[Federal Register Volume 76, Number 215 (Monday, November 7, 2011)]
[Notices]
[Pages 68800-68803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-28716]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[(Release No. 34-65663; File No. SR-FINRA-2011-035)]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, etc.

 November 1, 2011.

Overview Information

    Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Instituting Proceedings to Determine Whether to Approve or Disapprove a 
Proposed Rule Change, as modified by Partial Amendment No. 1, 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.

I. Introduction

    On July 14, 2011, the Financial Industry Regulatory Authority 
(``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 proposed rule change.\4\ On August 
31, 2011, FINRA extended the time period in which the Commission must 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change, to November 1, 2011. On October 31, 2011, 
FINRA filed Partial Amendment No. 1 to the proposed rule change and a 
letter responding to comments.\5\ The Commission is publishing this 
notice and order to solicit comments on Partial Amendment No. 1 to the 
proposed rule change from interested persons and to institute 
proceedings pursuant to Section 19(b)(2)(B) of the Act to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Partial Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64984 (July 28, 
2011), 76 FR 46870 (August 3, 2011) (Notice of Filing of SR-FINRA-
2011-035) (``Notice of Filing''). The comment period closed on 
August 24, 2011.
    \4\ See letter from Oscar S. Hackett, General Counsel, 
BrightScope, Inc., dated August 23, 2011 (``BrightScope Letter''); 
letter from Alexander C. Gavis, Fidelity Investments, dated August 
24, 2011 (``Fidelity Letter''); letter from David T. Bellaire, 
General Counsel and Director of Government Affairs, Financial 
Services Institute, dated August 24, 2011 (``FSI Letter''); letter 
from Dorothy M. Donohue, Senior Associate Counsel, Investment 
Company Institute, dated August 24, 2011 (``ICI Letter''); letter 
from Z. Jane Riley, Chief Compliance Officer, The Leaders Group, 
Inc., dated August 24, 2011 (``TLGI Letter''); letter from Peter J. 
Mougey, President, Public Investors Arbitration Bar Association, 
dated August 23, 2011 (``PIABA Letter''); letter from John Polanin 
and Clair Santaniello, Co-Chairs, Compliance and Regulatory Policy 
Committee 2011, Securities Industry and Financial Markets 
Association, dated August 25, 2011 (``SIFMA Letter''); letter from 
Sandra J. Burke, Principal, Vanguard, dated August 24, 2011 
(``Vanguard Letter''); and letter from Yoon-Young Lee, WilmerHale, 
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 
Letter''). Comment letters are available at http://www.sec.gov.
    \5\ See letter from Joseph P. Savage, FINRA, to Elizabeth 
Murphy, Secretary, SEC, dated October 31, 2011 (``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.
---------------------------------------------------------------------------

    Institution of these proceedings, however, does not indicate that 
the Commission has reached any conclusions with respect to the proposed 
rule change, nor does it mean that the Commission will ultimately 
disapprove the proposed rule change. Rather, as discussed below, the 
Commission seeks additional input from interested parties on the issues 
presented by the proposed rule change, as modified by Partial Amendment 
No. 1, and on FINRA's Response Letter.

II. Description of the Proposed Rule Change and Summary of Comments

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''), 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 in the 
Consolidated FINRA Rulebook, 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 would renumber NASD Rules 2210 and 2211 
and NASD Interpretive Materials 2210-1 and 2210-4 as FINRA Rule 2210, 
NASD Interpretive Material 2210-3 as FINRA Rule 2212, NASD Interpretive 
Material 2210-5 as FINRA Rule 2213, NASD Interpretive Material 2210-6 
as FINRA Rule 2214, NASD Interpretive Material 2210-7 as FINRA

[[Page 68801]]

Rule 2215, and NASD Interpretive Material 2210-8 as FINRA Rule 2216.
    NASD Rules 2210 and 2211, and the Interpretive Materials that 
follow Rule 2210, generally govern all FINRA members' communications 
with the public. Incorporated NYSE Rule 472 governs communications with 
the public of FINRA members that also are members of the New York Stock 
Exchange.
    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 FINRA Rule 2210.\6\
---------------------------------------------------------------------------

    \6\ Proposed FINRA Rule 2211 (Communications With the Public 
About Variable Insurance Products), which would replace 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).
---------------------------------------------------------------------------

    As discussed in the Notice of Filing, proposed FINRA Rule 2210 
would replace the current six communication categories with three new 
categories: Institutional communication, retail communication, and 
correspondence, and would prescribe approval, review, recordkeeping, 
filing and content requirements to such communications.
    In general, the commenters to the Notice of Filing supported the 
proposal. Commenters, however, raised concerns regarding various 
aspects of the proposed rules, including, among others:
     The scope of the definition of the term ``institutional 
investor''; \7\
---------------------------------------------------------------------------

    \7\ See Fidelity and SIFMA Letters, supra note 4.
---------------------------------------------------------------------------

     The circumstances in which an institutional communication 
could be deemed a retail communication (e.g., when a member ``has 
reason to believe that the communication or any excerpt thereof will be 
forwarded or made available to any retail investor''); \8\
---------------------------------------------------------------------------

    \8\ See FSI and SIFMA Letters, supra note 4.
---------------------------------------------------------------------------

     The treatment of internal communications for education and 
training as institutional communications; \9\
---------------------------------------------------------------------------

    \9\ See SIFMA, ICI, Fidelity and Vanguard Letters, supra note 4.
---------------------------------------------------------------------------

     The requirements applicable to communications prepared by 
research department personnel; \10\
---------------------------------------------------------------------------

    \10\ See SIFMA and Wilmer Letters, supra note 4.
---------------------------------------------------------------------------

     The requirements to file with FINRA within 10 business 
days of first use certain retail communications (e.g., communications 
concerning government securities, closed-end funds and any registered 
security that is derived from or based on a single security, a basket 
of securities, an index, a commodity, a debt issuance or a foreign 
currency, that is not included in other filing requirements); \11\
---------------------------------------------------------------------------

    \11\ See SIFMA, TLGI and SIFMA Letters, supra note 4.
---------------------------------------------------------------------------

     Disclosure requirements applicable to communications and 
public appearances that contain a recommendation (e.g., the proposed 
category of associated persons whose financial interest would need to 
be disclosed); \12\
---------------------------------------------------------------------------

    \12\ See Fidelity, FSI, ICI, PIABA, SIFMA and Wilmer Letters, 
supra note 4.
---------------------------------------------------------------------------

     The treatment of public appearances generally and, in 
particular, postings in online interactive fora; \13\ and
---------------------------------------------------------------------------

    \13\ See Fidelity, ICI and SIFMA Letters, supra note 4.
---------------------------------------------------------------------------

     The exclusion from the filing requirement for certain 
prospectuses and offering documents.
    FINRA responded to these and other comments in its Response Letter 
and filed Partial Amendment 1.\14\
---------------------------------------------------------------------------

    \14\ See supra, note 5.
---------------------------------------------------------------------------

III. Description of Partial Amendment No. 1

    FINRA's proposed changes in response to comments, as set forth in 
Partial Amendment No. 1 are summarized below.
    First, FINRA is proposing to amend proposed FINRA Rule 2210 to 
clarify that a member is 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.
    Second, FINRA is proposing to eliminate the filing requirement for 
retail communications concerning government securities (as defined by 
Section 3(a)(42) of the Exchange Act).
    Third, FINRA is proposing to amend proposed FINRA Rule 2210 to 
clarify that a comparative illustration of the mathematical principles 
of tax-deferred versus taxable compounding must disclose that ordinary 
income tax rates will apply to withdrawals from a tax-deferred 
investment.
    Fourth, FINRA is proposing to modify the disclosure requirements 
for retail communications and public appearances that include a 
recommendation of securities. FINRA proposes to change the category of 
associated persons whose financial interest would have to be disclosed 
pursuant to paragraph (d)(7)(A)(ii) of proposed FINRA Rule 2210. 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 proposes a technical modification to the language in 
paragraph (d)(7)(A)(iii) of proposed FINRA Rule 2210 in order to make 
it consistent with the language in paragraph (d)(7)(A)(ii) of proposed 
FINRA Rule 2210, by changing the reference to ``any securities of the 
recommended issuer'' to ``any of the securities of the issuer whose 
securities are recommended.'' FINRA proposes to modify proposed 
paragraph 2210(d)(7)(D) to clarify that the disclosure requirements in 
proposed paragraph (d)(7)(A) and the provisions regarding past specific 
recommendations in proposed paragraph (d)(7)(C) do not apply to a 
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, pursuant 
to proposed paragraph (d)(7)(B), a member must provide, or offer to 
furnish upon request, available investment information supporting the 
recommendation in such communications.
    FINRA also proposes to revise 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). An 
associated person making a public appearance would have to disclose, if 
applicable, his or her own 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. The associated person also would have to disclose any actual, 
material conflict of interest of the associated person or member of 
which the associated person knows or has

[[Page 68802]]

reason to know at the time of the public appearance. 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. 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.
    Fifth, FINRA is proposing to add paragraph (d)(8) to proposed FINRA 
Rule 2210, which would exclude from the content standards of proposed 
paragraph (d): Prospectuses, preliminary prospectuses, fund profiles 
and similar documents that have been filed with the SEC. FINRA also 
proposes to clarify that the content standards of paragraph (d) of 
proposed FINRA Rule 2210 do apply to an investment company prospectus 
published pursuant to Securities Act Rule 482 and a free writing 
prospectus that has been filed with the SEC pursuant to Securities Act 
Rule 433(d)(1)(ii).

IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2011-035 and Grounds for Disapproval Under Consideration

    In view of the issues raised by the proposal, the Commission has 
determined to institute proceedings pursuant to Section 19(b)(2) of the 
Act to determine whether to approve or disapprove FINRA's proposed rule 
change.\15\ Institution of such proceedings appears appropriate at this 
time in view of the legal and policy issues raised by the proposal. As 
noted above, institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, the Commission seeks and encourages interested 
persons to comment on the proposed rule change and provide the 
Commission with arguments to support the Commission's analysis as to 
whether to approve or disapprove the proposal.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2). Section 19(b)(2)(B) of the Act 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
The time for conclusion of the proceedings may be extended for up to 
an additional 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
---------------------------------------------------------------------------

    The Commission is asking that commenters address the changes that 
FINRA proposes in Partial Amendment No. 1, the comments received on the 
Notice of Filing, FINRA's Response Letter, in addition to any other 
comments they may wish to submit about the proposed rule change. The 
Commission requests comment, in particular, on the following aspects of 
the proposal, as modified by Partial Amendment No. 1:
    (1) The scope of the definition of ``institutional investor'' for 
purposes of these rules;
    (2) the ``reason to believe'' standard under Proposed Rule 
2210(a)(4)(F), which provides 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;''
    (3) the requirements applicable to internal communications, public 
appearances and postings in online interactive fora;
    (4) the requirements applicable to communications prepared by 
research department personnel;
    (5) the scope of the category of associated persons whose financial 
interests would have to be disclosed in a retail communication that 
includes a recommendation of securities; and
    (6) the scope of the proposed exclusion from the content standards 
as set forth in proposed paragraph 2210(d)(8).
    Pursuant to Section 19(b)(2)(B) of the Act,\16\ the Commission is 
providing notice of the grounds for disapproval under consideration. In 
particular, Section 15A(b)(6) of the Act \17\ requires, among other 
things, that FINRA rules must be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2)(B).
    \17\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission believes FINRA's proposal raises questions as to 
whether it is consistent with the requirements of Section 15A(b)(6) of 
the Act, including whether FINRA's proposal, as amended, would prevent 
fraudulent and manipulative acts, promote just and equitable principles 
of trade, and protect investors and the public interest.

V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any others they may have identified 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule 
change, as modified by Partial Amendment No. 1, is inconsistent with 
Section 15A(b)(6) or any other provision of the Act, or the rules and 
regulations thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\18\
---------------------------------------------------------------------------

    \18\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments by December 7, 2011 concerning Partial Amendment No. 1 and 
regarding whether the proposed rule change, as modified by Partial 
Amendment No. 1, should be approved or disapproved. Any person who 
wishes to file a rebuttal to any other person's submission must file 
that rebuttal by [insert date 45 days from publication in the Federal 
Register]. 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 [email protected]. 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, Station Place, 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

[[Page 68803]]

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 publicly available. All 
submissions should refer to File Number SR-FINRA-2011-035 and should be 
submitted on or before December 7, 2011. Rebuttal comments should be 
submitted by December 22, 2011.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-28716 Filed 11-4-11; 8:45 am]
BILLING CODE 8011-01-P