In April, the SEC approved a significant revamping of FINRA rules regarding member communications with the public (the “New Rules”). The rule changes are a culmination of a multi-year effort by FINRA to update, harmonize and consolidate various NASD rules and interpretations regarding communication and advertising rules.
New Communication Categories
One of the most significant changes brought about by the New Rules is the consolidation of the number of communication categories from six to three. Previously FINRA rules governed the following categories of communication with the public: advertising, sales literature, correspondence, institutional sales, materials public appearances, and independent reprints. These categories have been consolidated to the following:
1. “Institutional Communication” means any written (including electronic) communication that is distributed or made available only to institutional investors, but does not include a member’s internal communications. This category includes material that previously fell within the definition of “institutional sales material.” In addition, the definition of “institutional investor” has been expanded to include multiple employee benefit plans and qualified plans offered to employees of the same employer with, in the aggregate, at least 100 participants (but does not include the participants of such plans).
• While members are not affirmatively obliged to inquire as to whether institutional communications are being forwarded to “retail investors”, members are required to obtain reasonable assurance that policies and procedures are in place that prevent institutional communications are being improperly forwarded.
• The implications of repeated non-compliance by an institutional recipient are that the member would no longer be able to treat communications sent to that recipient as institutional communications, but would be required to treat them as retail communications, which would likely change both content and filing requirements. A member would be required to reasonably conclude that the improper practice has ceased before being permitted to consider future communications sent to that recipient to qualify as institutional communication. Similarly, where the member firm is a fund underwriter and the recipient is a broker-dealer, if there are red flags indicating that the broker-dealer has used or intends to use an institutional communication provided by the member firm with retail investors, the member firm would be expected to discontinue distribution of such materials to that broker-dealer until the underwriter reasonably concludes that the broker-dealer has adopted appropriate measures to prevent future redistribution of such communications to retail investors.
2. “Retail Communication” means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. “Retail investor” is defined as any person other than an institutional investor, regardless of whether the person has an account with a member.
• Retail communications encompasses material that previously fell within the definition of advertisements, sales literature, independent prepared reprint and public appearance.
3. “Correspondence” means any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar day period.
Additional rule changes would establish guidelines and restrictions governing the use of investment company rankings in retail communications; the use of bond mutual fund volatility ratings; the use of investment analysis tools; communications with the public regarding security futures; and communication with the public about collateralized mortgage obligations. Additional guidance is likely to be forthcoming from FINRA on these issues when the rule changes are ultimately adopted. However, it is clear that the compliance bar with respect to limitations on the distribution of institutional communications is being raised for institutions, broker-dealers and member firms.
Share this Post