Document ID: SEC-2012-0528-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-04-04T04:00Z

[Federal Register Volume 77, Number 65 (Wednesday, April 4, 2012)]
[Notices]
[Pages 20452-20471]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8043]

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SECURITIES AND EXCHANGE COMMISSION

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

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

 March 29, 2012.

I. Introduction

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

[[Page 20453]]

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

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

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

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

IV. Discussion of Comment Letters

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

[[Page 20454]]

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

V. Discussion and Commission Findings

A. Categories of Communications

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

[[Page 20455]]

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

[[Page 20456]]

communications are fair, balanced and accurate.\46\
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    \45\ See December Response Letter.
    \46\ See December Response Letter.
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    FINRA noted that in its experience regulating member sales 
material, even where investors may meet an ``accredited investor'' or 
other standard under the federal securities laws, it is not assured 
that sales material used with such investors will not be misleading or 
fraudulent, nor are such investors immune from being deceived by such 
material.\47\ FINRA indicates that, in FINRA's view, this is 
particularly true for individual investors that may have enough wealth 
to qualify for investing in privately placed securities, but lack the 
knowledge and understanding necessary to prevent investor harm from 
occurring.
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    \47\ See December Response Letter (citing examples of 
problematic practices. For example, FINRA notes that in one case, a 
member distributed sales literature regarding specific hedge funds 
to its customers that had inadequate risk disclosures about the 
specific risks of investing in these hedge funds and made unbalanced 
presentations that failed to provide investors with a sound basis 
for evaluating the facts associated with investments in these funds. 
FINRA states that these materials included projections of 
performance that were unwarranted. Id. at footnote 22 and 
accompanying text (citing to Altegris Investments Inc., AWC No. 
CAF030015 (April 15, 2003)).
    FINRA cites another case, in which a member distributed sales 
literature regarding privately placed registered investment 
companies that contained inadequate risk disclosures, and that 
stated that the fund was seeking a targeted rate of return without 
providing a substantiated basis for the target. Id. at footnote 23 
and accompanying text (citing to UBS Financial Services Inc., AWC 
No. CAF040051 (June 16, 2004)). In another case regarding the 
advertising of hedge funds, FINRA states that sales presentations 
and prospecting letters did not provide a sound basis for investors 
to evaluate the reasonableness of the targeted investment returns. 
For example, FINRA explains that some of the sales material included 
hypothetical results that were combined with the hedge fund's actual 
performance, giving the misimpression that the fund had actually 
achieved the combined performance record. Id. at footnote 24 and 
accompanying text (citing to Citigroup Global Markets, Inc., AWC No. 
CAF040077 (Oct. 4, 2004)).
    FINRA also provides an example of a recently litigated case, in 
which a member distributed emails to investors that qualified as 
accredited investors that contained predictions or projections of 
performance, including claims of returns of up to 100 percent 
annually and ``comfortable'' returns of 25-50 percent. FINRA notes 
that aside from violating FINRA rules prohibiting such projections 
of performance, these claims also lacked any historical support, and 
the emails lacked risk disclosures. Id. at footnote 25 and 
accompanying text (citing to Dep't of Enforcement v. Hedge Fund 
Capital Partners LLC, Complaint No. 2006004122402 FINRA Discip. 
LEXIS 20 (Jan. 26, 2011), appeal docketed, Feb. 7, 2011).
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    FINRA stated that there would be no more reason to lower the 
threshold than to raise it to a higher one, such as the threshold for a 
``qualified institutional buyer'' (certain institutions holding $100 
million in securities) under Rule 144A of the Securities Act of 
1933.\48\ Similarly, in response to the comments suggesting the 
Regulation D standard as an alternative, FINRA pointed to various 
observations about the accredited investor standard under Regulation D: 
some have asserted that the net worth, income or asset size may not be 
an indication of an investor's ability to bear the risk of loss \49\ 
and that the definition may be both under-inclusive (by excluding 
financially sophisticated investors who do not meet the definition's 
wealth tests) and over-inclusive (by including wealthy financial 
novices).\50\ FINRA concludes that the same criticisms can be made for 
any test of investor sophistication that is based upon measures of 
wealth, such as ``qualified investor'' or ``qualified purchaser.''
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

[[Page 20457]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 20458]]

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

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

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

    \69\ See December Response Letter (citing, NASD Rule 2211(a)(2) 
and (a)(3)(E)).
    \70\ See December Response Letter (citing, e.g., NASD Regulatory 
& Compliance Alert, ``Ask the Analyst'' (September 1998), available 
at www.finra.org).
    \71\ See December Response Letter (citing, e.g., NASD Letter of 
Acceptance, Waiver and Consent No. EAF0401000001 (MML Distributors, 
LLC) (Oct. 2005); NASD Letter of Acceptance, Waiver and Consent No. 
EAF0401240001 (AFSG Securities Corp.) (Oct. 2005); FINRA Letter of 
Acceptance, Waiver and Consent No. 20080130571 (US Bancorp 
Investments, Inc.) (Feb. 12, 2010); and FINRA Letter of Acceptance, 
Waiver and Consent No. 2008015443301 (UBS Financial Services, Inc.) 
(April 8, 2011)).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

B. Approval, Review and Recordkeeping

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

[[Page 20459]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 20460]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 20461]]

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

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

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

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

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

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

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

C. Filing Requirements and Review Procedures

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

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

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

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

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

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

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

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

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

[[Page 20462]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 20463]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 20464]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 20465]]

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

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

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

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

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

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

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

    \146\ FINRA stated that its Department staff codes mutual fund 
shareholder reports as ``performance reports,'' which includes not 
only fund shareholder reports, but also other periodic performance 
reports, such as quarterly fund reports and other types of periodic 
fund performance updates. The 7.5 percent figure reflects comments 
made on all communications coded as performance reports, although 
most performance reports are sales material and MDFPs included 
within mutual fund shareholder reports. Id.
---------------------------------------------------------------------------

    FINRA stated its position that although shareholder reports are 
filed with the Commission, they might be reviewed by Commission staff 
only on a three-year cycle.\147\ In contrast, FINRA noted that it 
reviews all shareholder report sales material and MDFPs that are filed 
with the Department and that the Department's comprehensive review 
program discourages funds from including content that is misleading or 
potentially harmful to investors.
---------------------------------------------------------------------------

    \147\ See December Response Letter.
---------------------------------------------------------------------------

    FINRA emphasized that it is sensitive to the costs that the 
communications rules impose upon the industry, and has agreed to 
changes to its existing rules and the proposed amendments to 
accommodate these concerns in a manner consistent with investor 
protection.\148\ However, FINRA stated that it believed the costs 
associated with the shareholder report filing requirement appear to be 
substantially less than the amount estimated by the industry. One 
commenter estimated that ``a significant number of Institute member 
firms pay more than $20,000 in fees annually to file shareholder 
reports with FINRA.'' \149\ FINRA noted the commenter's explanation 
that this estimate was based upon the assumption that a fund complex 
that files 100 shareholder reports twice a year at FINRA's minimum 
filing fee would pay $20,000 in filing fees, and that 31 firms that are 
members of the commenter have more than 100 funds in their complexes.
---------------------------------------------------------------------------

    \148\ See March Response Letter.
    \149\ See ICI January Letter.
---------------------------------------------------------------------------

    FINRA argued that this cost estimate appears overstated because 
many fund complexes combine multiple funds' shareholder reports into a 
single document, which they file one time with FINRA. FINRA noted that 
of the 10 fund complexes that filed the highest volume of shareholder 
reports in 2011, only two issue a separate shareholder report for each 
fund.\150\ For example, FINRA indicated that it is not uncommon for 
fund groups to combine shareholder reports for multiple target date 
funds, money market funds or municipal bond funds in a single document.
---------------------------------------------------------------------------

    \150\ See March Response Letter. FINRA noted that these 10 
largest fund complexes filed approximately 30 percent of all mutual 
fund performance reports received by FINRA in 2011 (which, as noted 
above, includes shareholder reports)--and of these fund complexes, 
one creates multiple-fund shareholder report documents for all of 
its funds, seven create multiple-fund shareholder report documents 
for at least some of their funds, and only two issue a separate 
shareholder report document for each fund.
---------------------------------------------------------------------------

    In light of the use of mutual fund shareholder reports to market 
the fund, and the substantive concerns raised by some shareholder 
reports, FINRA stated that it continues to believe that fund 
shareholder report sales material and MDFPs that will be used with 
prospective investors should be subject to the same filing requirements 
as other mutual fund sales material. Consequently, FINRA declined to 
exempt a fund shareholder report sales material and MDFP from proposed 
FINRA Rule 2210's filing requirements.
    The Commission believes that FINRA has responded adequately to 
comments regarding the MDFP filing requirement. For example, FINRA 
cited to substantive

[[Page 20466]]

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

D. Content Standards

    Proposed paragraph 2210(d) generally requires all communications to 
be based on principles of fair dealing and good faith, be fair and 
balanced, and provide a sound basis for evaluating the facts in regard 
to any particular security, industry or service. The proposed rule 
prohibits the use of false, exaggerated, unwarranted, promissory or 
misleading statements or claims in communications. Additionally, the 
proposed rule sets forth specific requirements that apply to the use of 
comparisons; disclosure of the member's name; tax considerations; 
disclosure of fees, expenses, and standardized performance; 
testimonials; and recommendations.
    Commenters raised various concerns about FINRA's proposed content 
standards.\151\ The comments focused on predictions of future 
performance, the detail required of tax consideration disclosure, the 
prominence requirement for disclosure of fees and expenses and 
requirements applicable to communications concerning recommendations of 
securities.
---------------------------------------------------------------------------

    \151\ See Wilmer August Letter; TLGI August Letter; and ICI 
August Letter.
---------------------------------------------------------------------------

1. Projections of Performance
    One commenter requested confirmation that proposed paragraph 
(d)(1)(F), which generally would prohibit communications from 
predicting or projecting performance, implying that past performance 
will recur, or making any exaggerated or unwarranted claim, opinion or 
forecast would not apply to communications produced by a member's 
research department.\152\
---------------------------------------------------------------------------

    \152\ See Wilmer August Letter.
---------------------------------------------------------------------------

    FINRA indicated that proposed paragraph (d)(1)(F) would apply to 
all communications, including those produced by a member's research 
department. However, FINRA indicated that it does not believe that the 
provision's restrictions would inhibit the types of content typically 
found in research communications. FINRA noted that the provision 
includes an exception expressly permitting price targets that meet the 
standards of NASD Rule 2711. In addition, FINRA noted that it does not 
believe that the type of content described by the commenter, such as 
forward-looking statements or earnings estimates commonly provided in 
research reports, would be considered projections of performance for 
purposes of the provision. FINRA provided additional guidance 
indicating that, in general, the provision is intended to prohibit 
specific percentage or dollar-based projections of performance of an 
investment. Nevertheless, FINRA noted that proposed paragraph (d)(1)(F) 
would prohibit research communications from including any exaggerated 
or unwarranted claim, opinion or forecast.
    The Commission believes that FINRA has responded adequately to this 
comment, including by providing guidance about the types of content 
that may or may not be prohibited under proposed paragraph (d)(1)(F).
2. Tax Considerations
    One commenter argued that the disclosure requirements in proposed 
FINRA Rule 2210(d)(4) impose complicated content standards and 
disclosure requirements on certain retail communications and 
correspondence that discuss tax considerations of investments and 
investment accounts and should be limited instead to a requirement to 
disclose that an investor should seek professional tax advice due to 
the complexity and changing nature of the tax code.\153\
---------------------------------------------------------------------------

    \153\ See TLGI August Letter.
---------------------------------------------------------------------------

    FINRA declined to make the change, indicating that it believes that 
the disclosures listed in proposed paragraph (d)(4) are important to 
help an investor understand the context and limitations of 
communications that discuss tax implications of investments and 
investment accounts. Additionally, FINRA cautioned against any member 
preparing a communication that it believes may be inaccurate in its 
representations of tax considerations due to the complexity of tax laws 
and rules.
    In Amendment No. 1, FINRA modified proposed paragraph (d)(4) to 
clarify that it intended to require such retail communications to 
disclose that ordinary tax rates apply to withdrawals from tax-deferred 
investments in illustrations of tax-deferred products or accounts to 
the extent withdrawals are subject to ordinary income tax rates.\154\
---------------------------------------------------------------------------

    \154\ See Amendment No. 1; proposed FINRA Rule 
2010(d)(4)(c)(vii)(d).
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to the 
comment regarding tax disclosure requirements under proposed FINRA Rule 
2210(d)(4) by, among other things, emphasizing the importance of the 
proposed disclosures for facilitating investor comprehension.
3. Standardized Performance Information
    One commenter opposed a requirement in proposed FINRA Rule 
2210(d)(5) that sets forth certain disclosure requirements concerning 
investment company fees and expenses with respect to retail 
communications and correspondence that advertise a fund's 
performance.\155\ The commenter suggested that instead of requiring 
certain standardized performance and expense information to be included 
in a prominent text box with respect to print advertisements that 
include fund performance, FINRA should instead revise proposed FINRA 
Rule 2210 to require funds to prominently present standardized 
performance, maximum sales charges, and expense ratios.
---------------------------------------------------------------------------

    \155\ See ICI August Letter.
---------------------------------------------------------------------------

    FINRA declined this recommendation, indicating that prior to the 
adoption of NASD Rule 2210(d)(3),\156\ FINRA stated that it had found 
that some mutual fund print advertisements placed standardized 
performance information in footnotes while placing non-standardized 
performance information in the body of a print advertisement, despite 
equal prominence requirements contained in Securities Act Rule 482. 
Additionally, FINRA noted that it found that NASD Rule 2210(d)(3) 
helped clarify that placing performance information in footnotes does 
not meet the equal prominence requirements of Rule 482, and made print 
performance advertisements more fair and balanced.
---------------------------------------------------------------------------

    \156\ Proposed FINRA Rule 2210(d)(5) generally carries forward 
the requirements of NASD Rule 2210(d)(3).
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to the 
comment opposing the disclosure requirements carried forward from NASD 
rule 2210(d)(3) by explaining, among other things, why it views the 
proposed requirement as an important tool for making print performance 
communications more fair and balanced.
4. Recommendations of Securities
    Proposed FINRA Rules 2210(d)(7) and 2210(f)(1) would require retail 
communications and public appearances that include a recommendation of 
securities to have a reasonable basis for the recommendation, and to 
make certain disclosures. Among other things, the Original Proposal 
provided that a retail communications or a public appearance that 
includes a recommendation of securities would have to disclose, if 
applicable, that the member or any

[[Page 20467]]

associated person with the ability to influence the content of the 
communication has a financial interest in any of the securities of the 
issuer whose securities are recommended, and the nature of the 
financial interest (including, without limitation, whether it consists 
of any option, right, warrant, future, long or short position), unless 
the extent of the financial interest is nominal. FINRA received a 
number of comments concerning these proposed requirements.
    Two commenters recommended that the disclosure requirements apply 
only to public appearances and retail communications that are published 
or used in any electronic or other media.\157\ These commenters noted 
that it is not necessary to mandate extensive disclosure requirements 
for public appearances before small groups.
---------------------------------------------------------------------------

    \157\ See Fidelity August Letter and SIFMA August Letter.
---------------------------------------------------------------------------

    Two commenters argued that the requirement to disclose the 
financial interests of any associated person with the ability to 
influence the content of the communication is unclear, too broad, and 
difficult to administer.\158\ The commenters argued that many persons 
within a firm may be able to influence a communication's content, and 
it would be difficult to track each person's financial interests with 
respect to particular retail communications or public appearances. One 
of the commenters also recommended that this disclosure requirement be 
limited to associated persons who are ``directly and materially 
involved in the preparation of the content.'' \159\ The other commenter 
questioned the need for this disclosure at all, which it considered to 
be ``meaningless to the majority of retail investors.'' \160\
---------------------------------------------------------------------------

    \158\ See Fidelity August Letter and FSI August Letter.
    \159\ See Fidelity August Letter.
    \160\ See FSI August Letter.
---------------------------------------------------------------------------

    One commenter recommended that the requirement to disclose the 
financial interests of any associated person with the ability to 
influence the content of the communication be deleted and replaced with 
a requirement to disclose the financial interests of a member's 
officers or partners, which the commenter stated is similar to the 
current disclosure requirements for securities recommendations in NASD 
IM-2210-1(6).\161\ The commenter argued that this alternative would 
``provide meaningful disclosures to customers, without requiring 
members to implement costly monitoring systems and processes.''
---------------------------------------------------------------------------

    \161\ See SIFMA August Letter.
---------------------------------------------------------------------------

    By contrast, another commenter urged FINRA to broaden the 
disclosure requirements for retail communications and public 
appearances that contain securities recommendations. This commenter 
argued that the proposed standard (associated persons with the ability 
to influence the content of a communication) is too narrow.\162\
---------------------------------------------------------------------------

    \162\ See PIABA August Letter.
---------------------------------------------------------------------------

    Two commenters focused particular attention on the proposed 
disclosure requirements as they would apply to public appearances. 
These commenters argued that the proposed standard is unworkable in 
this context, particularly where a speaker is answering a question 
about a particular security, and that such appearances would be 
impossible to monitor.\163\ One of those commenters also argued that 
the standard is unfair, since it would impose disclosure requirements 
on registered representatives who recommend securities that are not 
imposed even on research analysts that recommend securities in public 
appearances.\164\
---------------------------------------------------------------------------

    \163\ See Fidelity August Letter and ICI August Letter.
    \164\ See ICI August Letter.
---------------------------------------------------------------------------

    One commenter suggested as an alternative that the disclosure 
requirements of proposed FINRA Rule 2210(d)(7) apply to public 
appearances only if a member or associated person intends to recommend 
a security.\165\ Another commenter offered as an alternative a more 
general requirement that an associated person making a public 
appearance disclose any actual, material conflict of interest related 
to a particular recommendation of which the person knows or has reason 
to know at the time of the public appearance.\166\ The commenter noted 
that this standard is similar to the public appearance requirements 
that apply to research analysts under NASD Rule 2711(h).
---------------------------------------------------------------------------

    \165\ See Fidelity August Letter.
    \166\ See ICI August Letter.
---------------------------------------------------------------------------

    One of the commenters recommended that FINRA clarify that the 
disclosure requirements in proposed FINRA Rule 2210(d)(7)(A)(ii) do not 
apply to indirect holdings, such as securities that are held by mutual 
funds or other pooled vehicles in which an associated person 
invests.\167\
---------------------------------------------------------------------------

    \167\ See Fidelity August Letter.
---------------------------------------------------------------------------

    One commenter recommended that the exception in proposed FINRA Rule 
2210(d)(7)(D)(i), which would except from disclosure requirements any 
communication that meets the definition of ``research report'' or is a 
public appearance by a research analyst for purposes of NASD Rule 2711 
and includes all of the applicable disclosures required by that Rule, 
be expanded to cover all communications created by a firm's research 
department, including debt research and research related communications 
that are not research reports.\168\
---------------------------------------------------------------------------

    \168\ See Wilmer August Letter.
---------------------------------------------------------------------------

    In response to comments, FINRA has amended the disclosure 
requirements for both retail communications and public appearances that 
include securities recommendations. As suggested by several commenters, 
in Amendment No. 1, FINRA narrowed the scope of the persons whose 
financial interests would have to be disclosed to those involved in the 
preparation of a communication. As revised, a retail communication that 
includes a securities recommendation would have to disclose if the 
member or any associated person that is directly and materially 
involved in the preparation of the content of the communication has a 
financial interest in any of the securities of the issuer whose 
securities are recommended, and the nature of the financial interest, 
unless the extent of the financial interest is nominal.
    FINRA also modified paragraph (d)(7)(D) to clarify that the 
disclosure requirements in paragraph (d)(7)(A) and the provisions 
regarding past specific recommendations in paragraph (d)(7)(C) do not 
apply to a retail communication that recommends only registered 
investment companies or variable insurance products; however, such 
communications still must have a reasonable basis for the 
recommendation. In addition FINRA noted that pursuant to proposed 
paragraph (d)(7)(B), a member must provide, or offer to furnish upon 
request, available investment information supporting the recommendation 
in those communications.\169\
---------------------------------------------------------------------------

    \169\ See October Response Letter. FINRA noted that the proposed 
requirement in paragraph (d)(7)(B) to provide the price at the time 
a recommendation is made applies only to a recommendation of a 
corporate equity security, and thus does not apply to the 
recommendation of an investment company security or variable 
insurance product.
---------------------------------------------------------------------------

    FINRA clarified that the disclosure requirements in proposed FINRA 
Rule 2210(d)(7)(A)(ii), do not apply to the portfolio investments of an 
investment company or other fund owned by the member or such associated 
person.\170\
---------------------------------------------------------------------------

    \170\ FINRA stated that the disclosure requirements do not apply 
to any communication that recommends only registered investment 
companies or variable insurance products. See proposed FINRA Rule 
2210(d)(7)(D)(ii).
---------------------------------------------------------------------------

    FINRA indicated that the revised standard provides sufficient 
information to investors reading a retail

[[Page 20468]]

communication to warn them of potential conflicts of interest. It also 
reduces the burdens on members with regard to tracking financial 
interests that must be disclosed. FINRA also revised the disclosure 
standards for public appearances that include securities 
recommendations. As revised, the requirements under proposed FINRA Rule 
2210(f) would apply only to public appearances by associated persons 
(since members do not engage in public appearances except through their 
associated persons). As amended, an associated person making a public 
appearance would have to disclose, as applicable, his or her own 
financial interests in any of the securities of the issuer of the 
recommended security, and the nature of the financial interest, unless 
the extent of the financial interest is nominal. Additionally, the 
associated person would have to disclose any actual, material conflict 
of interest of the associated person or member of which the associated 
person knows or has reason to know at the time of the public 
appearance. FINRA noted that these disclosure requirements would not 
apply to any public appearance by a research analyst for purposes of 
NASD Rule 2711 that includes all of the applicable disclosures required 
by that Rule. FINRA further noted that the disclosure requirements also 
would not apply to a recommendation of investment company securities or 
variable insurance products; provided, however, that the associated 
person must have a reasonable basis for the recommendation. FINRA 
stated that it believes that this standard will still provide important 
information regarding potential conflicts to investors, while reducing 
the compliance burden to firms in administering this standard.
    The Commission believes that FINRA addressed adequately comments 
regarding the disclosure requirements for both retail communications 
and public appearances that include securities recommendations. FINRA 
has amended these provisions in several respects to address commenter 
concerns. For example, FINRA has narrowed the scope of persons whose 
financial interests must be disclosed to capture the member or any 
associated person that is directly and materially involved in the 
preparation of the content of the communication. FINRA also revised the 
disclosure standards for public appearances that include securities 
recommendations for purposes of providing important information 
regarding potential conflicts to investors without unduly burdening 
firms. Additionally, FINRA explained why it would not be necessary to 
expressly exclude indirect holdings from the disclosure requirements in 
proposed FINRA Rule 2210(d)(7)(A)(ii).

E. Other Issues Related to Public Appearances and Online Interactive 
Electronic Communications

    Currently, the term ``public appearance'' is included as a category 
within the broader term ``communications with the public,'' and 
includes participation in an online interactive electronic forum.\171\ 
Under proposed FINRA Rule 2210, public appearances would no longer be a 
separate category of the term ``communications,'' and instead would be 
governed by FINRA Rule 2210(f). Proposed paragraph 2210(f) sets forth 
certain content, supervisory and other requirements that apply to 
public appearances. The term also would not include posts on online 
interactive electronic forums, which would be considered retail 
communications. Under proposed FINRA Rule 2210(b)(1)(D)(ii), members 
would be permitted to supervise and review retail communications that 
are posted on an online interactive electronic forum in the same manner 
as required for supervising and reviewing correspondence under NASD 
Rule 3010(d). Thus, members would not have to approve each such retail 
communication prior to use, and would have flexibility regarding how 
they establish their supervisory systems.
---------------------------------------------------------------------------

    \171\ See NASD Rule 2210.
---------------------------------------------------------------------------

    One commenter opposed proposed FINRA Rule 2210(f)(2), which would 
require each member to establish written procedures that are 
appropriate to its business, size, structure and customers to supervise 
its associated persons' public appearances, arguing that it is 
duplicative of supervisory requirements that already exist under NASD 
Rule 3010.\172\ FINRA disagreed with this objection. FINRA maintains 
that while NASD Rule 3010 already generally requires a member to 
establish and maintain written procedures to supervise its associated 
persons' activities,\173\ FINRA rules also include provisions regarding 
the supervision of particular activities where appropriate.\174\ In 
this case, FINRA believes that proposed FINRA Rule 2210(f)(2) provides 
additional information regarding the type of supervision it expects 
members to maintain in connection with public appearances, and thus is 
appropriate.
---------------------------------------------------------------------------

    \172\ See ICI August Letter.
    \173\ See NASD Rule 3010(b)(1).
    \174\ See, e.g., FINRA Rule 2330(d) (supervisory procedures 
regarding the purchase or exchange of deferred variable annuities).
---------------------------------------------------------------------------

    Two commenters opposed the elimination of the term ``public 
appearance'' as a communication category, particularly with respect to 
online interactive electronic communications.\175\ These commenters 
argued that posts on online interactive electronic forums are more 
analogous to ``physical public appearances.'' They also argued that 
recordkeeping requirements would be less burdensome if posts on social 
media Web sites were considered public appearances.
---------------------------------------------------------------------------

    \175\ See Fidelity August Letter and SIFMA August Letter.
---------------------------------------------------------------------------

    FINRA disagreed that it is necessary to continue to treat posts on 
online interactive electronic forums as public appearances. FINRA noted 
that it has created an exception from the pre-use principal approval 
requirements for such posts, permitting members to supervise and review 
such posts in the same manner permitted for correspondence.\176\ 
Moreover, FINRA notes that this proposed standard would codify guidance 
already provided regarding supervision of posts on social media Web 
sites.\177\
---------------------------------------------------------------------------

    \176\ See proposed FINRA Rule 2210(b)(1)(D)(ii).
    \177\ See October Response Letter (citing Regulatory Notice 10-
06 (Guidance on Blogs and Social Networking Web sites) (January 
2010) and Regulatory Notice 11-39 (Guidance on Social Networking Web 
sites and Business Communications) (August 2011)).
---------------------------------------------------------------------------

    Following publication of the Notice and Proceedings Order, the 
commenters reiterated that FINRA should maintain its current definition 
of ``public appearance'' under NASD Rule 2210 and include online 
interactive electronic communications within this framework, 
``recognizing that these communications are more analogous to physical 
public appearances.'' \178\ One commenter expressed concern that 
otherwise, online interactive electronic communications may fall into 
the definitions of correspondence, institutional communications or 
retail communications, which would complicate how the rules apply to 
such communications.\179\ The other commenter recommended that FINRA 
exclude content that is interactive rather than static from the filing 
requirements under proposed FINRA Rule 2210(c), arguing that the burden 
of filing interactive online postings would far outweigh any potential 
benefits.\180\
---------------------------------------------------------------------------

    \178\ See Fidelity December Letter and SIFMA December Letter.
    \179\ See Fidelity December Letter.
    \180\ See SIFMA December Letter.
---------------------------------------------------------------------------

    In response to comments reiterating concerns about online 
interactive

[[Page 20469]]

electronic communications, FINRA disagreed that participation on an 
online interactive electronic forum is more analogous to a physical 
public appearance than other electronic communications. FINRA noted 
that an online interactive electronic forum post generally remains 
available to the public for an extended period of time. FINRA noted 
that unless an interview or other public speaking activity is recorded 
and made available afterwards through some other medium, it no longer 
is available to the public after the interview or speech is completed. 
Thus, FINRA believes it is more appropriate to classify online 
interactive electronic forum posts generally as retail communications 
rather than public appearances.
    FINRA recognized that participation on online electronic forums 
often occurs on a real-time basis and does not lend itself easily to 
pre-use principal approval. Accordingly, FINRA proposed to allow firms 
the flexibility to supervise participation on online electronic forums 
in the same manner as they supervise correspondence, which can include 
post-use review.\181\ FINRA believes the concerns expressed by a 
commenter regarding whether an online forum post is correspondence, an 
institutional communication or a retail communication are overstated 
because FINRA believes that as a general matter, under the rule 
proposal, the supervisory requirements will be the same in each case.
---------------------------------------------------------------------------

    \181\ See December Response Letter (citing to Regulatory Notice 
10-06 (Guidance on Blogs and Social Networking Web Sites) (January 
2010); Regulatory Notice 07-59 (FINRA Provides Guidance Regarding 
the Review and Supervision of Electronic Communications) (December 
2007)).
---------------------------------------------------------------------------

    As discussed above, FINRA recognized the potential difficulties 
associated with filing an online forum post, and accordingly amended 
proposed FINRA Rule 2210(c)(7) in Amendment No. 2, to add a filing 
exclusion for retail communications that are posted on online 
interactive electronic forums.
    The Commission believes that FINRA has responded adequately to 
these comments. For example, FINRA responded to the comment suggesting 
that the proposed rule contains requirements duplicative of NASD Rule 
3010 by clarifying that the proposed rule sets forth more specific 
information regarding the type of supervision it expects members to 
maintain in connection with public appearances. FINRA responded to 
comments regarding the treatment of online interactive electronic 
communications by noting that (1) the proposed rule permits members to 
supervise and review such communications in the same manner permitted 
for correspondence, (2) online interactive electronic forum posts 
generally remain available to the public for extended periods of time--
which suggests they are more appropriately classified as retail 
communication than public appearance, and (3) as noted above, FINRA 
amended the proposal to add a filing exclusion for such communications 
in light of potential difficulties associated with filing.

F. Social Media

    Three commenters expressed concern with the amount of content and 
data related to social media that must be stored under Commission 
recordkeeping rules.\182\ These commenters recommended that the 
Commission, FINRA and the securities industry work together to create a 
new paradigm for electronic recordkeeping. Two commenters also urged 
FINRA to take a longer-term, comprehensive approach to the regulation 
of social media taking into consideration evolving media and 
technology, as well as the costs and benefits of regulation.\183\ One 
of those commenters recommended that FINRA use its Social Media Task 
Force or another committee to consider how the communications rules 
should apply to mobile devices and provide guidance or new rules that 
are tailored to these technologies.\184\ Another commenter recommended 
that FINRA codify in its communications rules the guidance that it 
provided in Regulatory Notices 10-06 and 11-39.\185\
---------------------------------------------------------------------------

    \182\ See Fidelity August Letter; ICI August Letter; and 
Vanguard August Letter.
    \183\ See ICI August Letter and Vanguard August Letter.
    \184\ See Fidelity August Letter.
    \185\ See FSI August Letter.
---------------------------------------------------------------------------

    FINRA noted that the commenters' concerns regarding the 
Commission's recordkeeping rules are outside the scope of the proposed 
rule change. FINRA indicated that it will continue to work with the 
industry going forward to address issues raised under FINRA rules, and 
may issue more guidance or propose new rules regarding these issues in 
the future as appropriate.
    The Commission believes that FINRA responded adequately to these 
comments by indicating that it will continue to monitor and address 
issues that arise under FINRA rules in the social media landscape, 
whether through its Social Media Task Force or other means it deems 
suitable. The Commission also believes that Commission recordkeeping 
rules are outside the scope of the proposed rule change. Under Exchange 
Act Rule 17a-4, a broker-dealer is required to maintain originals of 
all communications received and copies of all communications sent 
relating to its ``business as such'' including all communications which 
are subject to the rules of a self regulatory organization regarding 
communications with the public.

G. Other General Comments

    One commenter indicated that the proposed rule change will not 
improve the flow of communications, which in turn will compromise 
investor protection.\186\ FINRA disagreed, indicating that the proposed 
rule change seeks to balance the need for members to communicate with 
their customers and the need for such communications to be fair and 
balanced. FINRA believes that members still will be able to communicate 
with their customers through a number of channels, and that the 
proposed rules will enhance rather than compromise investor protection.
---------------------------------------------------------------------------

    \186\ See TLGI August Letter.
---------------------------------------------------------------------------

    One commenter noted that it is difficult to follow the proposed 
rules in the form presented in the Proposing Release and urged FINRA to 
simplify that presentation.\187\ FINRA noted that it presents the 
proposed rule text in the format required by SEC Form 19b-4 under the 
Exchange Act.
---------------------------------------------------------------------------

    \187\ See SIFMA August Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA has responded adequately to 
comments regarding the flow of communications and the complexity of the 
proposed rule by, among other things, emphasizing that the proposed 
rule is designed to enhance investor protection, while still providing 
members a number of channels for communicating with customers.
    As FINRA noted in response to comments the presentation of the 
proposed rule is consistent with the requirements of SEC Form 19b-4. 
The Commission also notes that in an effort to assist commenters in 
reviewing proposed Amendment No. 1, FINRA submitted as a comment letter 
an alternative version of Exhibit 4 showing the full proposal marked 
with the changes in Amendment No. 1.\188\ Additionally, FINRA has 
revised its rule text to seek to provide clarity where commenters have 
pointed out ambiguities.
---------------------------------------------------------------------------

    \188\ See Letter from Philip A. Shaikun, FINRA, to Elizabeth M. 
Murhpy, Secretary, SEC, dated November 2, 2011 available at 
www.sec.gov.
---------------------------------------------------------------------------

H. Implementation Timeframe

    One commenter recommended that FINRA allow at least six months 
after

[[Page 20470]]

Commission approval of the proposed rule change before these changes 
become effective.\189\ Another commenter recommended that the 
compliance date be 10 business days after the second calendar quarter 
end following Commission approval.\190\ These commenters also 
recommended that if FINRA subjects internal training and education 
materials to proposed FINRA Rule 2210, FINRA should permit a compliance 
time period of nine months after Commission approval. Another commenter 
requested that FINRA provide, at a minimum, 12 months for members to 
adapt to the changes.\191\
---------------------------------------------------------------------------

    \189\ See Fidelity August Letter and Fidelity December Letter.
    \190\ See ICI August Letter.
    \191\ See FSI December Letter.
---------------------------------------------------------------------------

    FINRA stated that it recognizes that members will need time to 
alter their internal policies and procedures in response to new 
requirements imposed by the proposed rule change. FINRA indicated on 
multiple occasions that it plans to publish a Regulatory Notice no 
later than 90 days following Commission approval of the rule 
changes.\192\ FINRA has stated that the implementation date will be no 
later than 365 days following Commission approval. In establishing this 
schedule, FINRA agreed to consider members' need to adopt and implement 
policies and procedures necessary to comply with the new rules.
---------------------------------------------------------------------------

    \192\ See October Response Letter and December Response Letter.
---------------------------------------------------------------------------

    FINRA has clarified that it will take into account members' 
comments in establishing the implementation timeframe for members to 
adapt to changes. Therefore, the Commission believes that FINRA has 
responded adequately to the comments regarding the implementation 
timeframe of the proposed rule.

I. FINRA's General Comments Regarding the Proposal

    FINRA believes that the proposed rule change, as amended, satisfies 
the statutory standard for Commission approval. FINRA indicated that 
the proposed rule change is primarily intended to simplify FINRA's 
advertising rules by reducing the number of communications categories, 
codifying long-standing interpretations of the rules, and clarifying 
certain provisions. FINRA also stated that the industry supports most 
of these amendments, which it believes should simplify application of 
the rules by compliance professionals and other broker-dealer 
personnel. FINRA also believes that the proposed rule change would 
continue to ensure that FINRA's rules protect investors from false and 
misleading communications.
    FINRA noted that it has been responsive to industry and Commission 
staff comments. The industry and other members of the public have had 
four formal opportunities (one provided by FINRA and three by the 
Commission) to comment on iterations of the proposal. Throughout the 
comment process FINRA believes that it has responded to commenters' 
concerns. FINRA noted that many of the comments concerned provisions of 
existing NASD Rules 2210 and 2211 that FINRA had not originally 
proposed to amend.
    Among the changes that FINRA has proposed in response to comments 
are the following:
     Eliminating the existing requirement that internal 
training material is subject to NASD Rule 2211;
     Explicitly excluding retail communications that are posted 
on online interactive electronic forums from the filing requirement;
     Expanding a Supervisory Analyst's authority to approve 
retail communications;
     Eliminating the current filing requirement for 
advertisements concerning government securities;
     Providing a new exception from the filing and principal 
pre-use approval requirements for those retail communications that do 
not make a financial or investment recommendation or otherwise promote 
a product or service of the member;
     Permitting firms to combine multiple retirement plans 
offered by the same employer for purposes of determining whether there 
are 100 participants, thereby making it easier for such an employer to 
qualify as an institution for purposes of the rule;
     Permitting retail communications concerning collateralized 
mortgage obligations (CMOs) to be filed within 10 days of first use, 
rather than 10 days prior to use as required by the existing rule; and
     Authorizing FINRA to grant exemptions from both the filing 
and principal pre-use approval requirements for good cause shown.
    FINRA believes that these changes to the existing rules would 
address concerns raised by the industry in the comment process while 
maintaining rigorous investor protections.

J. General Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's response to the comments, and finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association. In particular, the Commission finds that the 
proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\193\ which, among other things, requires that FINRA rules 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. In approving this proposed 
rule change, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation.\194\
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    \193\ 15 U.S.C. 78o-3(b)(6).
    \194\ See 15 U.S.C. 78c(f).
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    As discussed above, the Commission believes that FINRA addressed 
adequately concerns regarding pre-filing and supervision requirements 
that could impact efficiency; and notes that the proposed rule's 
overarching goal of simplifying the regulatory framework enhances 
efficiency. As FINRA noted in the March Response Letter, the intent of 
the proposed rule is to simplify communications rules by decreasing the 
number of communications categories, codifying long-standing 
interpretations of the rules, and clarifying certain provisions. The 
Commission believes that the proposed rule simplifies the framework 
under which broker-dealers are required to supervise communications, 
disclose information to investors and file information with regulators.
    The Commission also believes that FINRA has addressed adequately 
competition concerns that could arise from differing treatment of 
certain products or categories of communications. The Commission 
believes that the proposed requirements for enhanced supervision and 
review of communications to retail investors by new members, containing 
certain rankings or ratings and/or concerning more complex products is 
designed to prevent misleading communications and to protect investors.
    The Commission has reviewed the record for the proposed rule change 
and notes that the record does not contain any information to indicate 
that the proposed rule would have a significant effect on capital 
formation. The Commission believes that the intent of the proposed rule 
is beneficial and that the changes will enhance consumer confidence by 
promoting fair and balanced communications from broker-dealers to the 
investing public.
    As noted in each category above, the Commission believes that FINRA 
has

[[Page 20471]]

considered carefully and responded adequately to comments and concerns 
raised about previous versions of the proposed rule. As evidence of 
FINRA's commitment to drafting a narrowly tailored rule while 
maintaining comprehensive investor protection standards, the Commission 
points to the discussion above which highlights the many revisions 
FINRA made to the proposal to address comments and concerns raised 
through four separate opportunities for comment.

VI. Accelerated Approval

    The Commission finds goods cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\195\ for approving the proposed rule change, as 
modified by Amendments Nos. 1, 2, and 3 thereto, prior to the 30th day 
after publication of notice of the filing of Amendment No. 3 in the 
Federal Register. The proposed rule change was informed by FINRA's 
consideration of, and the incorporation of many suggestions made in 
comments on a 2009 proposal to members to harmonize and modernize the 
communications with the public rules,\196\ the Original Proposal, the 
Notice and Proceedings Order, and Amendment No. 2. Amendment No. 3 
reflects FINRA's efforts to further address commenter concerns and 
minimize burdens resulting from the proposed rule's requirements.
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    \195\ 15 U.S.C. 78s(b)(2).
    \196\ See Regulatory Notice 09-55.
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    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment Nos. 1, 2 and 3 on an 
accelerated basis.

VII. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 3 
to 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-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 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 
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 April 25, 2012.

VIII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\197\ that the proposed rule change (SR-FINRA-2011-035), as 
modified by Amendments Nos. 1, 2 and 3, be, and hereby is, approved on 
an accelerated basis.
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    \197\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\198\
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    \198\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8043 Filed 4-3-12; 8:45 am]
BILLING CODE 8011-01-P