Exam Alert: FINRA Provides Guidance on Communications

On May 22, 2015, FINRA issued guidance concerning communications with the public. Here are some notable points from the guidance… Continue reading

Exam Alert

On May 22, 2015, FINRA issued guidance concerning communications with the public. Here are some notable points from the guidance.

  • Non-promotional communications (i.e. communications that do not promote or recommend a specific product or service) do not need to be filed with FINRA
  • Electronic forum posts are considered retail communication, but are specifically excluded from filing requirements
  • Template updates do not need to be filed with FINRA if all that changed was statistical information
  • Various non-material changes to previously filed communications do not require refiling the communication
  • A reprinted article does not need to be filed with FINRA
  • Promotional items that only have the name of a mutual fund are not considered “advertisements” under Rule 482
  • If a firm includes mutual fund performance in a retail communication or correspondence, they must also include the fund’s expense ratio
  • Firm must file retail communications regarding registered business development companies
  • A Series 26 registration does not permit a principal to approve retail communications concerning a business development company. The principal must have a Series 24, Series 9/10, or Series 39 registration instead.

Sources:
Regulatory Notice 15-17: Guidance on Rules Governing Communications With the Public
FINRA Rule 2210 Questions and Answers

This alert applies to the Series 6, Series 7, Series 9/10, Series 24, Series 26, Series 39, Series 62, Series 82, and Series 99.

Exam Alert: FINRA Excludes Research Reports on Exchange-Listed Securities From Filing Requirement

Effective July 11, 2014, FINRA revised its rules on filing retail communications. The new rules do not require firms to file research reports on securities listed on national exchanges, except for certain research reports on investment companies. Continue reading

Effective July 11, 2014, FINRA revised its rules on filing retail communications. Generally, FINRA requires firms to file retail communications on registered securities within ten business days of first use. The new rules exclude from filing research reports on securities listed on national exchanges. However, firms must still file certain research reports on investment companies. Specifically, research reports on open-end investment companies, unit investment trusts, and face-amount certificate companies must still be filed if they will be distributed to prospective investors.

Additionally, FINRA clarified that free-writing prospectuses that are exempt from the SEC’s filing requirements do not need to be filed with FINRA.

Retail communications are written communications, including electronic communications, that will be 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 the firm.

A research report is a written communication that includes information, analysis, and/or recommendations on a security.

Open-end investment companies, also known as mutual funds, are companies that offer shares of a portfolio of securities in the form of a fund to the public. Every time shares in the fund are purchased, the shares are issued new by the mutual fund company. Additionally, when shareholders wish to sell their shares, they must sell them back to the mutual fund company. The mutual fund company will then “redeem” them and expire the shares.

A unit investment trust (UIT) is an investment company that buys and holds a fixed portfolio of securities that are put into a trust in “units” that are sold to investors (unit holders). UITs have a stated termination date that varies according to the type of investments in the portfolio. A UIT in bonds may have as much as a 30-year life; a UIT in stocks may mature in one year or less. Unit holders receive a share of the principal at termination, and any income earned is distributed to investors in periodic payments of dividends or interest.

A face-amount certificate company is an investment company that issues debt securities called face-amount certificates backed by assets such as real property or other securities. Issuers of face-amount certificates promise to pay a stated amount (face-amount) to the investor at a specified time in the future. In return, investors pay the issuer a fixed amount of money either as a lump sum payment or in periodic installments. The rate of return is calculated by comparing the amount paid into the investment and the face-amount received.

A free-writing prospectus (FWP) is any written offer to sell or a solicitation to buy the securities in an offering, distributed during the cooling-off period, after a registration statement has been filed. It is not required to have the detail or depth of information of the preliminary prospectus.

This alert applies to the Series 6, Series 7, Series 24, Series 26, Series 62, Series 82, and Series 99.

Source: FINRA Regulatory Notice 14-30: SEC Approves Amendments to FINRA Rule 2210 to Exclude Research Reports on Exchange-Listed Securities From Filing Requirements and Clarify the Standards Applicable to Free Writing Prospectuses

Exam Alert: SEC clarifies standards for filing social media communications by investment companies

On March 15, 2013, the SEC issued guidance for investment companies regarding their communications over social media. Noting that investment companies have been filing certain communications unnecessarily, the SEC describes which types of communications should or should not be filed, providing examples of each. Continue reading

On March 15, 2013, the SEC issued guidance for investment companies regarding their communications over social media. Noting that investment companies have been filing certain communications unnecessarily, the SEC describes which types of communications should or should not be filed, providing examples of each.

 

Communications that should be filed include:

-Discussion of the specific elements of the performance of a fund

-Promotion of the performance of a fund

-Communication initiated by the issuer that talks about the merits of the fund

 

Communications that do not need to be filed include:

-Mention of an investment company that does not address the investment merits of the fund

-Talking about performance with no mention of any specific element of a fund’s return

-Factual introductory statements that include a link to the fund’s prospectus

-Factual responses to queries that do not address the investment merits of a fund

 

To see examples of what needs to be filed and what does not, check out the SEC guidance.

 

For further analysis of the SEC release, along with a general discussion of the intersection of regulation and social media, check out the blog post by Augie Ray at http://www.experiencetheblog.com/2013/03/regulators-to-financial-service-stop.html. Mr. Ray, an ex-Forrester analyst (source), asserts that regulators are encouraging firms to make more active use of social media, and that this guidance is part of that trend.

 

Source: SEC Release 2013-40: SEC Issues Guidance Update on Social Media Filings by Investment Companies

 

This alert applies primarily to the Series 6, Series 7, and Series 26. It may also be relevant to the Series 24, Series 62, Series 82, Series 99.

Exam Alert: MSRB requires price or yield information to accompany “NRO” designations

Effective November 1, 2012, the MSRB will prohibit broker-dealers from using the designation “not reoffered” or “NRO” in written communications about new issues of municipal securities, unless the broker-dealers include price or yield information on the securities. Continue reading

Effective November 1, 2012, the MSRB will prohibit broker-dealers from using the designation “not reoffered” or “NRO” in written communications about new issues of municipal securities, unless the broker-dealers include price or yield information on the securities.  This rule applies to any written communication sent at or after the time a municipal issuer accepts an underwriter’s terms for a new issue.

The designation “NRO” or “not reoffered” means that certain maturities of a new issue of municipal securities are not available to be reoffered to potential investors.  This occurs when the maturities are fully subscribed for or sold prior to the general reoffering of the issue.

Sources:

MSRB Receives Approval to Improve Price Transparency for “Not Reoffered” Municipal Securities

Glossary of Municipal Securities Terms

This alert applies to the Series 7.

Exam Alert: FINRA to implement new communications rules

The SEC has approved new FINRA rules governing communication with the public. The rules will take effect February 4, 2013. While the rules are generally based on current communications rules, several significant changes will be made. Continue reading

The SEC has approved new FINRA rules governing communication with the public.  The rules will take effect February 4, 2013.  While the rules are generally based on current communications rules, several significant changes will be made.  Those changes include:

 

Communication Categories

-The six current types of communications will be replaced with three types: institutional communication, retail communication, and correspondence.

-Institutional communication is communication that is only distributed to institutional investors.  In order for a communication to count as institutional communication, the firm must not have “reason to believe” that the communication will be forwarded to non-institutional investors (“retail investors”).

-Retail communication consists of communications to more than 25 non-institutional investors within a 30 calendar day period.

-Correspondence includes communications to 25 or fewer non-institutional investors.

-Replacements for current rules may apply to different categories of communication than the present rules do.  For full details on which rules will change, see the FINRA Notice.

 

Approval, Review, and Recordkeeping Requirements

-There are modified standards for pre-approval of communication by principals.

-Series 16 supervisory analysts may approve research that is not a “research report” if they have technical expertise in the product area and the product does not require licenses they do not have.

-The following are exempted from pre-approval: research/analysis on certain broad, limited topics; forum posts; and communications that do not make recommendations or promote a product or service of the firm.

-FINRA may grant an exemption from pre-approval requirements for good cause.

-Any communication filed with the Advertising Regulation Department must be pre-approved.

-Records must include information on the sources of tables, graphs, and charts.

-If a communication wasn’t pre-approved, records must include the name of the person who prepared and distributed the communication.

 

Filing Requirements and Review Procedures

-The one-year pre-filing period for new firms will start on the date the firm’s FINRA membership becomes effective.  Under the current rule, the period starts when a firm first files an advertisement with FINRA.

-The Advertising Regulation Department may require a firm to file any type or types of communications prior to use.

-The pre-use filing requirement is revised to include retail communications regarding investment companies that include self-created rankings, retail communications concerning securities futures, and retail communications that include bond mutual fund volatility ratings.

-All retail communications concerning closed-end registered investment companies, registered CMOs, and derivatives must be filed with FINRA within 10 business days of first use.

-A present requirement to file advertisements concerning government securities within 10 business days of first use has been eliminated.

-An exclusion from filing exists for:

–Retail communication based on a template that has been filed with FINRA, if the only changes are updating statistical or other “non-narrative” information;

–Retail communications that do not make recommendations or promote a product or service of the firm;

–Online forum posts; and

–Press releases issued by closed-end investment companies listed on the NYSE that are subject to the “immediate release policy.”

-Free writing prospectuses that are prepared by broker-dealers and that will be widely disseminated must be filed with FINRA.

-FINRA may grant an exemption from the concurrent-with-use filing requirement (requirement that states a communication must be filed within 10 business days of first use) for good cause.

 

Content Standards

-FINRA has added new specifications for illustrations that compare tax-deferred investments with taxable compounding investments.  These requirements include using actual federal income tax rates, making a fair comparison, and making appropriate disclosures – the full list of requirements may be found on pages 17-18 of the FINRA Notice.

-A firm must disclose that a testimonial is a paid testimonial if more than $100 is paid for a testimonial (the current rule requires disclosure if more than a “nominal sum” is paid).

-A retail communication that contains a recommendation of securities must disclose if the firm or any associated person involving in preparing the communication has a non-nominal financial interest in the issuer of the security.  This is in place of a prior requirement that required disclosure if any of the firm’s officers or partners had a non-nominal financial interest in the issuer.

-Firms are now subject to similar requirements as investment advisers in regards to retail communications about past recommendations – generally specific past recommendations are not allowed.  Lists of past recommendations that cover at least one year are acceptable if they include all recommendations for a given type, kind, or classification of security.


Public Appearances

-Public appearances will no longer require pre-approval or filing with FINRA.  They still require a reasonable basis for recommendations, proper disclosure, and written supervisory procedures.


Guildlines for Communications With the Public Regarding Security Futures

-Communications about securities futures must be accompanied or preceded by a risk disclosure document if it contains the names of specific securities.

 

Source: FINRA Regulatory Notice 12-29

 

This alert applies to the Series 6, Series 62, Series 26, Series 24, Series 7, Series 79, Series 99, and Series 82.

Exam Alert: FINRA provides guidance on TIPS fund advertising

On October 27, 2011, FINRA provided guidance on its rules that govern communications with the public regarding Treasury Inflation-Protected Securities (TIPS) funds. Specifically, if a TIPS fund’s current yield is adjusted monthly based on changes in the inflation rate, communication must explain that these changes can cause the yield to vary greatly from month to month. If an advertisement includes an unusually high current yield, “the material must disclose that the yield is attributable to the rise in the inflation rate, which might not be repeated.” Continue reading

On October 27, 2011, FINRA provided guidance on its rules that govern communications with the public regarding Treasury Inflation-Protected Securities (TIPS) funds.  Specifically, if a TIPS fund’s current yield is adjusted monthly based on changes in the inflation rate, communication must explain that these changes can cause the yield to vary greatly from month to month.  If an advertisement includes an unusually high current yield, “the material must disclose that the yield is attributable to the rise in the inflation rate, which might not be repeated.”

Source: FINRA Regulatory Notice 11-49

This alert is relevant to the Series 6, 7, 24, 26, 62, and 82.

Exam Alert: FINRA provides guidance on the use of FINRA in firm trademarks

On October 27, 2011, FINRA provided guidance on its rules that govern communications with the public regarding indicating FINRA membership. Specifically, FINRA stated that firms and associated persons may not use FINRA’s trademark in the firm’s or individual’s trademark. The firm’s or individual’s trademark also must not include references to FINRA membership. Continue reading

On October 27, 2011, FINRA provided guidance on its rules that govern communications with the public regarding indicating FINRA membership.  Specifically, FINRA stated that firms and associated persons may not use FINRA’s trademark in the firm’s or individual’s trademark.  The firm’s or individual’s trademark also must not include references to FINRA membership.

Source: FINRA Regulatory Notice 11-49

This alert is relevant to the Series 6, 7, 24, 26, 62, and 82.

Exam Alert: FINRA provides guidance on ETF and DPP advertising

On October 27, 2011, FINRA provided guidance on its rules that govern communications with the public regarding exchange-traded products. Specifically, FINRA reminded firms that research reports on exchange-traded funds (ETFs) must filed with FINRA within ten days of first use. FINRA also reminded firms that firms must file sales literature for direct participation programs (DPPs). Continue reading

On October 27, 2011, FINRA provided guidance on its rules that govern communications with the public regarding exchange-traded products.  Specifically, FINRA reminded firms that research reports on exchange-traded funds (ETFs) must filed with FINRA within ten days of first use.  FINRA also reminded firms that firms must file sales literature for direct participation programs (DPPs).

Source: FINRA Regulatory Notice 11-49

This alert is relevant to the Series 6, 7, 24, 26, 62, and 82.

Exam Alert: NASAA develops list of “Best Practices”

A 2010 NASAA review of broker-dealers found that the three most common compliance problem areas were failure to follow supervisory policy, Continue reading

A 2010 NASAA review of broker-dealers found that the three most common compliance problem areas were failure to follow supervisory policy, advertising and sales literature, and suitability issues. NASAA developed a list of ten best practices and released them in October of 2010.  The recommendations focus on suitability, exception reports, supervisory procedures, and communications.  Relevant to Series 6, Series 7, Series 63, Series 65, Series 66, Series 24, Series 26, Series 62 and Series 79. The list can be found here: http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/13382.cfm.