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Amendments to FINRA rules governing communications with the public
Posted in Litigation

Amendments to FINRA rules governing communications with the public

On Oct. 26, 2016, the SEC approved various amendments to the Financial Industry Regulatory Authority (FINRA) rules governing communications with the public. The amendments affect various filing requirements in FINRA Rule 2210 (general communications with the public), FINRA Rule 2214 (requirements for the use of investment analysis tools), and FINRA Rule 2213 (requirements for the use of bond mutual fund volatility ratings). These amendments, which will go into effect on Jan. 9, 2017, help clarify existing rules and create clearer implementation guidelines for all securities firms as they move forward into the new year.

Of the several amendments, the most extensive changes have occurred in Rule 2210, which outlines general guidelines regarding securities firms’ communications with the public. The first amendment concerns investment shareholder reports. Currently, there is no express filing exclusion for investment company shareholder reports when the reports are distributed or made available to prospective investors, other than the management’s discussion of fund performance (MDFP). As a result, while certain portions of shareholder reports, such as the financial statements or schedules or portfolio investments, are not expressly excluded under Rule 2210, investment firms were faced with some confusion with respect to whether such reports should be filed. The amendment clarifies this ambiguity, and will exclude from the filing requirements annual or semi-annual reports that have been filed with the SEC in compliance with applicable requirements.

Changes will also take effect with respect to retail communications. At this time, firms are required to refile previously filed retail communications subject to filing under Rule 2210(c)’s general filing requirements if the firm has updated any narrative information contained in the prior filing. Starting in January, the amended rule will allow firms to include narrative descriptions of market events during the period covered by the communication, as well as factual descriptions of portfolio changes, without having to refile the entire communication.

Additionally, the amendment eliminates the current rule that requires firms that file a retail communication for a registered investment company that contains a fund performance or performance comparison to include a copy of the ranking or comparison used in the retail communication. Because this information is now easily available online, the new Rule will eliminate this requirement, and instead will expressly require firms to maintain back-up materials as part of their records.

The final amendment to Rule 2210 is specific to Rule 2210(c)(3)(A), which requires firms to file within 10 business days of first use retail communications concerning registered investment companies, which included any generic investment company retail communications. However, the amendment narrows the broad nature of this filing requirement, and starting in January, will only require retail communications that promote a specific registered investment company or family of registered investment companies.

The amendments will also change FINRA Rule 2214, which governs the requirements for the use of investment analysis tools. Under FINRA, an investment analysis tool is an interactive technological tool that produces simulations and statistical analyses that present the likelihood of various investment outcomes if particular investments are made. Currently, firms that offer an investment analysis tool must file templates for written reports produced by the tool, or retail communications concerning the tool, within 10 business days of first use. Rule 2214 additionally requires firms to provide FINRA with access to the tool itself, as well as provide customers with specific disclosures when firms use or provide written reports generated by the tool. The amendment eliminates the filing requirement for the tool report templates and retail communications, and instead requires the firm to keep this information available upon request of FINRA.

The final amendment will affect Rule 2213, which discusses the requirements for the use of bond mutual fund volatility ratings. Under Rule 2213, firms are currently required to file prospectuses and communicate specific disclosures prior to publishing retail communications that include bond mutual fund volatility ratings, and withhold the communications from publication until any changes specified by FINRA are made. Beginning in January, firms will no longer need to include a prospectus or communicate the previously-required disclosures and may publish their retail communications without prior approval by FINRA.

The changes precipitated by FINRA’s amendments will undoubtedly allow securities firms to conduct their businesses in a more efficient manner. Firms should keep these amendments in mind as they move into 2017, and take advantage of FINRA’s new rules where appropriate.



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