within 10 business days of first use rather 
than at least 10 business days prior to first use.

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[[Page 39082]]

Investment Company Shareholder Reports
    FINRA currently requires members to file the management's 
discussion of fund performance (``MDFP'') portion of a registered 
investment company shareholder report if the report is distributed or 
made available to prospective investors.\5\ FINRA has required the MDFP 
to be filed because members sometimes distribute or make shareholder 
reports available to prospective investors to provide more information 
about the funds they offer. Thus, FINRA has considered the MDFP to be 
subject to the filing requirement for investment company retail 
communications.
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    \5\ See, e.g., Notice to Members 99-79 (September 1999) 
(``[m]embers are not required to file shareholder reports with 
[FINRA] if they are only sent to current fund shareholders. However, 
if a member uses a shareholder report as sales material with 
prospective investors, the member must file the management's 
discussion of fund performance (MDFP) portion of the report (as well 
as any supplemental sales material attached to or distributed with 
the report) with the Department.'').
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    Although Rule 2210 does not contain any express filing exclusion 
for investment company shareholder reports, FINRA has not required 
members to file portions of shareholder reports other than the MDFP, 
such as the financial statements or schedules of portfolio investments. 
FINRA has not regarded these other parts of investment company 
shareholder reports to be subject to the filing requirements of Rule 
2210, since they serve a regulatory purpose rather than promoting the 
sale of investment company securities.
    Investment companies already must file shareholder reports with the 
SEC,\6\ and the MDFP typically presents less investor risk than other 
types of promotional communications concerning investment companies, 
since it usually focuses on the most recent period covered by the 
report rather than containing promotional content that is intended to 
encourage future investments. Accordingly, FINRA proposes to exclude 
from the FINRA filing requirements the MDFP by adding an express 
exclusion for annual or semi-annual reports that have been filed with 
the SEC in compliance with applicable requirements.\7\ FINRA believes 
that it would assist members' understanding of Rule 2210 expressly to 
clarify that annual and semi-annual reports that have been filed with 
the SEC are not subject to filing. The rule already excludes 
prospectuses, fund profiles, offering circulars and similar documents 
that have been filed with the SEC. As such, FINRA believes it would be 
consistent to add shareholder reports that have been filed with the SEC 
to that list.
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    \6\ See Section 30 of the Investment Company Act of 1940 and 
Rules 30a-1 and 30b1-1 thereunder.
    \7\ See proposed amendments to FINRA Rule 2210(c)(7)(F). To the 
extent that a member distributes or attaches registered investment 
company sales material along with the fund's shareholder report, 
such material would remain subject to filing under Rule 2210.
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Offering Documents Concerning Unregistered Securities
    Rule 2210(c)(7)(F) currently excludes from filing ``prospectuses, 
preliminary prospectuses, fund profiles, offering circulars and similar 
documents that have been filed with the SEC or any state, or that is 
exempt from such registration . . .'' (emphasis supplied). The filing 
exclusion is intended (and has been interpreted by FINRA) to exclude 
issuer-prepared offering documents concerning securities offerings that 
are exempt from registration.
    Accordingly, FINRA is proposing to amend Rule 2210(c)(7)(F) to make 
this intent more clear, and to avoid any confusion concerning the 
phrase ``or that is exempt from such registration.'' As revised, Rule 
2210(c)(7)(F) would exclude from filing, among other things, ``similar 
offering documents concerning securities offerings that are exempt from 
SEC or state registration requirements.'' While FINRA believes that 
this amendment will clarify this filing exclusion, it does not believe 
that it represents a substantive change to the current filing exclusion 
for unregistered securities' offering documents.
Backup Material for Investment Company Performance Rankings and 
Comparisons
    A member that files a retail communication for a registered 
investment company that contains a fund performance ranking or 
performance comparison must include a copy of the ranking or comparison 
used in the retail communication.\8\ When FINRA adopted this 
requirement, prior to the Internet, FINRA staff did not have ready 
access to the sources of rankings or comparisons. Today, this 
information typically is easily available online. FINRA therefore 
proposes to eliminate the requirement to file ranking and comparison 
backup material and instead expressly to require members to maintain 
back-up materials as part of their records.\9\
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    \8\ See FINRA Rule 2210(c)(3)(A).
    \9\ See proposed amendments to FINRA Rules 2210(b)(4)(A)(vi) and 
2210(c)(3)(A).
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Generic Investment Company Communications
    FINRA Rule 2210(c)(3)(A) requires members to file within 10 
business days of first use retail communications ``concerning'' 
registered investment companies. FINRA proposes to revise this filing 
requirement to cover only retail communications that promote a specific 
registered investment company or family of registered investment 
companies. Thus, members would no longer be required to file generic 
investment company retail communications.
    An example of such a generic communication would be a retail 
communication that describes different mutual fund types and features 
but does not discuss the benefits of a specific fund or fund family. 
This type of material typically is intended to educate the public about 
investment companies in general or the types of products that a member 
offers, and thus does not present the same risks of including 
potentially misleading information as promotional communications about 
specific funds or fund families.
Investment Analysis Tools
    ``Investment analysis tools'' are interactive technological tools 
that produce simulations and statistical analyses that present the 
likelihood of various investment outcomes if certain investments are 
made or certain investment strategies or styles are undertaken. 
Pursuant to FINRA Rules 2210(c)(3)(C) and 2214(a), members that intend 
to offer an investment analysis tool must file templates for written 
reports produced by, or retail communications concerning, the tool, 
within 10 business days of first use. Rule 2214 also requires members 
to provide FINRA with access to the tool itself, and provide customers 
with specific disclosures when members communicate about the tool, use 
the tool or provide written reports generated by the tool.
    Since Rule 2214 became effective in 2005,\10\ FINRA has found that 
members have largely complied with the Rule's requirements applicable 
to templates for written reports produced by investment analysis tools 
and retail communications concerning such tools. FINRA does not believe 
that the filing requirements for these templates and retail 
communications are necessary given this history and in light of the 
investor protection afforded by other content standards and the 
requirement that members provide access to the tools

[[Page 39083]]

and their output upon request of FINRA staff. Accordingly, FINRA 
proposes to eliminate the filing requirements for investment analysis 
tool report templates and retail communications concerning such tools 
and instead require members to provide FINRA staff with access to 
investment analysis tools upon request.\11\
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    \10\ See Notice to Members 04-86 (November 2004).
    \11\ See proposed amendments to FINRA Rules 2210(c)(3) and 
2214(a).
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Filing Exclusion for Templates
    Members are not required to file retail communications that are 
based on templates that were previously filed with FINRA but changed 
only to update recent statistical or other non-narrative 
information.\12\ However, members are required to re-file previously 
filed retail communications that are subject to filing under FINRA Rule 
2210(c) to the extent that the member has updated any narrative 
information contained in the prior filing. Often these re-filed retail 
communications are templates for fact sheets concerning particular 
funds or products and provide quarterly information concerning a 
product's performance, portfolio holdings and investment objectives.
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    \12\ See FINRA Rule 2210(c)(7)(B).
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    Through its review of updated fund fact sheets and other similar 
templates, FINRA has found that certain narrative information has not 
presented significant risk to investors, and that these narrative 
updates typically are consistent with applicable standards. In 
particular, narrative updates that are not predictive in nature and 
merely describe market events that occurred during the period covered 
by the communication, or that merely describe changes in a fund's 
portfolio, rarely have presented significant investor risks. In 
addition, members often will update narrative information concerning a 
registered investment company, such as a description of a fund's 
investment objectives, based on information that is sourced from the 
fund's regulatory documents filed with the SEC. In both cases, FINRA 
believes that the costs associated with filing these types of narrative 
updates exceed the investor benefits associated with FINRA staff review 
of these updates.
    Accordingly, FINRA proposes to expand the template filing exclusion 
also to allow members to include updated non-predictive narrative 
descriptions of market events during the period covered by the 
communication and factual descriptions of portfolio changes without 
having to refile the template, as well as updated information that is 
sourced from a registered investment company's regulatory documents 
filed with the SEC.\13\
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    \13\ See proposed amendments to FINRA Rule 2210(c)(7)(B).
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Bond Mutual Fund Volatility Ratings
    FINRA Rule 2213 permits members to use communications that include 
ratings provided by independent third parties that address the 
sensitivity of the net asset value of an open-end management investment 
company's bond portfolio to changes in market conditions and the 
general economy, subject to a number of requirements. For example, 
these communications must be accompanied or preceded by the bond fund's 
prospectus and contain specific disclosures. Members currently must 
file retail communications that include bond mutual fund volatility 
ratings at least 10 business days prior to first use, and withhold them 
from publication or circulation until any changes specified by FINRA 
have been made.\14\
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    \14\ FINRA Rules 2210(c)(2)(C) and 2213(b) and (c).
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    FINRA believes that some of these requirements have discouraged 
members from including bond fund volatility ratings in their 
communications due to the significant compliance burdens associated 
with doing so, and the level of disclosures required to accompany such 
ratings. FINRA has found that, since Rule 2213 first became effective 
in 2000,\15\ members have rarely, if ever, filed communications that 
contain bond fund volatility ratings. In general, in the few cases in 
which members filed such communications with FINRA, the staff has found 
that they have met applicable standards.
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    \15\ See Notice to Members 00-23 (April 2000).
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    Given that bond fund volatility ratings may provide useful 
information to investors, and that Rule 2213 as currently drafted 
appears to have discouraged members from including these ratings in 
their communications, FINRA believes it is appropriate to revise the 
rule to reduce some of these burdens while continuing to include 
requirements that it believes will protect investors. Accordingly, 
FINRA proposes to modify some of Rule 2213's requirements.
    Consistent with the filing requirements for other retail 
communications about specific registered investment companies, the 
proposal would no longer require a retail communication that includes a 
bond fund volatility rating to be accompanied or preceded by a 
prospectus for the fund, and would permit members to file these 
communications within 10 business days of first use rather than prior 
to use.\16\
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    \16\ See proposed amendments to FINRA Rules 2210(c) and 2213(b). 
This change relates only to Rule 2213 and does not affect a member's 
obligation to deliver a prospectus under the Securities Act or for 
Investment Company Act companies.
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    FINRA believes that the requirement that any retail communication 
including a bond fund volatility rating be accompanied or preceded by a 
fund prospectus increases the burdens associated with these 
communications without adding commensurate investor protection. Except 
in rare circumstances due to operational hardship, all mutual fund 
prospectuses are available online, and thus an investor can easily 
access the prospectus, if needed.
    Similarly, FINRA believes that requiring members to file these 
retail communications at least 10 business days prior to use and to 
withhold them from publication or circulation until any changes 
specified by the Department have been made does not provide appreciably 
greater investor protection. According to FINRA, this pre-use filing 
requirement inhibits a member's ability to circulate retail 
communications containing volatility ratings in a timely manner. 
Moreover, members still would be required to file these communications 
within 10 business days of first use, so that if they contain 
misleading content, the Department staff can take appropriate measures 
to correct any problems, such as recommending changes to the 
communication, or directing the member to cease using the communication 
with the public. FINRA has found a post-use filing requirement to be an 
effective investor protection approach for most retail communications 
with similar risk profiles.\17\
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    \17\ As a general matter, FINRA does not believe that retail 
communications that include bond fund volatility ratings present 
risks of investor harm that are comparable to other retail 
communications that require pre-use filing, such as retail 
communications that include self-created rankings or comparisons or 
retail communications concerning security futures. See FINRA Rule 
2210(c)(2)(A) and (B). Retail communications that include self-
created rankings or comparisons present a greater risk of being 
misleading than bond fund volatility ratings, since they are not 
created by an entity that is independent of the member. In addition, 
security futures are more complex and potentially more volatile than 
most bond mutual funds.
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    The proposal also would streamline the content and disclosure 
requirements. In particular, the amendments would eliminate the 
requirements: (1) That all disclosures be contained in a separate 
Disclosure Statement; (2) to disclose all current bond mutual fund 
volatility ratings that have been issued with respect to the

[[Page 39084]]

fund; (3) to explain the reason for any change in the current rating 
from the most recent prior rating; (4) to describe the criteria and 
methodologies used to determine the rating; (5) to include a statement 
that not all bond funds have volatility ratings; and (6) to include a 
statement that the portfolio may have changed since the date of the 
rating.
    FINRA believes that many of these requirements are unnecessary in 
light of the content requirements that still will apply to such retail 
communications. For example, members still would not be permitted to 
refer to a volatility rating as a ``risk'' rating, and would have to 
incorporate the most recently available rating and reflect information 
that, at a minimum, is current to the most recent calendar quarter end. 
The criteria and methodology used to determine the rating still would 
have to be based exclusively on objective, quantifiable factors, and 
such communications would have to include a link to, or Web site 
address for, a Web site that includes the criteria and methodology. 
Communications would have to provide the name of the entity that issued 
the rating, the most current rating and date for the rating, and 
whether consideration was paid for the rating, as well as a description 
of the types of risks the rating measures.
    FINRA believes that, as long as the required disclosures are 
provided, it is not necessary that they appear in a separate Disclosure 
Statement. FINRA also believes it is unnecessary to disclose all other 
current volatility ratings assigned to the advertised fund, since this 
requirement is not imposed under other similar rules. For example, 
FINRA Rule 2214 allows members to provide fund ranking information 
without also requiring the member to disclose all rankings assigned by 
other ranking entities. The other disclosure requirements add little 
understanding about the rating presented, while adding voluminous text 
to the retail communication. In addition, if an investor does seek more 
information about the criteria and methodology used to create the 
rating, this information will be available via a hyperlink to separate 
Web site.
    If the Commission approves the proposed rule change, FINRA will 
announce the implementation 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 no later than 180 days 
following publication of 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,\18\ 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 
improve efficiency and reduce regulatory burden by reducing the filing 
requirements applicable to retail communications distributed by members 
and streamlining the content and disclosure requirements for retail 
communications that include bond mutual fund volatility ratings, while 
maintaining necessary investor protections.
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    \18\ 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. FINRA has undertaken an 
economic impact assessment, as set forth below, to analyze the 
regulatory need for the proposed rulemaking, its potential economic 
impacts, including anticipated costs and benefits, and the alternatives 
FINRA considered in assessing how to best meet its regulatory 
objectives.
Economic Impact Assessment
1. Regulatory Need
    As discussed previously, based on the retrospective review of rules 
governing communications with the public, FINRA has identified several 
areas where updating the rules would better provide information that 
may be useful to investors while maintaining important investor 
protections.
2. Economic Baseline
    The economic baseline used to evaluate the impact of the proposed 
amendments is the current regulatory framework. This baseline serves as 
the primary point of comparison for assessing economic impacts, 
including the incremental benefits and costs of the proposed rule 
change. To better understand the members affected by this proposal and 
the filings by these members, FINRA reviewed the filing history and its 
comments on the communications filed in 2014. Based on this review, 770 
members filed communications with FINRA in 2014, and approximately 40% 
to 50% of these members filed communications specific to the 
requirements in this proposal.
    In 2014, 79 members filed communications pursuant to the new firm 
filing requirement, 183 filed investment company shareholder reports, 
155 filed backup material for investment company performance rankings 
and comparisons, 51 filed communications associated with investment 
analysis tools, 218 filed updated fund fact sheets or other similar 
templates, and three filed communications that included bond mutual 
fund volatility ratings.\19\ Approximately 58% of the members that 
filed communications specific to the requirements in this proposal were 
small, whereas approximately 19% and 23% of the members were mid-sized 
and large, respectively.\20\ In 2014, these members filed approximately 
300 communications pursuant to the new firm filing requirement, 5,000 
investment company shareholder reports, 13,500 filings of backup 
material for investment company performance rankings and comparisons, 
590 filings related to investment analysis tools, and approximately 
23,800 filings of applicable templates. These filings were largely 
concentrated amongst a few members that filed frequently. For example, 
the 20 members with the highest number of filings overall accounted for 
over 50% of the filings related to this proposal.
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    \19\ FINRA cannot precisely identify the number of members that 
filed generic investment company communications or the number of 
such filings. However, based on experience and review of filings in 
2014, FINRA believes that the number of members that filed generic 
communications was approximately the same as the number of members 
that filed updated fund fact sheets or other similar templates.
    \20\ Based on FINRA By-Law, Article I (Definitions), members 
with 150 or fewer registered persons are classified as small, 
members with 151-499 persons are classified as mid-size, and members 
with 500 or more persons are classified as large.
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3. Economic Impacts
    The proposed amendments would impact members that are subject to 
the filing, content and disclosure requirements in this proposal. As 
discussed above, approximately 40% to 50% of the 770 members that in 
2014 filed communications specific to the requirements in this 
proposal. These members would be impacted directly by the proposed 
amendments.
i. Anticipated Benefits
    The amendments will benefit members by reducing their costs 
associated with the filing requirements in this proposal. These cost 
savings

[[Page 39085]]

would include savings on filing fees from the proposed elimination or 
reduction in the scope of certain filing requirements.
    Based on review of communication filings in 2014 and historical 
experience with such filings, FINRA preliminarily estimates that, as a 
result of the proposed amendments, there would be a reduction in the 
filings of investment company shareholder reports of 5,000 filings per 
year, and a potential decline in the filings of generic investment 
company communications of approximately 3,000 filings per year. FINRA 
further estimates that the anticipated decline in filings related to 
investment analysis tools and filings of templates would be 
approximately 500 and 13,000 filings per year, respectively.\21\ 
Overall, FINRA estimates that as a result of the proposed amendments, 
the total communications filings would be reduced by 21,500 filings per 
year.
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    \21\ Based on staff experience, FINRA believes that some members 
would continue to file communications even after the elimination of 
applicable filing requirements. FINRA's estimates for reduction in 
number of filings attempt to account for such voluntary filings.
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    Accordingly, based on an average filing fee of $185 in 2014, FINRA 
preliminarily estimates that the proposed amendments would reduce the 
filing fees for members by approximately $4 million per year.\22\ In 
addition to this reduction in filing fees, members would likely also 
benefit from a decrease in other direct costs associated with filings, 
such as staff, systems and infrastructure costs, or third-party legal 
and consulting fees associated with the requirements applicable to this 
proposal. Since these costs account for a significant proportion of 
members' overall direct costs, any reduction in these costs as a result 
of the proposed amendments could be material. For example, based on the 
survey results from the assessment phase of FINRA's retrospective rule 
review, FINRA estimates that the direct costs other than filing fees 
(such as staffing, systems and infrastructure costs, third-party legal 
and consulting fees) account for more than 90% of the overall 
advertising-related compliance costs for most members that file 
communications.\23\ Accordingly, the overall reduction in direct costs 
associated with communication filings could be larger than the 
anticipated reduction in filing fees discussed above. Moreover, the 
proposed elimination or reduction in the scope of certain filing 
requirements may also reduce disruption in members' advertising efforts 
associated with these filings. In addition, the streamlined disclosure 
and content requirements for the presentation of bond fund volatility 
ratings in communications may save members additional costs associated 
with creating and reviewing disclosure.
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    \22\ As discussed above, the relevant communication filings are 
largely concentrated amongst a few members that file frequently. 
Accordingly, the anticipated benefits, including reduction in filing 
fees and other direct costs associated with filing, would also 
largely accrue to these frequent filers.
    \23\ As part of the assessment phase of its retrospective review 
of FINRA's communications with the public rules, the staff conducted 
a survey of the entire membership to seek feedback on the 
effectiveness and efficiency of the rules, including direct and 
indirect costs associated with the current rules. Based on the 
survey responses, FINRA estimates that for approximately 52% of the 
members that file communications with FINRA, direct costs other than 
filing fees, such as staff, systems and infrastructure costs, or 
third-party legal and consulting fees, account for more than 90% of 
their overall direct costs.
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    The proposed amendments may generate benefits to the public as they 
may also encourage members to communicate additional valuable 
information to investors. For example, the elimination of the costs 
associated with the filing requirement for generic, educational 
communications regarding investment companies may encourage members to 
provide more frequent and timely information to investors. Similarly, 
the changes to the template exclusion from the filing requirement for 
investment company communications may enable members to provide 
investors with more timely explanations of market events as well as 
changes in a fund's portfolio, particularly for those firms that 
voluntarily file all retail communications prior to use and wait to 
receive the staff's response letter before distributing retail 
communications (instead of filing retail communications within 10 days 
of first use as required). Under the expanded filing exception for 
templates, it is likely that these firms may distribute the updated 
communications without choosing to file them, thus allowing them to 
communicate with investors sooner.
ii. Anticipated Costs
    Members that are subject to the filing, content and disclosure 
requirements in this proposal would likely incur costs associated with 
updating their policies and procedures. These costs would include 
training their advertising review and other staff associated with 
communications with the public. Members may also need to make updates 
to systems to reflect changes in the filing requirements. FINRA, 
however, anticipates that these costs would likely be minimal relative 
to the cost savings from the proposed amendments. FINRA would also 
incur costs associated with updating its Advertising Regulation 
Electronic Files (AREF) system as well as training the relevant staff 
on the amendments in the proposal.
iii. Other Economic Impacts
    FINRA also considered the potential negative impacts of the 
proposed amendments to investors. FINRA believes that the proposed 
exclusions and streamlining of filing requirements would not diminish 
investor protection because the applicable communications pose little 
risk to investors. For example, investment company shareholder reports, 
generic investment company retail communications, and non-predictive 
narrative descriptions about market events in report templates 
generally are low-risk communications in FINRA's view.
    Some members choose to file some mutual fund advertising materials 
on a voluntary basis. Members that choose to do so base their decision 
on business needs and not FINRA requirements. The proposed rule change 
would not limit the ability of members to continue to make voluntary 
filings if they should deem them to be valuable.
4. Alternatives
    In considering how to best meet its regulatory objectives, FINRA 
considered alternatives to particular features of this proposal. For 
example, FINRA considered narrowing the new member filing requirement 
to cover only public Web sites since new members primarily reach out to 
their existing and potential customers by developing Web sites. As 
discussed in more detail below, PIABA raised concerns about potential 
investor harm if FINRA only reviews new members' Web sites without 
reviewing other types of public media advertising, such as television 
and radio commercials and newspaper advertisement. FINRA reviewed the 
communications filing history and its comments on the communications 
filed by new members and found that a higher proportion of new member 
communications require revisions to be compliant with the applicable 
standards, compared to all filed communications. As a result, to 
maintain the same level of investor protection, FINRA has determined 
not to narrow the new member filing requirement to public Web sites.

[[Page 39086]]

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

Background
    In May 2015, FINRA published Regulatory Notice 15-16 (the 
``Notice''), requesting comment on proposed amendments that would 
revise the filing requirements in FINRA Rule 2210 and FINRA Rule 2214 
and the content and disclosure requirements in FINRA Rule 2213 (the 
``Notice proposal''). A copy of the Notice is attached as Exhibit 2a. 
The comment period expired on July 2, 2015. FINRA received 11 comments 
in response to the Notice. All but one commenter supported the 
proposal. A list of the commenters in response to the Notice is 
attached as Exhibit 2b, and copies of the comment letters received in 
response to the Notice are attached as Exhibit 2c.\24\ A summary of the 
comments and FINRA's response is provided below.
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    \24\ See Exhibit 2b for a list of abbreviations assigned to 
commenters.
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Continuation of Retrospective Review
    While many comments supported the proposal, some commenters 
recommended that FINRA continue its retrospective review of the 
communications rules to address other issues. Commenters urged FINRA to 
update the rules governing social media, mobile devices and electronic 
communications,\25\ performance advertising,\26\ the amount of 
disclosure required in print advertising,\27\ the content standards 
under FINRA Rule 2210(d),\28\ and options communications.\29\
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    \25\ See CAI, Fidelity, SIFMA, TD Ameritrade, and Vanguard.
    \26\ See TD Ameritrade.
    \27\ See Fidelity and TD Ameritrade.
    \28\ See FSI.
    \29\ See TD Ameritrade.
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    Commenters also recommended that FINRA harmonize the differences 
between its communications rules and SEC rules governing investment 
adviser communications, particularly with respect to rules governing 
projections and performance information,\30\ and that FINRA update its 
electronic filing system to allow members to file materials in other 
than PDF format.\31\ Wells Fargo suggested that FINRA clarify what 
constitutes a ``public appearance'' under Rule 2210(f)(3). The ICI 
urged FINRA to codify clear disclosure standards for retail 
communications concerning closed-end funds and eliminate the filing 
requirement for these communications. The CAI recommended that FINRA 
take a more risk-based approach of differentiating communications that 
should be filed and reviewed, and those that should not.
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    \30\ See Fidelity and Wells Fargo.
    \31\ See CAI.
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    While FINRA states that it appreciates these recommendations, FINRA 
does not believe it is necessary to address all of these issues as part 
of this proposed rule change. The amendments that FINRA has proposed in 
this filing are only the first step in addressing the results of the 
assessment phase of its retrospective review of the communications 
rules. FINRA continues to consider additional rule changes related to 
the areas raised by commenters and will address those topics as part of 
its future proposed rule changes, as appropriate.
New Member Filing Requirement
    In addition to changing the filing requirement for new members from 
a pre-use to a post-use requirement, the Notice proposal would have 
narrowed the types of retail communications subject to this 
requirement. Currently new members must file all retail communications 
used in electronic or other public media, including radio and 
television advertisements, newspaper and magazine ads, and public Web 
sites. The Notice proposal would have narrowed the new member filing 
requirement to cover only public Web sites.
    PIABA urged FINRA not to narrow the current new member filing 
requirements. PIABA stated that if FINRA reviews only new members' Web 
sites without reviewing other types of public media advertising, such 
as television and radio commercials and newspaper advertisements, 
investors potentially could be harmed. PIABA also noted that pre-use 
filing offers more investor protection than post-use filing, since pre-
use filing allows FINRA staff to review communications prior to their 
distribution.
    While the deficiencies noted by FINRA staff on new members' filed 
communications are still relatively low, the staff does find that a 
higher percentage of new members' communications require revisions to 
be compliant with applicable standards as compared with all 
communications filed with FINRA. Accordingly, FINRA has determined not 
to narrow the scope of public media communications required to be filed 
by new members.
    Nevertheless, FINRA still believes it is appropriate to allow new 
members to file these communications on a post-use rather than a pre-
use basis. In this regard, a post-use filing requirement allows new 
members to create and alter their public media communications in a 
timely manner (such as a change to a new member's Web site) without the 
need to wait for FINRA staff review before doing so. In addition, new 
members still would be required to approve public media communications 
prior to use, and such communications would remain subject to the 
communications rules' content standards. FINRA believes this revision 
appropriately balances the need to protect investors with making its 
communications rules less burdensome and resource-consuming for 
members.
Filing Exclusion for Shareholder Reports
    FINRA currently requires members to file the MDFP portion of 
registered investment company shareholder reports. The Notice proposal 
would have amended FINRA Rule 2210(c)(7)(F) to exclude from filing 
annual and semi-annual shareholder reports that have been filed with 
the SEC.
    Two commenters supported this proposed change on the ground that 
members are already required to file these reports with the SEC, and 
filing the MDFP with FINRA is therefore redundant and unnecessary.\32\ 
The ICI noted that the proposed exclusion is somewhat ambiguous, since 
it appears to apply only if the report has been filed with the SEC 
prior to or perhaps contemporaneously with making the report available 
to prospective investors. The ICI noted that SEC rules require funds to 
file their reports with the SEC ``not later than 10 days after the 
transmission to stockholders.'' \33\
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    \32\ See ICI and Vanguard.
    \33\ See Investment Company Act Rule 30b2-1(a).
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    PIABA opposed this change. PIABA asserted that SEC staff rarely 
reviews shareholder reports filed with the SEC given the volume of 
filings it receives on a daily basis, and that therefore FINRA should 
continue to require the MDFP to be filed and reviewed by FINRA staff.
    FINRA agrees that this proposed change would not require members to 
file fund shareholder reports prior to or contemporaneously with making 
the reports available to prospective investors, as long as the reports 
are filed in compliance with SEC rule requirements. To clarify this 
intent, FINRA is modifying the proposed amendment to Rule 2210(c)(7)(F) 
to specify that such reports must be filed with the SEC ``in compliance 
with applicable requirements.''
    FINRA has found through its filing program that the MDFPs in 
shareholder reports rarely have raised issues

[[Page 39087]]

requiring members to revise or withdraw reports from circulation. FINRA 
also notes that, while the SEC may not review all securities-related 
filings contemporaneous with their submission, the staff can review 
higher risk communications as needed. FINRA believes that removing this 
filing requirement would not harm investors and would allow FINRA to 
allocate its staff resources more efficiently to focus on reviewing 
higher risk communications more expeditiously.
Backup Ranking Data
    The Notice proposal would have eliminated the current requirement 
to include a copy of an investment company performance ranking or 
comparison used in any retail communication that contains such a 
ranking or comparison. TD Ameritrade supported the elimination of this 
requirement given that this information typically is available online. 
PIABA opposed this change, apparently believing that it would 
completely eliminate the requirement to file retail communications that 
contain performance rankings or comparisons, rather than merely 
eliminating the requirement to file the backup data.
    FINRA continues to believe this change is appropriate and will 
relieve members of the additional burden of having to file backup 
ranking data, given the online availability of such data. The proposal 
will not eliminate the requirement to file retail communications that 
contain performance rankings or comparisons. In addition, the proposal 
would require members to maintain the backup materials for inspection. 
Accordingly, FINRA believes PIABA's concerns are misplaced.
Generic Investment Company Communications
    Commenters generally supported the proposal to revise the filing 
requirement for retail communications concerning registered investment 
companies to cover only those communications that promote or recommend 
a specific registered investment company or family of registered 
investment companies.\34\
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    \34\ See CAI, TD Ameritrade, and Vanguard.
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    The CAI had a number of recommendations for changes and 
clarifications. First, it asked FINRA to confirm that the mere mention 
of the name of an investment company does not necessarily constitute 
the promotion or recommendation of the investment company, and that 
this determination needs to be made based on the full context of the 
communication. Second, it requested that FINRA clarify that the 
proposed change would exclude from filing generic retail communications 
concerning variable annuity contracts that do not promote or recommend 
a particular contract.
    Third, it noted that this proposed change might have the unintended 
effect of increasing compliance costs for members, since members that 
create generic investment company communications would no longer file 
them, and thus other members that use these communications would no 
longer be able to rely on the principal approval exception contained in 
FINRA Rule 2210(b)(1)(C).\35\ The CAI recommended that FINRA revise 
Rule 2210(b)(1)(C) to create an exception from the principal approval 
requirements for generic retail communications created by a third 
party, even if the third party has not filed it with FINRA. The CAI 
also suggested that FINRA consider creating a principal approval 
exception for any third-party communication that is reviewed and 
approved by another member.
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    \35\ Rule 2210(b)(1)(C) provides that the principal approval 
requirements do not apply to a retail communication if (i) another 
member has filed it with FINRA and received a letter from FINRA 
stating that it appears consistent with applicable standards, and 
(ii) the member using it in reliance upon this exception has not 
materially altered it and will not use it in a manner inconsistent 
with the conditions contained in the FINRA review letter.
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    The IPA recommended that FINRA create a similar filing exclusion 
for retail communications concerning unlisted real estate investment 
trusts (REITs) and direct participation programs (DPPs) that do not 
promote or recommend a particular product.
    The determination of whether a retail communication promotes or 
recommends a specific registered investment company or family of 
investment companies will always be a facts-and-circumstances analysis. 
Accordingly, FINRA does not believe it would be productive to speculate 
whether particular types of retail communications that mention the name 
of a specific investment company would have to be filed.
    The filing requirement for retail communications concerning 
registered investment companies applies to communications concerning 
mutual funds, exchange-traded funds, variable insurance products, 
closed-end funds, and unit investment trusts.\36\ Accordingly, by its 
terms, this filing requirement would not apply to a retail 
communication concerning a variable annuity contract unless it promoted 
or recommended a specific contract or family of such contracts (e.g., a 
retail communication concerning variable contracts that promoted or 
recommended a specific insurance company).
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    \36\ See FINRA Rule 2210(c)(3)(A).
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    FINRA declines to revise the exception from the principal approval 
requirements for retail communications under FINRA Rule 2210(b)(1)(C). 
Part of the reason for this exception is that communications covered by 
this provision must have been filed with FINRA and received a letter 
stating that the communication appears consistent with applicable 
standards. FINRA does not believe an exception that excludes this 
filing requirement would offer the same level of investor protection.
    FINRA also declines to create another filing exclusion for generic 
retail communications concerning REITs or DPPs. A filing exclusion for 
retail communications concerning REITs is unnecessary in FINRA's view, 
since FINRA Rule 2210 currently does not require retail communications 
concerning REITs to be filed. FINRA believes that DPPs often are more 
complex and less familiar to retail investors than registered 
investment companies; accordingly FINRA believes that a filing 
requirement for generic retail communications concerning DPPs still 
makes sense in light of the investor protection offered by this 
requirement.
Investment Analysis Tools
    TD Ameritrade supported the proposed elimination of the current 
filing requirement for report templates and retail communications 
concerning investment analysis tools. However, it recommended that 
FINRA also eliminate the disclosure requirements in FINRA Rule 2214(c) 
for retail communications that promote investment analysis tools.\37\ 
TD Ameritrade also stated that FINRA staff has inappropriately applied 
Rule 2214 to retirement planning calculators.
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    \37\ FINRA Rule 2214(c) requires written reports generated by 
investment analysis tools and related retail communications to: (1) 
Describe the criteria and methodology used, including the tool's 
limitations and key assumptions; (2) explain that results may vary 
with each use and over time; (3) if applicable, describe the 
universe of investments considered in the analysis, explain how the 
tool determines which securities to select, disclose if the tool 
favors certain securities and, if so, explain the reason for the 
selectivity, and state that other investments not considered may 
have characteristics similar or superior to those being analyzed; 
and (4) display a specific legend regarding the hypothetical nature 
of the projections created by the tool.
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    FINRA does not believe it is necessary to revise Rule 2214(c) as 
suggested. Rule 2214.06 already provides that a retail communication 
that contains only an

[[Page 39088]]

incidental reference to an investment analysis tool need not include 
the disclosures required by Rule 2214(c). In addition, Rule 2214.06 
provides 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 retail communication may exclude 
some of the disclosures required by Rule 2214(c). FINRA believes this 
provision already provides appropriate flexibility and regulatory 
relief for retail communications concerning investment analysis tools.
    As for the comment that FINRA staff has inappropriately applied 
current Rule 2214 to retirement planning calculators, FINRA believes 
that these concerns are best addressed through discussions with FINRA 
staff rather than through a proposed change to Rule 2214.
Template Filing Exclusion
    Multiple commenters supported the proposed change to the current 
filing exclusion for templates contained in FINRA Rule 2210(c)(7)(B), 
which currently does not require a member to file a retail 
communication that is based on a template that was previously filed 
with FINRA and where the changes are limited to updates of more recent 
statistical and other non-narrative information.\38\ The Notice 
proposal would have allowed a member that had previously filed a retail 
communication template also to update non-predictive narrative 
information that describes market events during the period covered by 
the communication or factual changes in portfolio composition.
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    \38\ See CAI, ICI, and TD Ameritrade.
---------------------------------------------------------------------------

    The CAI recommended that FINRA allow members to make non-material 
changes to narrative disclosures, as well as updates to non-predictive 
descriptions of market events and market commentary. Two other 
commenters recommended that the filing exclusion for templates be 
revised to allow members to include other non-predictive narrative 
information, provided that it comes from either an independent data 
provider or is sourced from an investment company's regulatory 
documents filed with the SEC.\39\
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    \39\ See Fidelity and ICI. The ICI suggested that this revision 
only cover data received from ``ranking entities'' as that term is 
defined in FINRA Rule 2212, rather than any third-party data 
provider.
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    PIABA opposed the proposed change to the template filing exclusion, 
arguing that funds sometimes write misleading descriptions of market 
events to explain losses in a fund's net asset value. PIABA gave as an 
example of this practice a 2007 FINRA enforcement action involving a 
fund fact sheet.
    FINRA Rule 2210(c)(7)(A) already contains a filing exclusion for 
retail communications that previously were filed with FINRA and that 
are used without material change. Accordingly, FINRA does not believe 
it is necessary to revise the proposed change to Rule 2210(c)(7)(B) to 
allow non-material changes.
    FINRA agrees that it makes little sense for members to refile 
previously filed templates if the only changes to the template are 
sourced from an investment company's regulatory documents filed with 
the SEC. For example, if a fund alters the description of its 
investment objectives in its prospectus and files these changes with 
the SEC, and a member wants to make a corresponding change to a 
previously filed fact sheet concerning the fund, there is little need 
to file such an update with FINRA.
    Accordingly, FINRA is revising its proposed changes to the template 
filing exclusion also to cover updated information that is sourced from 
an investment company's regulatory documents filed with the SEC. FINRA 
declines to expand this filing exclusion also to cover any information 
that comes from an independent data provider regardless of its source, 
as that information is not subject to the same level of regulatory 
scrutiny as information in documents required by SEC rules. Therefore, 
if a narrative change to a template is not sourced from SEC filings, 
FINRA believes that such changes should require the member to refile 
the template, even if this information comes from an independent third-
party data provider.
    FINRA recognizes that it is always possible that a member will use 
this filing exclusion to include non-predictive narrative information 
that is misleading in nature. Nevertheless, FINRA has found over the 
years from reviewing thousands of template updates that non-predictive 
narrative information concerning market events or portfolio composition 
has rarely generated comments from the staff and generally has been 
low-risk in nature. Based on this experience, FINRA believes the 
proposed changes to the template filing exclusion will improve staff 
efficiency without sacrificing investor protection. Moreover, any 
updates to templates remain subject to Rule 2210's content standards. 
Accordingly, if a member did prepare a misleading update to a template, 
FINRA could still reach that conduct and bring an action for violation 
of the communications with the public rules.
Bond Fund Volatility Ratings
    PIABA urged FINRA not to modify Rule 2213's requirements applicable 
to retail communications that include a bond mutual fund volatility 
rating. PIABA argued that past FINRA enforcement actions involving the 
sale of bond funds demonstrate that bond funds should be more highly 
regulated.
    FINRA disagrees with this comment. The proposed changes to Rule 
2213 will not eliminate the filing requirement for any retail 
communication concerning bond funds, regardless of whether such filing 
includes a volatility rating. Even with the changes, members will still 
be required to file retail communications that contain a bond fund 
volatility rating within 10 business days of first use. Moreover, as 
revised, Rule 2213 would still require members to include many 
disclosures concerning the risks and limitations of such ratings. 
Accordingly, FINRA believes that revised Rule 2213 still would offer 
ample protection to investors and involve FINRA staff review of such 
communications.

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 (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 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-018 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 39089]]

Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2016-018. This 
file number should be included on the subject line if email 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 
10:00 a.m. and 3:00 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-2016-018 and should be 
submitted on or before July 6, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14084 Filed 6-14-16; 8:45 am]
 BILLING CODE 8011-01-P