Document ID: SEC-2008-0211-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-02-07T05:00Z

[Federal Register: February 7, 2008 (Volume 73, Number 26)]
[Notices]               
[Page 7339-7340]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07fe08-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57257; File No. SR-FINRA-2007-020]

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

February 1, 2008.

I. Introduction

    On November 1, 2007, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to amendments to NASD Rule 2210. The 
proposed rule change was published for comment in the Federal Register 
on December 28, 2007.\3\ The Commission received three comment letters 
in response to the proposed rule change.\4\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57010 (December 20, 
2007); 72 FR 73928 (Dec. 28, 2007).
    \4\ See letter from Neal E. Nakagiri, President, CEO & CCO, NPB 
Financial Group, LLC, dated January 16, 2008 (``NPB letter''); 
letter from Dale E. Brown, President & CEO, Financial Services 
Institute, dated January 18, 2008 (``FSI letter''); and letter from 
Dorothy Donohue, Senior Associate Counsel, Investment Company 
Institute, dated January 18, 2008 (``ICI letter'').
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II. Description of the Proposed Rule Change

    The proposed rule change amends NASD Rule 2210 (Communications with 
the Public) to create an exception from the principal approval 
requirements for certain filed sales material.
    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 
materials, 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,\5\ and to eliminate what FINRA regards as a compliance 
redundancy, FINRA proposed 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

[[Page 7340]]

review letter finding that the material appears to be consistent with 
applicable standards.
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    \5\ 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.
    FINRA believes this exception 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.\6\
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    \6\ 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 record-keeping 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 recordkeeping 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.

III. Comment Letters

    The Commission received three comment letters in response to the 
proposed rule change.\7\ All of the commenters supported the proposed 
rule change. Two commenters stated that the proposed rule change would 
eliminate hours of unnecessary work.\8\ One commenter expressed support 
for the proposal, stating it would be a less burdensome alternative for 
intermediary firms.\9\ Moreover, two commenters indicated that the 
proposed rule change should not compromise investor protection.\10\ 
Similarly, one commenter opined that the existing requirement serves no 
useful or beneficial purpose, in terms of additional investor 
protection concerns.\11\
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    \7\ Supra note 4.
    \8\ FSI letter; NPB letter.
    \9\ ICI letter.
    \10\ FSI letter; ICI letter.
    \11\ NPB letter.
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IV. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act, and the rules 
and regulations thereunder that are applicable to a national securities 
association. \12\ In particular, the Commission believes that the 
proposed rule change is consistent with the provisions of section 
15A(b)(6) of the Act,\13\ 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. The 
Commission believes that eliminating the requirement for firms to re-
approve sales material in limited circumstances when a registered 
principal of a firm has previously approved the sales material and the 
Department has previously supplied a favorable review letter will 
eliminate a compliance redundancy while maintaining investor 
protections. Notably, the initial firm creating all sales material 
subject to this exception will continue to be required to obtain sales 
material approval from its registered principal, file the sales 
material for review with the Department, and obtain a favorable review 
letter from the Department.
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    \12\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
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V. Conclusions

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-FINRA-2007-020) be, and 
hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
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    \15\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E8-2161 Filed 2-6-08; 8:45 am]

BILLING CODE 8011-01-P