Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating To Amending NASD Rule 2220 (Options Communications With the Public), 24332-24338 [E8-9631]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 73, Number 86 (Friday, May 2, 2008)]
[Notices]
[Pages 24332-24338]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-9631]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57720; File No. SR-FINRA-2008-013]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating To 
Amending NASD Rule 2220 (Options Communications With the Public)

April 25, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 7, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend NASD Rule 2220 (Options Communications 
with the Public), to better address current needs for regulating 
options communications practices and promote consistency across the 
options communications rules of other self-regulatory organizations 
(``SROs''). Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *
2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC
* * * * *
2220. Options Communications [with the Public]
    (a) Definitions
    For purposes of this Rule and any interpretation thereof:
    (1) ``Options communications'' consist of:
    (A) ``Advertisement.'' Any ``Advertisement'' as defined in Rule 
2210(a)(1) concerning options. [shall include any material that reaches 
a mass audience through public media such as newspapers, periodicals, 
magazines, radio, television, telephone recording, motion picture, 
audio or video device, telecommunications device, billboards, signs or 
through written sales communications to customers or the public that 
are not required to be accompanied or preceded by one or more current 
options disclosure documents.]
    [(2) ``Educational material'' shall include any explanatory 
material distributed or made generally available to customers or the 
public that is limited to information describing the general nature of 
the standardized options markets or one or more strategies.]
    [(3)] (B) ``Sales literature.'' Any ``Sales Literature'' as defined 
in Rule 2210(a)(2) concerning options including worksheet templates. 
[shall include any written communication (not defined as an 
``advertisement'' or as ``educational material'') distributed or made 
generally available to customers or the public that contains any 
analysis, performance report, projection or recommendation with respect 
to options, underlying securities or market conditions, any standard 
forms of worksheets, or any seminar text which pertains to options and 
which is communicated to customers or the public at seminars, lectures 
or similar such events.]
    (C) ``Correspondence.'' Any ``Correspondence'' as defined in Rule 
2211(a)(1) concerning options.
    (D) ``Institutional sales material.'' Any ``Institutional Sales 
Material'' as defined in Rule 2211(a)(2) concerning options.
    (E) ``Public appearance.'' Any participation in a seminar, forum 
(including an interactive electronic forum), radio, television or print 
media interview, or other public speaking activity, or the writing of a 
print media article, concerning options.
    (F) ``Independently prepared reprint.'' Any ``Independently 
Prepared Reprint'' as defined in Rule 2210(a)(6)(A) concerning options.
    (2) ``Existing retail customer'' as is defined in Rule 2211(a)(4).
    (3) ``Standardized option'' means any option contract issued, or 
subject to issuance, by The Options Clearing Corporation, that has 
standardized terms for the strike price, expiration date, and amount of 
the underlying security, and is traded on a national

[[Page 24333]]

securities exchange registered pursuant to section 6(a) of the Act.
    (4) ``Options'' as is defined in Rule 2860(a).
    (5) ``Options disclosure document'' has the same meaning as the 
term ``disclosure document'' as defined in Rule 2860(b)(2)(T).
    (b) Approval by [Compliance] Registered Options and Security 
Futures Principal and Recordkeeping
    (1) Advertisements, Sales Literature, and Independently Prepared 
Reprints. All advertisements, sales literature (except completed 
worksheets), [and educational material] and independently prepared 
reprints issued by a member [or member organization pertaining to] 
concerning options shall be approved in advance by a [the Compliance] 
Registered Options and Security Futures Principal designated by the 
member's written supervisory procedures.[or designee.]
    (2) Correspondence. Correspondence need not be approved by a 
Registered Options and Security Futures Principal prior to use, unless 
such correspondence is distributed to 25 or more existing retail 
customers within any 30 calendar-day period and makes any financial or 
investment recommendation or otherwise promotes a product or service of 
the member. All correspondence is subject to the supervision and review 
requirements of Rule 3010(d).
    (3) Institutional Sales Material. Each member shall establish 
written procedures that are appropriate to its business, size, 
structure, and customers for the review by a Registered Options and 
Security Futures Principal of institutional sales material used by the 
member and its registered representatives as described in Rule 
2211(b)(1)(B).
    (4) Copies [thereof] of the options communications shall be 
retained by the member in accordance with SEC Rule 17a-4 of the Act.[, 
together with t] The names of the persons who prepared the options 
communications [material], the names of the persons who approved the 
options communications [material] and,[in the case of sales 
literature,] the source of any recommendations contained therein, shall 
be retained by the member [or member organization] and be kept [at an 
easily accessible place for examination by the Association period of 
three years] in the form and for the time period required for options 
communications by SEC Rule 17a-4 of the Act.
    (c) Association Approval Requirements and Review Procedures
    (1) In addition to the approval required by paragraph (b) of this 
Rule, [every] all advertisements, [and all educational material] sales 
literature, and independently prepared reprints [of] issued by a member 
[or member organization pertaining to] concerning standardized options 
used prior to delivery of the applicable current options disclosure 
document or prospectus shall be submitted to the Advertising [/
Investment Companies] Regulation Department of the Association [\*\] 
(the ``Department'') at least ten calendar days prior to use (or such 
shorter period as the [Association] Department may allow in particular 
instances) for approval and, if changed or expressly disapproved by the 
[Association] Department, shall be withheld from circulation until any 
changes specified by the [Association] Department have been made or, in 
the event of disapproval, until such options communication [ the 
advertisement or educational material] has been resubmitted for, and 
has received, [Association] Department approval.
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    [\*\ This Department located at 1735 K Street, NW., Washington, 
D.C. 20006.]
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    (2)(A) Notwithstanding the foregoing provision, the Department, 
upon review of a member's options [advertisements, educational material 
and/or sales literature] communications, and after determining that the 
member [will again] has departed from the standards of this Rule, may 
require that such member file some or all options [advertisements, 
educational material and/or sales literature,] communications or the 
portions of such member's [material] communications that [is] are 
related to options [any specific types or classes of securities or 
services,] with the Department, at least ten calendar days prior to 
use.
    (B) The Department shall notify the member in writing of the types 
of options communications [material] to be filed and the length of time 
such requirement is to be in effect. The requirement shall not exceed 
one year, however, and shall not take effect until 21 calendar days 
after service of the written notice, during which time the member may 
request a hearing under Rules 9551 and 9559.
    (3) In addition to the foregoing requirements, every member's 
options [advertising and sales literature] communications shall be 
subject to a routine spot-check procedure. Upon written request from 
the [Association] Department, each member shall promptly submit the 
communications [material] requested. Members will not be required to 
submit communications [material] under this procedure that have[s] been 
previously submitted pursuant to one of the foregoing requirements.
    (4) The requirements of this paragraph (c) shall not be applicable 
to:
    (A) options communications [advertisements or educational material] 
submitted to another self-regulatory organization having comparable 
standards pertaining to such communications [advertisements or 
educational material, and];
    (B) [advertisements] communications in which the only reference to 
options is contained in a listing of the services of [a] the 
member[organization.];
    (C) the options disclosure document; and
    (D) the prospectus.
    [(5) Except as otherwise provided in subparagraphs (d)(2)(B) and 
(C), no written material respecting options may be disseminated to any 
person who has not previously or contemporaneously received one or more 
current options disclosure documents.]
    (d) Standards Applicable to Communications [with the Public]
    (1) [General Standards] Communications Regarding Standardized 
Options used Prior to Delivery of Options Disclosure Document
    (A) Options communications regarding standardized options exempted 
under SEC Rule 238 under the Securities Act of 1933 used prior to 
options disclosure document delivery:
    (i) must be limited to general descriptions of the options being 
discussed. The text may also contain a brief description of options, 
including a statement that identifies registered clearing agencies for 
options and a brief description of the general attributes and method of 
operation of the exchanges on which such options are traded, including 
a discussion of how an option is priced;
    (ii) must contain contact information for obtaining a copy of the 
options disclosure document;
    (iii) must not contain recommendations or past or projected 
performance figures, including annualized rates of return, or names of 
specific securities;
    (iv) may include any statement required by any state law or 
administrative authority;
    (v) may include advertising designs and devices, including borders, 
scrolls, arrows, pointers, multiple and combined logos and unusual type 
faces and lettering as well as attention-getting headlines and 
photographs and other graphics, provided such material is not 
misleading; and
    (B) Options communications regarding options not exempted under

[[Page 24334]]

SEC Rule 238 under the Securities Act of 1933 used prior to delivery of 
a prospectus that meets the requirements of Section 10(a) of said Act 
must conform to SEC Rule 134 or 134a under said Act, as applicable.
    (2) General Standards
    (A) No member [or member organization] or associated person of the 
member [associated with a member] shall use[tilize any advertisement, 
educational material, sales literature,] any [or other] options 
communications [to any customer or member of the public concerning 
options] which:
    [(A)](i) contains any untrue statement or omission of a material 
fact or is otherwise false or misleading;
    [(B)](ii) contains promises of specific results, exaggerated or 
unwarranted claims, opinions for which there is no reasonable basis or 
forecasts of future events which are unwarranted or which are not 
clearly labeled as forecasts;
    [(C)](iii) contains [hedge clauses or disclaimers which are not 
legible, which attempt to disclaim responsibility for the content of 
such literature or for opinions expressed therein, or which are 
otherwise inconsistent with such communication] cautionary statements 
or caveats that are not legible, are misleading, or are inconsistent 
with the content of the material; [ or]
    [(D)](iv) would constitute a prospectus as that term is defined in 
the Securities Act of 1933, unless it meets the requirements of Section 
10 of said Act[.];
    (v) contains statements suggesting the certain availability of a 
secondary market for options;
    [(2) Specific Standards (A)](vi) fails to reflect [T]the [special] 
risks attendant to options transactions and the complexities of certain 
options investment strategies [shall be reflected in any advertisement, 
educational material or sales literature which discusses the uses or 
advantages of options.];
    (vii) [Such communications shall] fails to include a warning to the 
effect that options are not suitable for all investors or contains 
suggestions to the contrary[. In the preparation of written 
communications respecting options, the following guidelines shall be 
observed:]; or
    (viii) fails to include a statement that supporting documentation 
for any claims (including any claims made on behalf of options programs 
or the options expertise of sales persons), comparison, 
recommendations, statistics, or other technical data will be supplied 
upon request.
    (B) Subparagraphs (vii) and (viii) above shall not apply to 
institutional sales material as defined in paragraph (a) of this Rule.
    (C)[(i)] Any statement in any options communications referring to 
the potential opportunities or advantages presented by options shall be 
balanced by a statement of the corresponding risks. The risk statement 
shall reflect the same degree of specificity as the statement of 
opportunities, and broad generalities [should] must be avoided[. Thus, 
a statement such as ``with options, an investor has an opportunity to 
earn profits while limiting his risk of loss,'' should be balanced by a 
statement such as ``of course, an options investor may lose the entire 
amount committed to options in a relatively short period of time.''].
    [(ii) It shall not be suggested that options are suitable for all 
investors.]
    [(iii) Statements suggesting the certain availability of a 
secondary market for options shall not be made.]
    [(B) Advertisements pertaining to options shall conform to the 
following standards:]
    [(i) Advertisements may only be used (and copies of the 
advertisements may be sent to persons who have not received one or more 
options disclosure documents) if the material meets the requirements of 
SEC Rule 134 under the Securities Act of 1933, as that Rule has been 
interpreted as applying to options. Under Rule 134, advertisements must 
be limited to general descriptions of the security being offered and of 
its issuer. Advertisements under this Rule shall state the name and 
address of the person from whom a current options disclosure 
document(s) may be obtained. Such advertisements may have the following 
characteristics:]
    [a. The text of the advertisement may contain a brief description 
of such options, including a statement that the issuer of every such 
option is the Options Clearing Corporation. The text may also contain a 
brief description of the general attributes and method of operation of 
the exchange or exchanges on which such options are traded and of the 
Options Clearing Corporation, including a discussion of how the price 
of an option is determined on the trading floor(s) of such 
exchange(s);]
    [b. The advertisement may include any statement required by any 
state law or administrative authority;]
    [c. Advertising designs and devices, including borders, scrolls, 
arrows, pointers, multiple and combined logos and unusual type faces 
and lettering as well as attention-getting headlines and photographs 
and other graphics may be used, provided such material is not 
misleading.]
    [(ii) The use of recommendations or of past or projected 
performance figures, including annualized rates of return, is not 
permitted in any advertisement pertaining to options.]
    [(C) Educational material, including advertisements, pertaining to 
options may be used if the material meets the requirements of SEC Rule 
134A under the Securities Act of 1933. Those requirements are as 
follows:]
    [(i) The potential risks related to options trading generally and 
to each strategy addressed are explained;]
    [(ii) No past or projected performance figures, including 
annualized rates of return are used;]
    [(iii) No recommendation to purchase or sell any option contract is 
made;]
    [(iv) No specific security is identified other than:]
    [a. a security which is exempt from registration under the Act, or 
an option on such exempt security;]
    [b. an index option, including the component securities of the 
index; or]
    [c. a foreign currency option; and]
    [(v) The material contains the name and address of a person or 
persons from whom the appropriate current Options Disclosure 
Document(s), as defined in SEC Rule 9b-1 of the Act, may be obtained.]
    [(D) Sales literature pertaining to options shall conform to the 
following standards:]
    [(i) Sales literature shall state that supporting documentation for 
any claims (including any claims made on behalf of options programs or 
the options expertise of sales persons), comparisons, recommendations, 
statistics or other technical data will be supplied upon request.]
    [(ii) Such communications may contain projected performance figures 
(including projected annualized rates of return), provided that:]
    (3) Projections
    Options communications may contain projected performance figures 
(including projected annualized rates of return) provided that:
    (A) all such communications regarding standardized options are 
accompanied or preceded by the options disclosure document;
    (B)[a.] no suggestion of certainty of future performance is made;
    (C)[b.] parameters relating to such performance figures are clearly 
established (e.g., to indicate exercise price of option, purchase price 
of the underlying stock and its market price, option premium, 
anticipated dividends, etc.);
    (D)[c.] all relevant costs, including commissions, fees, and 
interest charges ([if] as applicable [with regard to margin

[[Page 24335]]

transactions]) are disclosed and reflected in the projections;
    (E)[d.] such projections are plausible and are intended as a source 
of reference or a comparative device to be used in the development of a 
recommendation;
    (F)[e.] all material assumptions made in such calculations are 
clearly identified (e.g., ``assume option expires,'' ``assume option 
unexercised,'' ``assume option exercised,'' etc.);
    (G)[f.] the risks involved in the proposed transactions are also 
disclosed; and
    (H)[g.] in communications relating to annualized rates of return, 
that such returns are not based upon any less than a sixty-day 
experience; any formulas used in making calculations are clearly 
displayed; and a statement is included to the effect that the 
annualized returns cited might be achieved only if the parameters 
described can be duplicated and that there is no certainty of doing so.
    (4) Historical Performance
    [(iii) Such] Options communications may feature records and 
statistics that portray the performance of past recommendations or of 
actual transactions, provided that:
    (A) all such communications regarding standardized options are 
accompanied or preceded by the options disclosure document;
    (B)[a.] any such portrayal is done in a balanced manner, and 
consists of records or statistics that are confined to a specific 
``universe'' that can be fully isolated and circumscribed and that 
covers at least the most recent 12-month period;
    (C)[b.] such communications include the date of each initial 
recommendation or transaction, the price of each such recommendation or 
transaction as of such date, and the date and price of each 
recommendation or transaction at the end of the period or when 
liquidation was suggested or effected, whichever was earlier; provided 
that if the communications are limited to summarized or averaged 
records or statistics, in lieu of the complete record there may be 
included the number of items recommended or transacted, the number that 
advanced and the number that declined, together with an offer to 
provide the complete record upon request;
    (D)[c.] [such communications disclose ]all relevant costs, 
including commissions, [and interest charges (if applicable with regard 
to margin transactions) and,] fees, and daily margin obligations (as 
applicable) are disclosed and reflected in the performance;
    (E) whenever such communications contain annualized rates of return 
[are used], all material assumptions used in the process of 
annualization are disclosed;
    (F)[d.] an indication is provided of the general market conditions 
during the period(s) covered, and any comparison made between such 
records and statistics and the overall market (e.g., comparison to an 
index) is valid;
    (G)[e.] such communications state that the results presented should 
not and cannot be viewed as an indicator of future performance; and
    (H)[f.] a Registered Options and Security Futures Principal 
determines that the records or statistics fairly present the status of 
the recommendations or transactions reported upon and so initials the 
report.
    (5) Options Programs
    [(iv) In the case of]In communications regarding an options program 
(i.e., an investment plan employing the systematic use of one or more 
options strategies), the cumulative history or unproven nature of the 
program and its underlying assumptions shall be disclosed.
    [(v) Standard forms of options worksheets utilized by member 
organizations, in addition to complying with the requirements 
applicable to sales literature, must be uniform within a member 
organization.]
    [(vi) If a member organization has adopted a standard form of 
worksheet for a particular options strategy, nonstandard worksheets for 
that strategy may not be used.]
    [(vii) Communications that portray performance of past 
recommendations or actual transactions and completed worksheets shall 
be kept at a place easily accessible to the sales office for the 
accounts or customers involved.]
    (6) Violation of Other Rules
    Any violation by a member or associated person of any rule or 
requirement of the SEC or any rule of the Securities Investor 
Protection Corporation applicable to member communications concerning 
options will be deemed a violation of this Rule 2220.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    FINRA and other SROs have sought to modernize their rules 
concerning options communications with the public. One of the goals of 
this rule modernization is to make the rules on options communications 
consistent with the general rules on communications with the public. To 
this end, FINRA proposes to: (1) Use, to the extent appropriate, the 
same terminology and definitions as in its general communications 
rules; (2) make the requirements for principal review of correspondence 
concerning options the same as for correspondence generally; and (3) 
update the standards on the content of communications that precede the 
delivery of the options disclosure document (``ODD''). A discussion of 
the specific changes is provided below.
NASD Rule 2220(a) Definitions
    The proposed rule change would amend the definitions in NASD Rule 
2220(a) to adopt (and classify collectively as ``options 
communications'') definitions of ``advertisement,'' ``sales 
literature,'' ``independently prepared reprint,'' ``correspondence,'' 
``institutional sales material,'' and ``public appearance'' \3\ that 
are consistent with those terms as they are defined in FINRA's general 
advertising rules--NASD Rule 2210 (Communications with the Public) and 
NASD Rule 2211 (Institutional Sales Material and Correspondence).\4\ 
With respect to the definition of ``sales literature,'' the proposed 
rule change also would make clear that worksheet templates, which are 
commonly used in the marketing of options, are included within the 
definition of sales literature.\5\

[[Page 24336]]

The proposed rule change also would adopt the definition of ``existing 
retail customer'' set forth in NASD Rule 2211.\6\
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    \3\ Options communications that qualify as public appearances 
(e.g., seminars, radio, forums) may also qualify as other forms of 
options communications (e.g., advertisements, sales literature). For 
example, the writing of a print media article would generally 
qualify as both an advertisement and a public appearance. Seminar 
scripts, handouts, slides, or other visual presentations would also 
generally be deemed to be sales literature.
    \4\ See NASD Rule 2210(a)(1), (2), (5) & (6)(A); NASD Rule 
2211(a)(1), and (2).
    \5\ The definition of ``sales literature'' in NASD Rule 
2210(a)(2) includes many examples but does not include worksheets. 
In view of that fact that other SROs' definitions of ``sales 
literature'' include ``worksheets,'' FINRA has expressly included 
``worksheet templates'' in the definition of sales literature in 
proposed Rule 2220(a)(1)(B) to ensure consistency and avoid any 
ambiguity.
    \6\ See Rule NASD 2211(a)(4).
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    In addition, the proposed rule change would eliminate NASD Rule 
2220's current definition of ``educational material,'' which is a term 
unique to options communications. Communications that would previously 
have been considered ``educational material'' would now be classified 
as either ``advertisements'' or ``sales literature.'' This approach 
also would allow FINRA members to continue to create educational 
material concerning options, while at the same time providing members 
with greater flexibility in designing such materials.
    The proposed rule change would also adopt the definition of 
``options'' as defined in NASD Rule 2860(a) (Options), FINRA's general 
rule governing members' conduct when engaging in options activity. NASD 
Rule 2220 currently does not have a definition for the term 
``options.'' Adopting NASD Rule 2860's definition of that term would 
not only clarify the meaning of ``options'' as it is used in NASD Rule 
2220, it would also promote consistency between the two rules.
    Additionally, the proposed rule change would define the term 
``standardized option'' for purposes of NASD Rule 2220 to mean any 
option contract issued, or subject to issuance, by The Options Clearing 
Corporation (``OCC''), that has standardized terms for the strike 
price, expiration date, and amount of the underlying security, and is 
traded on a national securities exchange registered pursuant to section 
6(a) of the Securities Exchange Act of 1934 (``the Act''). FINRA is 
proposing this definition to help members understand the meaning of 
this term as it is used in proposed NASD Rule 2220(d)(1), which details 
the standards applicable to communications regarding standardized 
options exempted under SEC Rule 238 under the Securities Act of 1933 
(``Securities Act'') that are used prior to delivery of the ODD, and to 
communications regarding options not exempted under SEC Rule 238 that 
are used prior to delivery of a prospectus that meets the requirements 
of Section 10(a) of the Securities Act.
    Finally, the proposed rule change would define ``options disclosure 
document'' as having the same meaning as the definition of the term 
``disclosure document'' defined in NASD Rule 2860.\7\ FINRA believes 
that having a specific definition of ``options disclosure document'' 
would assist members in correctly understanding and applying the 
proposed rule changes.
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    \7\ See NASD Rule 2860(b)(2)(T).
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NASD Rule 2220(b) Approval by Registered Options and Security Futures 
Principal and Recordkeeping
    The proposed rule change would remove the outdated term 
``educational material'' in the requirement in NASD Rule 2220(b) to 
have an options principal approve prior to use certain options 
communications and would add ``independently prepared reprints'' to the 
types of options communications that require pre-use approval by an 
options principal. The proposed rule change would also exclude 
``completed worksheets'' from those materials requiring approval of an 
options principal. Because the definition of ``sales literature'' 
includes ``worksheet templates'' this exclusion would clarify that only 
the templates, and not each subsequent worksheet with data, is required 
to be approved by an options principal.
    In addition, the proposed rule change would include new 
requirements for principal review of correspondence in NASD Rule 
2220(b) that are consistent with recently amended correspondence 
principal approval requirements in NASD Rule 2211.\8\ As noted 
previously, because Rule NASD 2220 currently does not have a definition 
of correspondence, the proposed rule change would incorporate NASD Rule 
2211's definition of ``correspondence,'' which classifies 
correspondence as any written letter or electronic mail message 
distributed by a member to one or more of its existing retail customers 
and to fewer than 25 prospective retail customers within any 30 
calendar-day period.\9\ Pursuant to the proposed rule change, 
correspondence would not need to be approved by a Registered Options 
and Security Futures Principal prior to use, unless such correspondence 
is distributed to 25 or more existing retail customers within any 30 
calendar-day period and makes any financial or investment 
recommendation or otherwise promotes a product or service of the 
member. Also consistent with NASD Rule 2210, any written letters, 
emails, or instant messages to 25 or more prospective retail customers 
within any 30 calendar-day period would be deemed sales literature, 
which would have to be approved prior to use by a Registered Options 
and Security Futures Principal.\10\ Finally, as with NASD Rule 2210, 
the proposed rule change would make clear that all correspondence 
concerning options is subject to NASD Rule 3010(d)'s supervision and 
review requirements.
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    \8\ See Exchange Act Rel. No. 54217 (July 26, 2006), 71 F.R. 
43831 (August 2, 2006) (SR-NASD-2006-011).
    \9\ Previously, such material would have been examined to 
determine whether it should be considered an advertisement, sales 
literature, or educational material.
    \10\ See NASD Notice to Members 06-45 (August 2006). FINRA 
anticipates that other SROs will adopt similar standards to FINRA.
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    The proposed rule change would also include new requirements for 
principal review of institutional sales material in NASD Rule 
2220(b)(3) that are consistent with the principal review requirements 
for general institutional sales material in NASD Rule 2211. As noted 
previously, because NASD Rule 2220 does not have a definition of 
institutional sales material, the proposed rule change would 
incorporate NASD Rule 2211's definition of ``institutional sales 
material,'' which classifies institutional sales material as any 
communication that is distributed or made available only to 
institutional customers.\11\ Pursuant to the proposed rule change, each 
member would be required to establish written procedures that are 
appropriate for its business size, structure, and customers for the 
review by a Registered Options and Security Futures Principal of 
institutional sales material used by the member and its registered 
representatives as described in NASD Rule 2211(b)(1)(B).\12\
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    \11\ Previously, such material would have been examined to 
determine whether it should be considered an advertisement, sales 
literature or educational material.
    \12\ NASD Rule 2211(b)(1)(B) requires such procedures to be in 
writing and be designed to reasonably supervise each registered 
representative. Where such procedures do not require review of all 
institutional sales material prior to use or distribution, they must 
include provision for the education and training of associated 
persons as to the firm's procedures governing institutional sales 
material, documentation of such education and training, and 
surveillance and follow-up to ensure that such procedures are 
implemented and adhered to. Evidence that these supervisory 
procedures have been implemented and carried out must be maintained 
and made available to FINRA upon request.
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    The proposed rule change also would require that a member retain 
copies of the options communications in accordance with SEC Rule 17a-4. 
Additionally, a member would be required to retain the names of the 
persons who prepared the communications and the source of any 
recommendations contained in the communications and keep them in the 
form and for the time period required for options communications 
required in SEC Rule 17a-4.

[[Page 24337]]

NASD Rule 2220(c) FINRA Approval Requirements and Review Procedures
    Currently, NASD Rule 2220(c)(1) requires members to submit all 
options advertisements and educational material to FINRA's Advertising 
Regulation Department (the ``Department'') for approval at least ten 
days prior to use (or such shorter period as FINRA may allow) but does 
not require members to submit sales literature. The effect has been 
that widely disseminated communications (i.e., advertisements and 
educational material) used prior to delivery of the ODD are filed for 
approval while more targeted communications (i.e., sales literature, as 
previously defined) that must be preceded or accompanied by the ODD are 
exempted from filing. FINRA intends to follow a similar approach in the 
proposed rule change. Communications concerning standardized options 
that are likely to be widely disseminated such as advertisements, sales 
literature (as newly defined), and independently prepared reprints 
would be subject to filing under the proposed rule change. In contrast, 
more targeted communications--generally correspondence--that will be 
used once the applicable ODD or prospectus has been delivered would 
continue to be exempt from the filing requirements. In addition, as 
discussed below, communications used prior to the delivery of the ODD 
or prospectus would be subject to the more stringent content standards 
in subparagraph (d)(1). The proposed rule change would also modify 
existing rule text to clarify that the filing must occur at least ten 
calendar days prior to use (or such shorter period as the Department 
may allow in particular instances).
    The proposed rule change would delete NASD Rule 2220(c)(5), which 
prohibits the distribution of any written material, except as described 
in subparagraphs (d)(2)(B) and (C), respecting options to any person 
who had not previously or contemporaneously received one or more 
current options disclosure documents. This requirement would be 
subsumed into proposed NASD Rule 2220(d)(1) which would establish the 
standards for communications that may be used prior to delivery of the 
options disclosure document or prospectus.
NASD Rule 2220(d) Standards Applicable to Communications
    The proposed rule change would make several amendments to the 
standards applicable to options communications contained in NASD Rule 
2220(d). First, new NASD Rule 2220(d)(1) would clarify and update the 
standards limiting the content of communications regarding standardized 
options, as that term is defined and discussed earlier in the proposed 
rule change. Specifically, proposed new NASD Rule 2220(d)(1)(A) would 
provide that communications regarding standardized options exempted 
under SEC Rule 238 under the Securities Act that are used prior to 
delivery of the ODD must be limited to general descriptions of the 
options being discussed. This could include a brief description of 
options, including a statement that identifies registered clearing 
agencies for options and a brief description of the general attributes 
and method of operation of the exchanges on which such options are 
traded, including a discussion of how an option is priced. 
Additionally, such options communications would be required to include 
contact information for obtaining a copy of the ODD, but could not 
contain recommendations or past or projected performance figures, 
including annualized rates of return, or names of specific securities. 
These options communications could also include any statement required 
by any state law and administrative authority as well as any 
advertising designs and devices, provided such material is not 
misleading.
    Second, proposed new NASD Rule 2220(d)(1)(B) would provide that 
options communications regarding options not exempted under SEC Rule 
238 that are used prior to delivery of a prospectus that meets the 
requirements of the Securities Act Section 10(a) must conform to SEC 
Rule 134 or 134a under the Securities Act, as applicable.
    Third, the proposed rule change would broaden NASD Rule 2220(d)(2), 
which prohibits hedge clauses or disclaimers that are not legible, 
attempt to disclaim responsibility, or are otherwise inconsistent, by 
deleting references to disclaimers and the outdated term ``hedge 
clauses'' and instead generally prohibiting the use of illegible, 
misleading, or inconsistent cautionary statements or caveats.
    Fourth, the proposed rule change would require all options 
communications, with the exception of institutional sales material, to 
include a statement that supporting documentation for any claims 
(including any claims made on behalf of options programs or the options 
expertise of sales persons), comparison, recommendations, statistics, 
or other technical data, will be supplied upon request. Currently, NASD 
Rule 2220(d)(2)(D) only requires sales literature to include this 
statement.
    Fifth, the proposed rule change would except institutional sales 
materials from being required to include the existing required 
disclosure that options are not suitable for all investors. This 
disclaimer appears unnecessary in institutional sales material because, 
for purposes of this provision, institutions are viewed to be 
sufficiently sophisticated to be aware that options are not suitable 
for all investors.
    Sixth, proposed changes to NASD Rules 2220(d)(3) and (d)(4) would 
permit projected and historical performance figures in any options 
communications. Currently, only communications defined as sales 
literature may contain this information.\13\ The proposed rule change 
also would require all such communications regarding standardized 
options to be preceded or accompanied by the ODD. In addition, all 
relevant costs would be required to be disclosed and reflected in the 
projections.
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    \13\ See Rule NASD 2220(d)(2)(D)(ii).
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    Seventh, the proposed rule change would amend Rule NASD 2220(d)(6) 
to provide that any violation by a member or associated person of any 
rule or requirement of the SEC or any rule of the Securities Investor 
Protection Corporation applicable to member communications regarding 
options will be deemed a violation of NASD Rule 2220. This approach is 
consistent with NASD Rule 2210.\14\
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    \14\ See Rule 2210(e).
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General Technical Amendments to NASD Rule 2220
    The proposed rule change also would delete and update outdated rule 
language identified by the Options Self Regulatory Council and the 
subcommittee assigned to update the SROs' options communications rules. 
In particular, the proposed rule change would replace references 
throughout NASD Rule 2220 to ``material'' with the term 
``communications.'' The proposed rule change would also replace 
references to ``Registered Options Principal'' with ``Registered 
Options and Security Futures Principal.''
    FINRA believes that the proposed rule change will better address 
the needs for regulating current options communications practices and 
promote consistency across SROs. After these proposed changes are filed 
with the SEC, FINRA and other SROs will begin work on updating the 
Guidelines for Options Communications.\15 \
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    \15\ The Guidelines for Options Communications is an industry-
wide publication prepared by FINRA and the options exchanges. The 
Guidelines explain the SROs' options communications rules and 
interpretations, address frequently asked questions and common 
problems, and provide a framework for informative and effective 
communications with the public.

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[[Page 24338]]

    As noted in Item 2 of this filing, FINRA will announce the 
effective date of the proposed rule change in a Regulatory Notice to be 
published no later than 60 days following Commission approval. The 
effective date will be 90 days following publication of the Regulatory 
Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\16\ which 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. FINRA believes that the proposed rule change promotes 
just and equitable principles of trade and protects investors and the 
public interest by providing the investing public with options 
communications rules that are designed to provide appropriate 
safeguards and greater clarity by promoting harmonization between 
FINRA's and other SROs' options communications rules.
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    \16\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether 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 (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-013 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

    All submissions should refer to File Number SR-FINRA-2008-013. This 
file number should be included on the subject line if e-mail 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 (https://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 inspection 
and copying 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-2008-013 and should be 
submitted on or before May 23, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-9631 Filed 5-1-08; 8:45 am]
BILLING CODE 8010-01-P