Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rules 2210 (Communications With the Public), 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings), and 2214 (Requirements for the Use of Investment Analysis Tools), 39081-39089 [2016-14084]
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Federal Register / Vol. 81, No. 115 / Wednesday, June 15, 2016 / Notices
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 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
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–Phlx–2016–64 and should
be submitted on or before July 6, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–14085 Filed 6–14–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78026; File No. SR–FINRA–
2016–018]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rules 2210 (Communications
With the Public), 2213 (Requirements
for the Use of Bond Mutual Fund
Volatility Ratings), and 2214
(Requirements for the Use of
Investment Analysis Tools)
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June 9, 2016.
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 May 25,
2016, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) 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
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
solicit comments on the proposed rule
change from interested persons.
2214 and the content and disclosure
requirements in FINRA Rule 2213.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Proposed Amendments
FINRA is proposing amendments that
would revise the filing requirements in
FINRA Rule 2210 (Communications
with the Public) and FINRA Rule 2214
(Requirements for the Use of Investment
Analysis Tools) and the content and
disclosure requirements in FINRA Rule
2213 (Requirements for the Use of Bond
Mutual Fund Volatility Ratings).
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
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
In April 2014, FINRA launched a
retrospective review of its
communications with the public rules
to assess their effectiveness and
efficiency. In December 2014, FINRA
published a report on the assessment
phase of the review.3 The report
concluded that, while the rules have
met their intended investor protection
objectives, they could benefit from some
updating to better align the investor
protection benefits and the economic
impacts. To this end, FINRA
recommended consideration of a
combination of rule proposals, guidance
and administrative measures, to
enhance the efficiency of the rules with
no reduction in investor protection.
Pursuant to these recommendations,
FINRA initially is proposing
amendments to the filing requirements
in FINRA Rule 2210 and FINRA Rule
10 17
1 15
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3 See Retrospective Rule Report, Communications
with the Public, December 2014.
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New Member Communications
FINRA Rule 2210(c)(1)(A) currently
requires new FINRA members to file
with FINRA retail communications used
in any electronic or other public media
at least 10 business days prior to use.
This requirement extends for one year
from the effective date of the firm’s
membership. This new firm filing
requirement only applies to broadly
disseminated retail communications,
such as generally accessible Web sites,
print media communications, and
television and radio commercials.
While FINRA believes that the
requirement for new members to file
their broadly disseminated retail
communications serves a useful
purpose, since new members may not be
as familiar with the standards that apply
to retail communications as more
established members, the requirement to
file these communications at least 10
business days prior to use can delay
members’ abilities to communicate with
the public in a timely manner according
to FINRA. For example, if a new
member wishes to update its public
Web site with new information, the
member must first file the proposed
update with FINRA and wait at least 10
business days before it can post this
update on its Web site. FINRA believes
that such a delay may hinder its ability
to communicate important information
to its existing and prospective
customers.
FINRA believes it can continue to
protect investors from potential harm
without imposing this time delay on
new members by reviewing new
members’ communications on a postuse, rather than a pre-use, basis. FINRA
has found a post-use filing requirement
to be an effective investor protection
approach for retail communications
with similar risk profiles as FINRA
typically sees from new members.
Accordingly, FINRA proposes to revise
the new member filing requirement to
require new members to file retail
communications used in electronic or
other public media within 10 business
days of first use for a one-year period,
rather than requiring these filings at
least 10 business days prior to use.4
4 See proposed amendments to FINRA Rule
2210(c)(1)(A). This proposed change also would
delete as redundant current rule text that permits
a new member to file a retail communication that
is a free writing prospectus filed with the SEC
pursuant to Securities Act Rule 433(d)(1)(ii), within
10 business days of first use rather than at least 10
business days prior to first use.
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Investment Company Shareholder
Reports
FINRA currently requires members to
file the management’s discussion of
fund performance (‘‘MDFP’’) portion of
a registered investment company
shareholder report if the report is
distributed or made available to
prospective investors.5 FINRA has
required the MDFP to be filed because
members sometimes distribute or make
shareholder reports available to
prospective investors to provide more
information about the funds they offer.
Thus, FINRA has considered the MDFP
to be subject to the filing requirement
for investment company retail
communications.
Although Rule 2210 does not contain
any express filing exclusion for
investment company shareholder
reports, FINRA has not required
members to file portions of shareholder
reports other than the MDFP, such as
the financial statements or schedules of
portfolio investments. FINRA has not
regarded these other parts of investment
company shareholder reports to be
subject to the filing requirements of
Rule 2210, since they serve a regulatory
purpose rather than promoting the sale
of investment company securities.
Investment companies already must
file shareholder reports with the SEC,6
and the MDFP typically presents less
investor risk than other types of
promotional communications
concerning investment companies, since
it usually focuses on the most recent
period covered by the report rather than
containing promotional content that is
intended to encourage future
investments. Accordingly, FINRA
proposes to exclude from the FINRA
filing requirements the MDFP by adding
an express exclusion for annual or semiannual reports that have been filed with
the SEC in compliance with applicable
requirements.7 FINRA believes that it
would assist members’ understanding of
Rule 2210 expressly to clarify that
annual and semi-annual reports that
have been filed with the SEC are not
5 See, e.g., Notice to Members 99–79 (September
1999) (‘‘[m]embers are not required to file
shareholder reports with [FINRA] if they are only
sent to current fund shareholders. However, if a
member uses a shareholder report as sales material
with prospective investors, the member must file
the management’s discussion of fund performance
(MDFP) portion of the report (as well as any
supplemental sales material attached to or
distributed with the report) with the Department.’’).
6 See Section 30 of the Investment Company Act
of 1940 and Rules 30a–1 and 30b1–1 thereunder.
7 See proposed amendments to FINRA Rule
2210(c)(7)(F). To the extent that a member
distributes or attaches registered investment
company sales material along with the fund’s
shareholder report, such material would remain
subject to filing under Rule 2210.
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subject to filing. The rule already
excludes prospectuses, fund profiles,
offering circulars and similar documents
that have been filed with the SEC. As
such, FINRA believes it would be
consistent to add shareholder reports
that have been filed with the SEC to that
list.
Offering Documents Concerning
Unregistered Securities
Rule 2210(c)(7)(F) currently excludes
from filing ‘‘prospectuses, preliminary
prospectuses, fund profiles, offering
circulars and similar documents that
have been filed with the SEC or any
state, or that is exempt from such
registration . . .’’ (emphasis supplied).
The filing exclusion is intended (and
has been interpreted by FINRA) to
exclude issuer-prepared offering
documents concerning securities
offerings that are exempt from
registration.
Accordingly, FINRA is proposing to
amend Rule 2210(c)(7)(F) to make this
intent more clear, and to avoid any
confusion concerning the phrase ‘‘or
that is exempt from such registration.’’
As revised, Rule 2210(c)(7)(F) would
exclude from filing, among other things,
‘‘similar offering documents concerning
securities offerings that are exempt from
SEC or state registration requirements.’’
While FINRA believes that this
amendment will clarify this filing
exclusion, it does not believe that it
represents a substantive change to the
current filing exclusion for unregistered
securities’ offering documents.
Backup Material for Investment
Company Performance Rankings and
Comparisons
A member that files a retail
communication for a registered
investment company that contains a
fund performance ranking or
performance comparison must include a
copy of the ranking or comparison used
in the retail communication.8 When
FINRA adopted this requirement, prior
to the Internet, FINRA staff did not have
ready access to the sources of rankings
or comparisons. Today, this information
typically is easily available online.
FINRA therefore proposes to eliminate
the requirement to file ranking and
comparison backup material and instead
expressly to require members to
maintain back-up materials as part of
their records.9
8 See
FINRA Rule 2210(c)(3)(A).
proposed amendments to FINRA Rules
2210(b)(4)(A)(vi) and 2210(c)(3)(A).
Generic Investment Company
Communications
FINRA Rule 2210(c)(3)(A) requires
members to file within 10 business days
of first use retail communications
‘‘concerning’’ registered investment
companies. FINRA proposes to revise
this filing requirement to cover only
retail communications that promote a
specific registered investment company
or family of registered investment
companies. Thus, members would no
longer be required to file generic
investment company retail
communications.
An example of such a generic
communication would be a retail
communication that describes different
mutual fund types and features but does
not discuss the benefits of a specific
fund or fund family. This type of
material typically is intended to educate
the public about investment companies
in general or the types of products that
a member offers, and thus does not
present the same risks of including
potentially misleading information as
promotional communications about
specific funds or fund families.
Investment Analysis Tools
‘‘Investment analysis tools’’ are
interactive technological tools that
produce simulations and statistical
analyses that present the likelihood of
various investment outcomes if certain
investments are made or certain
investment strategies or styles are
undertaken. Pursuant to FINRA Rules
2210(c)(3)(C) and 2214(a), members that
intend to offer an investment analysis
tool must file templates for written
reports produced by, or retail
communications concerning, the tool,
within 10 business days of first use.
Rule 2214 also requires members to
provide FINRA with access to the tool
itself, and provide customers with
specific disclosures when members
communicate about the tool, use the
tool or provide written reports generated
by the tool.
Since Rule 2214 became effective in
2005,10 FINRA has found that members
have largely complied with the Rule’s
requirements applicable to templates for
written reports produced by investment
analysis tools and retail
communications concerning such tools.
FINRA does not believe that the filing
requirements for these templates and
retail communications are necessary
given this history and in light of the
investor protection afforded by other
content standards and the requirement
that members provide access to the tools
9 See
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10 See
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and their output upon request of FINRA
staff. Accordingly, FINRA proposes to
eliminate the filing requirements for
investment analysis tool report
templates and retail communications
concerning such tools and instead
require members to provide FINRA staff
with access to investment analysis tools
upon request.11
Filing Exclusion for Templates
Members are not required to file retail
communications that are based on
templates that were previously filed
with FINRA but changed only to update
recent statistical or other non-narrative
information.12 However, members are
required to re-file previously filed retail
communications that are subject to
filing under FINRA Rule 2210(c) to the
extent that the member has updated any
narrative information contained in the
prior filing. Often these re-filed retail
communications are templates for fact
sheets concerning particular funds or
products and provide quarterly
information concerning a product’s
performance, portfolio holdings and
investment objectives.
Through its review of updated fund
fact sheets and other similar templates,
FINRA has found that certain narrative
information has not presented
significant risk to investors, and that
these narrative updates typically are
consistent with applicable standards. In
particular, narrative updates that are not
predictive in nature and merely describe
market events that occurred during the
period covered by the communication,
or that merely describe changes in a
fund’s portfolio, rarely have presented
significant investor risks. In addition,
members often will update narrative
information concerning a registered
investment company, such as a
description of a fund’s investment
objectives, based on information that is
sourced from the fund’s regulatory
documents filed with the SEC. In both
cases, FINRA believes that the costs
associated with filing these types of
narrative updates exceed the investor
benefits associated with FINRA staff
review of these updates.
Accordingly, FINRA proposes to
expand the template filing exclusion
also to allow members to include
updated non-predictive narrative
descriptions of market events during the
period covered by the communication
and factual descriptions of portfolio
changes without having to refile the
template, as well as updated
information that is sourced from a
11 See
proposed amendments to FINRA Rules
2210(c)(3) and 2214(a).
12 See FINRA Rule 2210(c)(7)(B).
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registered investment company’s
regulatory documents filed with the
SEC.13
Bond Mutual Fund Volatility Ratings
FINRA Rule 2213 permits members to
use communications that include
ratings provided by independent third
parties that address the sensitivity of the
net asset value of an open-end
management investment company’s
bond portfolio to changes in market
conditions and the general economy,
subject to a number of requirements. For
example, these communications must be
accompanied or preceded by the bond
fund’s prospectus and contain specific
disclosures. Members currently must
file retail communications that include
bond mutual fund volatility ratings at
least 10 business days prior to first use,
and withhold them from publication or
circulation until any changes specified
by FINRA have been made.14
FINRA believes that some of these
requirements have discouraged
members from including bond fund
volatility ratings in their
communications due to the significant
compliance burdens associated with
doing so, and the level of disclosures
required to accompany such ratings.
FINRA has found that, since Rule 2213
first became effective in 2000,15
members have rarely, if ever, filed
communications that contain bond fund
volatility ratings. In general, in the few
cases in which members filed such
communications with FINRA, the staff
has found that they have met applicable
standards.
Given that bond fund volatility ratings
may provide useful information to
investors, and that Rule 2213 as
currently drafted appears to have
discouraged members from including
these ratings in their communications,
FINRA believes it is appropriate to
revise the rule to reduce some of these
burdens while continuing to include
requirements that it believes will protect
investors. Accordingly, FINRA proposes
to modify some of Rule 2213’s
requirements.
Consistent with the filing
requirements for other retail
communications about specific
registered investment companies, the
proposal would no longer require a
retail communication that includes a
bond fund volatility rating to be
accompanied or preceded by a
prospectus for the fund, and would
permit members to file these
13 See proposed amendments to FINRA Rule
2210(c)(7)(B).
14 FINRA Rules 2210(c)(2)(C) and 2213(b) and (c).
15 See Notice to Members 00–23 (April 2000).
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39083
communications within 10 business
days of first use rather than prior to
use.16
FINRA believes that the requirement
that any retail communication including
a bond fund volatility rating be
accompanied or preceded by a fund
prospectus increases the burdens
associated with these communications
without adding commensurate investor
protection. Except in rare circumstances
due to operational hardship, all mutual
fund prospectuses are available online,
and thus an investor can easily access
the prospectus, if needed.
Similarly, FINRA believes that
requiring members to file these retail
communications at least 10 business
days prior to use and to withhold them
from publication or circulation until any
changes specified by the Department
have been made does not provide
appreciably greater investor protection.
According to FINRA, this pre-use filing
requirement inhibits a member’s ability
to circulate retail communications
containing volatility ratings in a timely
manner. Moreover, members still would
be required to file these
communications within 10 business
days of first use, so that if they contain
misleading content, the Department staff
can take appropriate measures to correct
any problems, such as recommending
changes to the communication, or
directing the member to cease using the
communication with the public. FINRA
has found a post-use filing requirement
to be an effective investor protection
approach for most retail
communications with similar risk
profiles.17
The proposal also would streamline
the content and disclosure
requirements. In particular, the
amendments would eliminate the
requirements: (1) That all disclosures be
contained in a separate Disclosure
Statement; (2) to disclose all current
bond mutual fund volatility ratings that
have been issued with respect to the
16 See proposed amendments to FINRA Rules
2210(c) and 2213(b). This change relates only to
Rule 2213 and does not affect a member’s obligation
to deliver a prospectus under the Securities Act or
for Investment Company Act companies.
17 As a general matter, FINRA does not believe
that retail communications that include bond fund
volatility ratings present risks of investor harm that
are comparable to other retail communications that
require pre-use filing, such as retail
communications that include self-created rankings
or comparisons or retail communications
concerning security futures. See FINRA Rule
2210(c)(2)(A) and (B). Retail communications that
include self-created rankings or comparisons
present a greater risk of being misleading than bond
fund volatility ratings, since they are not created by
an entity that is independent of the member. In
addition, security futures are more complex and
potentially more volatile than most bond mutual
funds.
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fund; (3) to explain the reason for any
change in the current rating from the
most recent prior rating; (4) to describe
the criteria and methodologies used to
determine the rating; (5) to include a
statement that not all bond funds have
volatility ratings; and (6) to include a
statement that the portfolio may have
changed since the date of the rating.
FINRA believes that many of these
requirements are unnecessary in light of
the content requirements that still will
apply to such retail communications.
For example, members still would not
be permitted to refer to a volatility
rating as a ‘‘risk’’ rating, and would have
to incorporate the most recently
available rating and reflect information
that, at a minimum, is current to the
most recent calendar quarter end. The
criteria and methodology used to
determine the rating still would have to
be based exclusively on objective,
quantifiable factors, and such
communications would have to include
a link to, or Web site address for, a Web
site that includes the criteria and
methodology. Communications would
have to provide the name of the entity
that issued the rating, the most current
rating and date for the rating, and
whether consideration was paid for the
rating, as well as a description of the
types of risks the rating measures.
FINRA believes that, as long as the
required disclosures are provided, it is
not necessary that they appear in a
separate Disclosure Statement. FINRA
also believes it is unnecessary to
disclose all other current volatility
ratings assigned to the advertised fund,
since this requirement is not imposed
under other similar rules. For example,
FINRA Rule 2214 allows members to
provide fund ranking information
without also requiring the member to
disclose all rankings assigned by other
ranking entities. The other disclosure
requirements add little understanding
about the rating presented, while adding
voluminous text to the retail
communication. In addition, if an
investor does seek more information
about the criteria and methodology used
to create the rating, this information will
be available via a hyperlink to separate
Web site.
If the Commission approves the
proposed rule change, FINRA will
announce the implementation 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 no later than 180 days
following publication of the Regulatory
Notice announcing Commission
approval.
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2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,18 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 will improve
efficiency and reduce regulatory burden
by reducing the filing requirements
applicable to retail communications
distributed by members and
streamlining the content and disclosure
requirements for retail communications
that include bond mutual fund volatility
ratings, while maintaining necessary
investor protections.
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. FINRA has
undertaken an economic impact
assessment, as set forth below, to
analyze the regulatory need for the
proposed rulemaking, its potential
economic impacts, including
anticipated costs and benefits, and the
alternatives FINRA considered in
assessing how to best meet its regulatory
objectives.
and approximately 40% to 50% of these
members filed communications specific
to the requirements in this proposal.
In 2014, 79 members filed
communications pursuant to the new
firm filing requirement, 183 filed
investment company shareholder
reports, 155 filed backup material for
investment company performance
rankings and comparisons, 51 filed
communications associated with
investment analysis tools, 218 filed
updated fund fact sheets or other similar
templates, and three filed
communications that included bond
mutual fund volatility ratings.19
Approximately 58% of the members
that filed communications specific to
the requirements in this proposal were
small, whereas approximately 19% and
23% of the members were mid-sized
and large, respectively.20 In 2014, these
members filed approximately 300
communications pursuant to the new
firm filing requirement, 5,000
investment company shareholder
reports, 13,500 filings of backup
material for investment company
performance rankings and comparisons,
590 filings related to investment
analysis tools, and approximately
23,800 filings of applicable templates.
These filings were largely concentrated
amongst a few members that filed
frequently. For example, the 20
members with the highest number of
filings overall accounted for over 50%
of the filings related to this proposal.
Economic Impact Assessment
3. Economic Impacts
1. Regulatory Need
As discussed previously, based on the
retrospective review of rules governing
communications with the public,
FINRA has identified several areas
where updating the rules would better
provide information that may be useful
to investors while maintaining
important investor protections.
The proposed amendments would
impact members that are subject to the
filing, content and disclosure
requirements in this proposal. As
discussed above, approximately 40% to
50% of the 770 members that in 2014
filed communications specific to the
requirements in this proposal. These
members would be impacted directly by
the proposed amendments.
2. Economic Baseline
The economic baseline used to
evaluate the impact of the proposed
amendments is the current regulatory
framework. This baseline serves as the
primary point of comparison for
assessing economic impacts, including
the incremental benefits and costs of the
proposed rule change. To better
understand the members affected by this
proposal and the filings by these
members, FINRA reviewed the filing
history and its comments on the
communications filed in 2014. Based on
this review, 770 members filed
communications with FINRA in 2014,
18 15
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i. Anticipated Benefits
The amendments will benefit
members by reducing their costs
associated with the filing requirements
in this proposal. These cost savings
19 FINRA cannot precisely identify the number of
members that filed generic investment company
communications or the number of such filings.
However, based on experience and review of filings
in 2014, FINRA believes that the number of
members that filed generic communications was
approximately the same as the number of members
that filed updated fund fact sheets or other similar
templates.
20 Based on FINRA By-Law, Article I
(Definitions), members with 150 or fewer registered
persons are classified as small, members with 151–
499 persons are classified as mid-size, and members
with 500 or more persons are classified as large.
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would include savings on filing fees
from the proposed elimination or
reduction in the scope of certain filing
requirements.
Based on review of communication
filings in 2014 and historical experience
with such filings, FINRA preliminarily
estimates that, as a result of the
proposed amendments, there would be
a reduction in the filings of investment
company shareholder reports of 5,000
filings per year, and a potential decline
in the filings of generic investment
company communications of
approximately 3,000 filings per year.
FINRA further estimates that the
anticipated decline in filings related to
investment analysis tools and filings of
templates would be approximately 500
and 13,000 filings per year,
respectively.21 Overall, FINRA estimates
that as a result of the proposed
amendments, the total communications
filings would be reduced by 21,500
filings per year.
Accordingly, based on an average
filing fee of $185 in 2014, FINRA
preliminarily estimates that the
proposed amendments would reduce
the filing fees for members by
approximately $4 million per year.22 In
addition to this reduction in filing fees,
members would likely also benefit from
a decrease in other direct costs
associated with filings, such as staff,
systems and infrastructure costs, or
third-party legal and consulting fees
associated with the requirements
applicable to this proposal. Since these
costs account for a significant
proportion of members’ overall direct
costs, any reduction in these costs as a
result of the proposed amendments
could be material. For example, based
on the survey results from the
assessment phase of FINRA’s
retrospective rule review, FINRA
estimates that the direct costs other than
filing fees (such as staffing, systems and
infrastructure costs, third-party legal
and consulting fees) account for more
than 90% of the overall advertisingrelated compliance costs for most
members that file communications.23
21 Based on staff experience, FINRA believes that
some members would continue to file
communications even after the elimination of
applicable filing requirements. FINRA’s estimates
for reduction in number of filings attempt to
account for such voluntary filings.
22 As discussed above, the relevant
communication filings are largely concentrated
amongst a few members that file frequently.
Accordingly, the anticipated benefits, including
reduction in filing fees and other direct costs
associated with filing, would also largely accrue to
these frequent filers.
23 As part of the assessment phase of its
retrospective review of FINRA’s communications
with the public rules, the staff conducted a survey
of the entire membership to seek feedback on the
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Accordingly, the overall reduction in
direct costs associated with
communication filings could be larger
than the anticipated reduction in filing
fees discussed above. Moreover, the
proposed elimination or reduction in
the scope of certain filing requirements
may also reduce disruption in members’
advertising efforts associated with these
filings. In addition, the streamlined
disclosure and content requirements for
the presentation of bond fund volatility
ratings in communications may save
members additional costs associated
with creating and reviewing disclosure.
The proposed amendments may
generate benefits to the public as they
may also encourage members to
communicate additional valuable
information to investors. For example,
the elimination of the costs associated
with the filing requirement for generic,
educational communications regarding
investment companies may encourage
members to provide more frequent and
timely information to investors.
Similarly, the changes to the template
exclusion from the filing requirement
for investment company
communications may enable members
to provide investors with more timely
explanations of market events as well as
changes in a fund’s portfolio,
particularly for those firms that
voluntarily file all retail
communications prior to use and wait to
receive the staff’s response letter before
distributing retail communications
(instead of filing retail communications
within 10 days of first use as required).
Under the expanded filing exception for
templates, it is likely that these firms
may distribute the updated
communications without choosing to
file them, thus allowing them to
communicate with investors sooner.
ii. Anticipated Costs
Members that are subject to the filing,
content and disclosure requirements in
this proposal would likely incur costs
associated with updating their policies
and procedures. These costs would
include training their advertising review
and other staff associated with
communications with the public.
Members may also need to make
updates to systems to reflect changes in
the filing requirements. FINRA,
however, anticipates that these costs
effectiveness and efficiency of the rules, including
direct and indirect costs associated with the current
rules. Based on the survey responses, FINRA
estimates that for approximately 52% of the
members that file communications with FINRA,
direct costs other than filing fees, such as staff,
systems and infrastructure costs, or third-party legal
and consulting fees, account for more than 90% of
their overall direct costs.
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39085
would likely be minimal relative to the
cost savings from the proposed
amendments. FINRA would also incur
costs associated with updating its
Advertising Regulation Electronic Files
(AREF) system as well as training the
relevant staff on the amendments in the
proposal.
iii. Other Economic Impacts
FINRA also considered the potential
negative impacts of the proposed
amendments to investors. FINRA
believes that the proposed exclusions
and streamlining of filing requirements
would not diminish investor protection
because the applicable communications
pose little risk to investors. For
example, investment company
shareholder reports, generic investment
company retail communications, and
non-predictive narrative descriptions
about market events in report templates
generally are low-risk communications
in FINRA’s view.
Some members choose to file some
mutual fund advertising materials on a
voluntary basis. Members that choose to
do so base their decision on business
needs and not FINRA requirements. The
proposed rule change would not limit
the ability of members to continue to
make voluntary filings if they should
deem them to be valuable.
4. Alternatives
In considering how to best meet its
regulatory objectives, FINRA considered
alternatives to particular features of this
proposal. For example, FINRA
considered narrowing the new member
filing requirement to cover only public
Web sites since new members primarily
reach out to their existing and potential
customers by developing Web sites. As
discussed in more detail below, PIABA
raised concerns about potential investor
harm if FINRA only reviews new
members’ Web sites without reviewing
other types of public media advertising,
such as television and radio
commercials and newspaper
advertisement. FINRA reviewed the
communications filing history and its
comments on the communications filed
by new members and found that a
higher proportion of new member
communications require revisions to be
compliant with the applicable
standards, compared to all filed
communications. As a result, to
maintain the same level of investor
protection, FINRA has determined not
to narrow the new member filing
requirement to public Web sites.
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Federal Register / Vol. 81, No. 115 / Wednesday, June 15, 2016 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Background
In May 2015, FINRA published
Regulatory Notice 15–16 (the ‘‘Notice’’),
requesting comment on proposed
amendments that would revise the filing
requirements in FINRA Rule 2210 and
FINRA Rule 2214 and the content and
disclosure requirements in FINRA Rule
2213 (the ‘‘Notice proposal’’). A copy of
the Notice is attached as Exhibit 2a. The
comment period expired on July 2,
2015. FINRA received 11 comments in
response to the Notice. All but one
commenter supported the proposal. A
list of the commenters in response to the
Notice is attached as Exhibit 2b, and
copies of the comment letters received
in response to the Notice are attached as
Exhibit 2c.24 A summary of the
comments and FINRA’s response is
provided below.
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Continuation of Retrospective Review
While many comments supported the
proposal, some commenters
recommended that FINRA continue its
retrospective review of the
communications rules to address other
issues. Commenters urged FINRA to
update the rules governing social media,
mobile devices and electronic
communications,25 performance
advertising,26 the amount of disclosure
required in print advertising,27 the
content standards under FINRA Rule
2210(d),28 and options
communications.29
Commenters also recommended that
FINRA harmonize the differences
between its communications rules and
SEC rules governing investment adviser
communications, particularly with
respect to rules governing projections
and performance information,30 and
that FINRA update its electronic filing
system to allow members to file
materials in other than PDF format.31
Wells Fargo suggested that FINRA
clarify what constitutes a ‘‘public
appearance’’ under Rule 2210(f)(3). The
ICI urged FINRA to codify clear
disclosure standards for retail
communications concerning closed-end
funds and eliminate the filing
24 See Exhibit 2b for a list of abbreviations
assigned to commenters.
25 See CAI, Fidelity, SIFMA, TD Ameritrade, and
Vanguard.
26 See TD Ameritrade.
27 See Fidelity and TD Ameritrade.
28 See FSI.
29 See TD Ameritrade.
30 See Fidelity and Wells Fargo.
31 See CAI.
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requirement for these communications.
The CAI recommended that FINRA take
a more risk-based approach of
differentiating communications that
should be filed and reviewed, and those
that should not.
While FINRA states that it appreciates
these recommendations, FINRA does
not believe it is necessary to address all
of these issues as part of this proposed
rule change. The amendments that
FINRA has proposed in this filing are
only the first step in addressing the
results of the assessment phase of its
retrospective review of the
communications rules. FINRA
continues to consider additional rule
changes related to the areas raised by
commenters and will address those
topics as part of its future proposed rule
changes, as appropriate.
New Member Filing Requirement
In addition to changing the filing
requirement for new members from a
pre-use to a post-use requirement, the
Notice proposal would have narrowed
the types of retail communications
subject to this requirement. Currently
new members must file all retail
communications used in electronic or
other public media, including radio and
television advertisements, newspaper
and magazine ads, and public Web sites.
The Notice proposal would have
narrowed the new member filing
requirement to cover only public Web
sites.
PIABA urged FINRA not to narrow
the current new member filing
requirements. PIABA stated that if
FINRA reviews only new members’ Web
sites without reviewing other types of
public media advertising, such as
television and radio commercials and
newspaper advertisements, investors
potentially could be harmed. PIABA
also noted that pre-use filing offers more
investor protection than post-use filing,
since pre-use filing allows FINRA staff
to review communications prior to their
distribution.
While the deficiencies noted by
FINRA staff on new members’ filed
communications are still relatively low,
the staff does find that a higher
percentage of new members’
communications require revisions to be
compliant with applicable standards as
compared with all communications
filed with FINRA. Accordingly, FINRA
has determined not to narrow the scope
of public media communications
required to be filed by new members.
Nevertheless, FINRA still believes it is
appropriate to allow new members to
file these communications on a post-use
rather than a pre-use basis. In this
regard, a post-use filing requirement
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allows new members to create and alter
their public media communications in a
timely manner (such as a change to a
new member’s Web site) without the
need to wait for FINRA staff review
before doing so. In addition, new
members still would be required to
approve public media communications
prior to use, and such communications
would remain subject to the
communications rules’ content
standards. FINRA believes this revision
appropriately balances the need to
protect investors with making its
communications rules less burdensome
and resource-consuming for members.
Filing Exclusion for Shareholder
Reports
FINRA currently requires members to
file the MDFP portion of registered
investment company shareholder
reports. The Notice proposal would
have amended FINRA Rule 2210(c)(7)(F)
to exclude from filing annual and semiannual shareholder reports that have
been filed with the SEC.
Two commenters supported this
proposed change on the ground that
members are already required to file
these reports with the SEC, and filing
the MDFP with FINRA is therefore
redundant and unnecessary.32 The ICI
noted that the proposed exclusion is
somewhat ambiguous, since it appears
to apply only if the report has been filed
with the SEC prior to or perhaps
contemporaneously with making the
report available to prospective investors.
The ICI noted that SEC rules require
funds to file their reports with the SEC
‘‘not later than 10 days after the
transmission to stockholders.’’ 33
PIABA opposed this change. PIABA
asserted that SEC staff rarely reviews
shareholder reports filed with the SEC
given the volume of filings it receives on
a daily basis, and that therefore FINRA
should continue to require the MDFP to
be filed and reviewed by FINRA staff.
FINRA agrees that this proposed
change would not require members to
file fund shareholder reports prior to or
contemporaneously with making the
reports available to prospective
investors, as long as the reports are filed
in compliance with SEC rule
requirements. To clarify this intent,
FINRA is modifying the proposed
amendment to Rule 2210(c)(7)(F) to
specify that such reports must be filed
with the SEC ‘‘in compliance with
applicable requirements.’’
FINRA has found through its filing
program that the MDFPs in shareholder
reports rarely have raised issues
32 See
33 See
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ICI and Vanguard.
Investment Company Act Rule 30b2–1(a).
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requiring members to revise or
withdraw reports from circulation.
FINRA also notes that, while the SEC
may not review all securities-related
filings contemporaneous with their
submission, the staff can review higher
risk communications as needed. FINRA
believes that removing this filing
requirement would not harm investors
and would allow FINRA to allocate its
staff resources more efficiently to focus
on reviewing higher risk
communications more expeditiously.
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Backup Ranking Data
The Notice proposal would have
eliminated the current requirement to
include a copy of an investment
company performance ranking or
comparison used in any retail
communication that contains such a
ranking or comparison. TD Ameritrade
supported the elimination of this
requirement given that this information
typically is available online. PIABA
opposed this change, apparently
believing that it would completely
eliminate the requirement to file retail
communications that contain
performance rankings or comparisons,
rather than merely eliminating the
requirement to file the backup data.
FINRA continues to believe this
change is appropriate and will relieve
members of the additional burden of
having to file backup ranking data,
given the online availability of such
data. The proposal will not eliminate
the requirement to file retail
communications that contain
performance rankings or comparisons.
In addition, the proposal would require
members to maintain the backup
materials for inspection. Accordingly,
FINRA believes PIABA’s concerns are
misplaced.
Generic Investment Company
Communications
Commenters generally supported the
proposal to revise the filing requirement
for retail communications concerning
registered investment companies to
cover only those communications that
promote or recommend a specific
registered investment company or
family of registered investment
companies.34
The CAI had a number of
recommendations for changes and
clarifications. First, it asked FINRA to
confirm that the mere mention of the
name of an investment company does
not necessarily constitute the promotion
or recommendation of the investment
company, and that this determination
needs to be made based on the full
34 See
CAI, TD Ameritrade, and Vanguard.
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context of the communication. Second,
it requested that FINRA clarify that the
proposed change would exclude from
filing generic retail communications
concerning variable annuity contracts
that do not promote or recommend a
particular contract.
Third, it noted that this proposed
change might have the unintended
effect of increasing compliance costs for
members, since members that create
generic investment company
communications would no longer file
them, and thus other members that use
these communications would no longer
be able to rely on the principal approval
exception contained in FINRA Rule
2210(b)(1)(C).35 The CAI recommended
that FINRA revise Rule 2210(b)(1)(C) to
create an exception from the principal
approval requirements for generic retail
communications created by a third
party, even if the third party has not
filed it with FINRA. The CAI also
suggested that FINRA consider creating
a principal approval exception for any
third-party communication that is
reviewed and approved by another
member.
The IPA recommended that FINRA
create a similar filing exclusion for retail
communications concerning unlisted
real estate investment trusts (REITs) and
direct participation programs (DPPs)
that do not promote or recommend a
particular product.
The determination of whether a retail
communication promotes or
recommends a specific registered
investment company or family of
investment companies will always be a
facts-and-circumstances analysis.
Accordingly, FINRA does not believe it
would be productive to speculate
whether particular types of retail
communications that mention the name
of a specific investment company would
have to be filed.
The filing requirement for retail
communications concerning registered
investment companies applies to
communications concerning mutual
funds, exchange-traded funds, variable
insurance products, closed-end funds,
and unit investment trusts.36
Accordingly, by its terms, this filing
requirement would not apply to a retail
communication concerning a variable
annuity contract unless it promoted or
35 Rule 2210(b)(1)(C) provides that the principal
approval requirements do not apply to a retail
communication if (i) another member has filed it
with FINRA and received a letter from FINRA
stating that it appears consistent with applicable
standards, and (ii) the member using it in reliance
upon this exception has not materially altered it
and will not use it in a manner inconsistent with
the conditions contained in the FINRA review
letter.
36 See FINRA Rule 2210(c)(3)(A).
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39087
recommended a specific contract or
family of such contracts (e.g., a retail
communication concerning variable
contracts that promoted or
recommended a specific insurance
company).
FINRA declines to revise the
exception from the principal approval
requirements for retail communications
under FINRA Rule 2210(b)(1)(C). Part of
the reason for this exception is that
communications covered by this
provision must have been filed with
FINRA and received a letter stating that
the communication appears consistent
with applicable standards. FINRA does
not believe an exception that excludes
this filing requirement would offer the
same level of investor protection.
FINRA also declines to create another
filing exclusion for generic retail
communications concerning REITs or
DPPs. A filing exclusion for retail
communications concerning REITs is
unnecessary in FINRA’s view, since
FINRA Rule 2210 currently does not
require retail communications
concerning REITs to be filed. FINRA
believes that DPPs often are more
complex and less familiar to retail
investors than registered investment
companies; accordingly FINRA believes
that a filing requirement for generic
retail communications concerning DPPs
still makes sense in light of the investor
protection offered by this requirement.
Investment Analysis Tools
TD Ameritrade supported the
proposed elimination of the current
filing requirement for report templates
and retail communications concerning
investment analysis tools. However, it
recommended that FINRA also
eliminate the disclosure requirements in
FINRA Rule 2214(c) for retail
communications that promote
investment analysis tools.37 TD
Ameritrade also stated that FINRA staff
has inappropriately applied Rule 2214
to retirement planning calculators.
FINRA does not believe it is necessary
to revise Rule 2214(c) as suggested. Rule
2214.06 already provides that a retail
communication that contains only an
37 FINRA Rule 2214(c) requires written reports
generated by investment analysis tools and related
retail communications to: (1) Describe the criteria
and methodology used, including the tool’s
limitations and key assumptions; (2) explain that
results may vary with each use and over time; (3)
if applicable, describe the universe of investments
considered in the analysis, explain how the tool
determines which securities to select, disclose if the
tool favors certain securities and, if so, explain the
reason for the selectivity, and state that other
investments not considered may have
characteristics similar or superior to those being
analyzed; and (4) display a specific legend
regarding the hypothetical nature of the projections
created by the tool.
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Federal Register / Vol. 81, No. 115 / Wednesday, June 15, 2016 / Notices
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incidental reference to an investment
analysis tool need not include the
disclosures required by Rule 2214(c). In
addition, Rule 2214.06 provides that if
a retail communication refers to an
investment analysis tool in more detail
but does not provide access to the tool
or the results generated by the tool, the
retail communication may exclude some
of the disclosures required by Rule
2214(c). FINRA believes this provision
already provides appropriate flexibility
and regulatory relief for retail
communications concerning investment
analysis tools.
As for the comment that FINRA staff
has inappropriately applied current
Rule 2214 to retirement planning
calculators, FINRA believes that these
concerns are best addressed through
discussions with FINRA staff rather
than through a proposed change to Rule
2214.
Template Filing Exclusion
Multiple commenters supported the
proposed change to the current filing
exclusion for templates contained in
FINRA Rule 2210(c)(7)(B), which
currently does not require a member to
file a retail communication that is based
on a template that was previously filed
with FINRA and where the changes are
limited to updates of more recent
statistical and other non-narrative
information.38 The Notice proposal
would have allowed a member that had
previously filed a retail communication
template also to update non-predictive
narrative information that describes
market events during the period covered
by the communication or factual
changes in portfolio composition.
The CAI recommended that FINRA
allow members to make non-material
changes to narrative disclosures, as well
as updates to non-predictive
descriptions of market events and
market commentary. Two other
commenters recommended that the
filing exclusion for templates be revised
to allow members to include other nonpredictive narrative information,
provided that it comes from either an
independent data provider or is sourced
from an investment company’s
regulatory documents filed with the
SEC.39
PIABA opposed the proposed change
to the template filing exclusion, arguing
that funds sometimes write misleading
descriptions of market events to explain
losses in a fund’s net asset value. PIABA
gave as an example of this practice a
38 See
CAI, ICI, and TD Ameritrade.
Fidelity and ICI. The ICI suggested that this
revision only cover data received from ‘‘ranking
entities’’ as that term is defined in FINRA Rule
2212, rather than any third-party data provider.
39 See
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2007 FINRA enforcement action
involving a fund fact sheet.
FINRA Rule 2210(c)(7)(A) already
contains a filing exclusion for retail
communications that previously were
filed with FINRA and that are used
without material change. Accordingly,
FINRA does not believe it is necessary
to revise the proposed change to Rule
2210(c)(7)(B) to allow non-material
changes.
FINRA agrees that it makes little sense
for members to refile previously filed
templates if the only changes to the
template are sourced from an
investment company’s regulatory
documents filed with the SEC. For
example, if a fund alters the description
of its investment objectives in its
prospectus and files these changes with
the SEC, and a member wants to make
a corresponding change to a previously
filed fact sheet concerning the fund,
there is little need to file such an update
with FINRA.
Accordingly, FINRA is revising its
proposed changes to the template filing
exclusion also to cover updated
information that is sourced from an
investment company’s regulatory
documents filed with the SEC. FINRA
declines to expand this filing exclusion
also to cover any information that comes
from an independent data provider
regardless of its source, as that
information is not subject to the same
level of regulatory scrutiny as
information in documents required by
SEC rules. Therefore, if a narrative
change to a template is not sourced from
SEC filings, FINRA believes that such
changes should require the member to
refile the template, even if this
information comes from an independent
third-party data provider.
FINRA recognizes that it is always
possible that a member will use this
filing exclusion to include nonpredictive narrative information that is
misleading in nature. Nevertheless,
FINRA has found over the years from
reviewing thousands of template
updates that non-predictive narrative
information concerning market events
or portfolio composition has rarely
generated comments from the staff and
generally has been low-risk in nature.
Based on this experience, FINRA
believes the proposed changes to the
template filing exclusion will improve
staff efficiency without sacrificing
investor protection. Moreover, any
updates to templates remain subject to
Rule 2210’s content standards.
Accordingly, if a member did prepare a
misleading update to a template, FINRA
could still reach that conduct and bring
an action for violation of the
communications with the public rules.
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Bond Fund Volatility Ratings
PIABA urged FINRA not to modify
Rule 2213’s requirements applicable to
retail communications that include a
bond mutual fund volatility rating.
PIABA argued that past FINRA
enforcement actions involving the sale
of bond funds demonstrate that bond
funds should be more highly regulated.
FINRA disagrees with this comment.
The proposed changes to Rule 2213 will
not eliminate the filing requirement for
any retail communication concerning
bond funds, regardless of whether such
filing includes a volatility rating. Even
with the changes, members will still be
required to file retail communications
that contain a bond fund volatility
rating within 10 business days of first
use. Moreover, as revised, Rule 2213
would still require members to include
many disclosures concerning the risks
and limitations of such ratings.
Accordingly, FINRA believes that
revised Rule 2213 still would offer
ample protection to investors and
involve FINRA staff review of such
communications.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove
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 email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2016–018 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
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Commission, 100 F Street NE.,
Washington, DC 20549–1090.
SECURITIES AND EXCHANGE
COMMISSION
All submissions should refer to File
Number SR–FINRA–2016–018. 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 (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 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
10:00 a.m. and 3:00 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–
2016–018 and should be submitted on
or before July 6, 2016.
[Release No. 34–78029; File No. SR–
NYSEMKT–2016–45]
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–14084 Filed 6–14–16; 8:45 am]
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BILLING CODE 8011–01–P
40 17
CFR 200.30–3(a)(12).
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Self-Regulatory Organizations; NYSE
MKT LLC; Suspension of and Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change To Modify the
NYSE Amex Options Fee Schedule
With Respect to Fees, Rebates, and
Credits for Transactions in the
Customer Best Execution Auction
June 9, 2016.
I. Introduction
On April 11, 2016, NYSE MKT LLC
(the ‘‘Exchange’’ or ‘‘NYSE MKT’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2 a
proposed rule change (File No. SR–
NYSEMKT–2016–45) to modify the
NYSE Amex Options Fee Schedule with
respect to fees, rebates, and credits
relating to the Exchange’s Customer Best
Execution Auction (‘‘CUBE Auction’’),3
and to increase credits available under
the Exchange’s Amex Customer
Engagement Program (‘‘ACE Program’’).4
The proposed rule change was
immediately effective upon filing with
the Commission pursuant to Section
19(b)(3)(A) of the Act.5 Notice of filing
of the proposed rule change was
published in the Federal Register on
April 26, 2016.6 Under Section
19(b)(3)(C) of the Act,7 the Commission
is (1) hereby temporarily suspending
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The CUBE Auction is a mechanism in which an
Exchange ATP Holder submits an agency order on
behalf of a customer for price improvement, paired
with a contra-side order guaranteeing execution of
the agency order at or better than the National Best
Bid or Offer (‘‘NBBO’’) depending on the
circumstances. The contra-side order could be for
the account of the ATP Holder that initiated the
CUBE Auction (‘‘Initiating Participant’’), or an order
solicited from another participant. The agency order
is exposed for a random period of time between 500
and 750 milliseconds in which other ATP Holders
submit competing interest at the same price as the
initial price or better (‘‘RFR Responses’’). The
Initiating Participant is guaranteed at least 40% of
any remainder of the order (after public customers
and better-priced RFR Responses) at the final price
for the CUBE order. See NYSE MKT Rule 971.1NY.
4 Under the ACE Program, credits are available to
ATP Holders that bring customer orders to the
Exchange based on the percentage (by tier) of
national industry customer volume those customer
orders comprise. See NYSE Amex Options Fee
Schedule Section I.E.
5 15 U.S.C. 78s(b)(3)(A).
6 See Securities Exchange Act Release No. 77658
(April 20, 2016), 81 FR 24674 (‘‘Notice’’).
7 15 U.S.C. 78s(b)(3)(C).
2 17
PO 00000
Frm 00069
Fmt 4703
Sfmt 4703
39089
File No. SR–NYSEMKT–2016–45, and
(2) instituting proceedings to determine
whether to approve or disapprove File
No. SR–NYSEMKT–2016–45.
II. Summary of the Proposed Rule
Change
The Exchange’s proposal amended
certain fees, rebates, and credits relating
to executions through its CUBE Auction.
First, the proposal increased the fees
assessed by the Exchange for RFR
Responses (i.e., orders and quotes
submitted during a CUBE Auction that
are executed against the agency order).8
Specifically, the Exchange increased
RFR Response fees for Non-Customers
(including Market Makers) from $0.12 to
$0.70 for classes subject to the Penny
Pilot 9 (‘‘Penny classes’’) and from $0.12
to $1.05 for classes not subject to the
Penny Pilot (‘‘Non-Penny classes’’).
Further, the proposal increased a
rebate available to Initiating Participants
in CUBE Auctions (i.e., ATP Holders
that initiate such auctions) 10 under the
Exchange’s ACE Program. Specifically,
the proposal increased the rebate paid to
Initiating Participants that meet certain
tiers of the ACE Program from $0.05 to
$0.18 (the ‘‘ACE Initiating Participant
Rebate’’) for each of the first 5,000
Customer contracts of an agency order
executed in a CUBE Auction.11
Finally, the proposal increased the
credit paid by the Exchange to Initiating
Participants (the ‘‘break-up credit’’) for
each contract in the contra-side order
that is paired with the agency order that
does not trade with the agency order
because it is replaced in the auction.
Prior to the proposal, the credit granted
was $0.05 per contract in all classes.
The proposal raised it to $0.35 for
Penny classes and $0.70 for Non-Penny
classes.12
In its filing, the Exchange stated that
the changes to the CUBE Auction
transaction fees are reasonable,
equitable and not unfairly
discriminatory ‘‘because they apply
equally to all ATP Holders that choose
to participate in the CUBE, and access
to the Exchange is offered on terms that
8 See supra note 3 and NYSE Amex Options Fee
Schedule, Section I.G.
9 See Commentary .02 to NYSE MKT Rule 960NY.
See also Securities Exchange Act Release No. 75281
(June 24, 2015), 80 FR 37338 (June 30, 2015) (SR–
NYSEMKT–2015–43) (extending the Penny Pilot
through June 30, 2016).
10 See supra note 3.
11 See NYSE Amex Options Fee Schedule,
Section I.G.
12 See id. Separate from its proposed changes to
CUBE Auction fees and credits, the Exchange’s
proposal also increased certain credits available
through its ACE Program with respect to non-CUBE
transactions. See Notice, supra note 6, at 24674–75.
See also NYSE Amex Options Fee Schedule,
Section I.E.
E:\FR\FM\15JNN1.SGM
15JNN1
]]>Agencies
[Federal Register Volume 81, Number 115 (Wednesday, June 15, 2016)]
[Notices]
[Pages 39081-39089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14084]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78026; File No. SR-FINRA-2016-018]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rules 2210 (Communications With the Public), 2213 (Requirements
for the Use of Bond Mutual Fund Volatility Ratings), and 2214
(Requirements for the Use of Investment Analysis Tools)
June 9, 2016.
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 May 25, 2016, Financial Industry Regulatory Authority, Inc.
(``FINRA'') 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing amendments that would revise the filing
requirements in FINRA Rule 2210 (Communications with the Public) and
FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools)
and the content and disclosure requirements in FINRA Rule 2213
(Requirements for the Use of Bond Mutual Fund Volatility Ratings).
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
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
In April 2014, FINRA launched a retrospective review of its
communications with the public rules to assess their effectiveness and
efficiency. In December 2014, FINRA published a report on the
assessment phase of the review.\3\ The report concluded that, while the
rules have met their intended investor protection objectives, they
could benefit from some updating to better align the investor
protection benefits and the economic impacts. To this end, FINRA
recommended consideration of a combination of rule proposals, guidance
and administrative measures, to enhance the efficiency of the rules
with no reduction in investor protection.
---------------------------------------------------------------------------
\3\ See Retrospective Rule Report, Communications with the
Public, December 2014.
---------------------------------------------------------------------------
Pursuant to these recommendations, FINRA initially is proposing
amendments to the filing requirements in FINRA Rule 2210 and FINRA Rule
2214 and the content and disclosure requirements in FINRA Rule 2213.
Proposed Amendments
New Member Communications
FINRA Rule 2210(c)(1)(A) currently requires new FINRA members to
file with FINRA retail communications used in any electronic or other
public media at least 10 business days prior to use. This requirement
extends for one year from the effective date of the firm's membership.
This new firm filing requirement only applies to broadly disseminated
retail communications, such as generally accessible Web sites, print
media communications, and television and radio commercials.
While FINRA believes that the requirement for new members to file
their broadly disseminated retail communications serves a useful
purpose, since new members may not be as familiar with the standards
that apply to retail communications as more established members, the
requirement to file these communications at least 10 business days
prior to use can delay members' abilities to communicate with the
public in a timely manner according to FINRA. For example, if a new
member wishes to update its public Web site with new information, the
member must first file the proposed update with FINRA and wait at least
10 business days before it can post this update on its Web site. FINRA
believes that such a delay may hinder its ability to communicate
important information to its existing and prospective customers.
FINRA believes it can continue to protect investors from potential
harm without imposing this time delay on new members by reviewing new
members' communications on a post-use, rather than a pre-use, basis.
FINRA has found a post-use filing requirement to be an effective
investor protection approach for retail communications with similar
risk profiles as FINRA typically sees from new members. Accordingly,
FINRA proposes to revise the new member filing requirement to require
new members to file retail communications used in electronic or other
public media within 10 business days of first use for a one-year
period, rather than requiring these filings at least 10 business days
prior to use.\4\
---------------------------------------------------------------------------
\4\ See proposed amendments to FINRA Rule 2210(c)(1)(A). This
proposed change also would delete as redundant current rule text
that permits a new member to file a retail communication that is a
free writing prospectus filed with the SEC pursuant to Securities
Act Rule 433(d)(1)(ii), within 10 business days of first use rather
than at least 10 business days prior to first use.
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[[Page 39082]]
Investment Company Shareholder Reports
FINRA currently requires members to file the management's
discussion of fund performance (``MDFP'') portion of a registered
investment company shareholder report if the report is distributed or
made available to prospective investors.\5\ FINRA has required the MDFP
to be filed because members sometimes distribute or make shareholder
reports available to prospective investors to provide more information
about the funds they offer. Thus, FINRA has considered the MDFP to be
subject to the filing requirement for investment company retail
communications.
---------------------------------------------------------------------------
\5\ See, e.g., Notice to Members 99-79 (September 1999)
(``[m]embers are not required to file shareholder reports with
[FINRA] if they are only sent to current fund shareholders. However,
if a member uses a shareholder report as sales material with
prospective investors, the member must file the management's
discussion of fund performance (MDFP) portion of the report (as well
as any supplemental sales material attached to or distributed with
the report) with the Department.'').
---------------------------------------------------------------------------
Although Rule 2210 does not contain any express filing exclusion
for investment company shareholder reports, FINRA has not required
members to file portions of shareholder reports other than the MDFP,
such as the financial statements or schedules of portfolio investments.
FINRA has not regarded these other parts of investment company
shareholder reports to be subject to the filing requirements of Rule
2210, since they serve a regulatory purpose rather than promoting the
sale of investment company securities.
Investment companies already must file shareholder reports with the
SEC,\6\ and the MDFP typically presents less investor risk than other
types of promotional communications concerning investment companies,
since it usually focuses on the most recent period covered by the
report rather than containing promotional content that is intended to
encourage future investments. Accordingly, FINRA proposes to exclude
from the FINRA filing requirements the MDFP by adding an express
exclusion for annual or semi-annual reports that have been filed with
the SEC in compliance with applicable requirements.\7\ FINRA believes
that it would assist members' understanding of Rule 2210 expressly to
clarify that annual and semi-annual reports that have been filed with
the SEC are not subject to filing. The rule already excludes
prospectuses, fund profiles, offering circulars and similar documents
that have been filed with the SEC. As such, FINRA believes it would be
consistent to add shareholder reports that have been filed with the SEC
to that list.
---------------------------------------------------------------------------
\6\ See Section 30 of the Investment Company Act of 1940 and
Rules 30a-1 and 30b1-1 thereunder.
\7\ See proposed amendments to FINRA Rule 2210(c)(7)(F). To the
extent that a member distributes or attaches registered investment
company sales material along with the fund's shareholder report,
such material would remain subject to filing under Rule 2210.
---------------------------------------------------------------------------
Offering Documents Concerning Unregistered Securities
Rule 2210(c)(7)(F) currently excludes from filing ``prospectuses,
preliminary prospectuses, fund profiles, offering circulars and similar
documents that have been filed with the SEC or any state, or that is
exempt from such registration . . .'' (emphasis supplied). The filing
exclusion is intended (and has been interpreted by FINRA) to exclude
issuer-prepared offering documents concerning securities offerings that
are exempt from registration.
Accordingly, FINRA is proposing to amend Rule 2210(c)(7)(F) to make
this intent more clear, and to avoid any confusion concerning the
phrase ``or that is exempt from such registration.'' As revised, Rule
2210(c)(7)(F) would exclude from filing, among other things, ``similar
offering documents concerning securities offerings that are exempt from
SEC or state registration requirements.'' While FINRA believes that
this amendment will clarify this filing exclusion, it does not believe
that it represents a substantive change to the current filing exclusion
for unregistered securities' offering documents.
Backup Material for Investment Company Performance Rankings and
Comparisons
A member that files a retail communication for a registered
investment company that contains a fund performance ranking or
performance comparison must include a copy of the ranking or comparison
used in the retail communication.\8\ When FINRA adopted this
requirement, prior to the Internet, FINRA staff did not have ready
access to the sources of rankings or comparisons. Today, this
information typically is easily available online. FINRA therefore
proposes to eliminate the requirement to file ranking and comparison
backup material and instead expressly to require members to maintain
back-up materials as part of their records.\9\
---------------------------------------------------------------------------
\8\ See FINRA Rule 2210(c)(3)(A).
\9\ See proposed amendments to FINRA Rules 2210(b)(4)(A)(vi) and
2210(c)(3)(A).
---------------------------------------------------------------------------
Generic Investment Company Communications
FINRA Rule 2210(c)(3)(A) requires members to file within 10
business days of first use retail communications ``concerning''
registered investment companies. FINRA proposes to revise this filing
requirement to cover only retail communications that promote a specific
registered investment company or family of registered investment
companies. Thus, members would no longer be required to file generic
investment company retail communications.
An example of such a generic communication would be a retail
communication that describes different mutual fund types and features
but does not discuss the benefits of a specific fund or fund family.
This type of material typically is intended to educate the public about
investment companies in general or the types of products that a member
offers, and thus does not present the same risks of including
potentially misleading information as promotional communications about
specific funds or fund families.
Investment Analysis Tools
``Investment analysis tools'' are interactive technological tools
that produce simulations and statistical analyses that present the
likelihood of various investment outcomes if certain investments are
made or certain investment strategies or styles are undertaken.
Pursuant to FINRA Rules 2210(c)(3)(C) and 2214(a), members that intend
to offer an investment analysis tool must file templates for written
reports produced by, or retail communications concerning, the tool,
within 10 business days of first use. Rule 2214 also requires members
to provide FINRA with access to the tool itself, and provide customers
with specific disclosures when members communicate about the tool, use
the tool or provide written reports generated by the tool.
Since Rule 2214 became effective in 2005,\10\ FINRA has found that
members have largely complied with the Rule's requirements applicable
to templates for written reports produced by investment analysis tools
and retail communications concerning such tools. FINRA does not believe
that the filing requirements for these templates and retail
communications are necessary given this history and in light of the
investor protection afforded by other content standards and the
requirement that members provide access to the tools
[[Page 39083]]
and their output upon request of FINRA staff. Accordingly, FINRA
proposes to eliminate the filing requirements for investment analysis
tool report templates and retail communications concerning such tools
and instead require members to provide FINRA staff with access to
investment analysis tools upon request.\11\
---------------------------------------------------------------------------
\10\ See Notice to Members 04-86 (November 2004).
\11\ See proposed amendments to FINRA Rules 2210(c)(3) and
2214(a).
---------------------------------------------------------------------------
Filing Exclusion for Templates
Members are not required to file retail communications that are
based on templates that were previously filed with FINRA but changed
only to update recent statistical or other non-narrative
information.\12\ However, members are required to re-file previously
filed retail communications that are subject to filing under FINRA Rule
2210(c) to the extent that the member has updated any narrative
information contained in the prior filing. Often these re-filed retail
communications are templates for fact sheets concerning particular
funds or products and provide quarterly information concerning a
product's performance, portfolio holdings and investment objectives.
---------------------------------------------------------------------------
\12\ See FINRA Rule 2210(c)(7)(B).
---------------------------------------------------------------------------
Through its review of updated fund fact sheets and other similar
templates, FINRA has found that certain narrative information has not
presented significant risk to investors, and that these narrative
updates typically are consistent with applicable standards. In
particular, narrative updates that are not predictive in nature and
merely describe market events that occurred during the period covered
by the communication, or that merely describe changes in a fund's
portfolio, rarely have presented significant investor risks. In
addition, members often will update narrative information concerning a
registered investment company, such as a description of a fund's
investment objectives, based on information that is sourced from the
fund's regulatory documents filed with the SEC. In both cases, FINRA
believes that the costs associated with filing these types of narrative
updates exceed the investor benefits associated with FINRA staff review
of these updates.
Accordingly, FINRA proposes to expand the template filing exclusion
also to allow members to include updated non-predictive narrative
descriptions of market events during the period covered by the
communication and factual descriptions of portfolio changes without
having to refile the template, as well as updated information that is
sourced from a registered investment company's regulatory documents
filed with the SEC.\13\
---------------------------------------------------------------------------
\13\ See proposed amendments to FINRA Rule 2210(c)(7)(B).
---------------------------------------------------------------------------
Bond Mutual Fund Volatility Ratings
FINRA Rule 2213 permits members to use communications that include
ratings provided by independent third parties that address the
sensitivity of the net asset value of an open-end management investment
company's bond portfolio to changes in market conditions and the
general economy, subject to a number of requirements. For example,
these communications must be accompanied or preceded by the bond fund's
prospectus and contain specific disclosures. Members currently must
file retail communications that include bond mutual fund volatility
ratings at least 10 business days prior to first use, and withhold them
from publication or circulation until any changes specified by FINRA
have been made.\14\
---------------------------------------------------------------------------
\14\ FINRA Rules 2210(c)(2)(C) and 2213(b) and (c).
---------------------------------------------------------------------------
FINRA believes that some of these requirements have discouraged
members from including bond fund volatility ratings in their
communications due to the significant compliance burdens associated
with doing so, and the level of disclosures required to accompany such
ratings. FINRA has found that, since Rule 2213 first became effective
in 2000,\15\ members have rarely, if ever, filed communications that
contain bond fund volatility ratings. In general, in the few cases in
which members filed such communications with FINRA, the staff has found
that they have met applicable standards.
---------------------------------------------------------------------------
\15\ See Notice to Members 00-23 (April 2000).
---------------------------------------------------------------------------
Given that bond fund volatility ratings may provide useful
information to investors, and that Rule 2213 as currently drafted
appears to have discouraged members from including these ratings in
their communications, FINRA believes it is appropriate to revise the
rule to reduce some of these burdens while continuing to include
requirements that it believes will protect investors. Accordingly,
FINRA proposes to modify some of Rule 2213's requirements.
Consistent with the filing requirements for other retail
communications about specific registered investment companies, the
proposal would no longer require a retail communication that includes a
bond fund volatility rating to be accompanied or preceded by a
prospectus for the fund, and would permit members to file these
communications within 10 business days of first use rather than prior
to use.\16\
---------------------------------------------------------------------------
\16\ See proposed amendments to FINRA Rules 2210(c) and 2213(b).
This change relates only to Rule 2213 and does not affect a member's
obligation to deliver a prospectus under the Securities Act or for
Investment Company Act companies.
---------------------------------------------------------------------------
FINRA believes that the requirement that any retail communication
including a bond fund volatility rating be accompanied or preceded by a
fund prospectus increases the burdens associated with these
communications without adding commensurate investor protection. Except
in rare circumstances due to operational hardship, all mutual fund
prospectuses are available online, and thus an investor can easily
access the prospectus, if needed.
Similarly, FINRA believes that requiring members to file these
retail communications at least 10 business days prior to use and to
withhold them from publication or circulation until any changes
specified by the Department have been made does not provide appreciably
greater investor protection. According to FINRA, this pre-use filing
requirement inhibits a member's ability to circulate retail
communications containing volatility ratings in a timely manner.
Moreover, members still would be required to file these communications
within 10 business days of first use, so that if they contain
misleading content, the Department staff can take appropriate measures
to correct any problems, such as recommending changes to the
communication, or directing the member to cease using the communication
with the public. FINRA has found a post-use filing requirement to be an
effective investor protection approach for most retail communications
with similar risk profiles.\17\
---------------------------------------------------------------------------
\17\ As a general matter, FINRA does not believe that retail
communications that include bond fund volatility ratings present
risks of investor harm that are comparable to other retail
communications that require pre-use filing, such as retail
communications that include self-created rankings or comparisons or
retail communications concerning security futures. See FINRA Rule
2210(c)(2)(A) and (B). Retail communications that include self-
created rankings or comparisons present a greater risk of being
misleading than bond fund volatility ratings, since they are not
created by an entity that is independent of the member. In addition,
security futures are more complex and potentially more volatile than
most bond mutual funds.
---------------------------------------------------------------------------
The proposal also would streamline the content and disclosure
requirements. In particular, the amendments would eliminate the
requirements: (1) That all disclosures be contained in a separate
Disclosure Statement; (2) to disclose all current bond mutual fund
volatility ratings that have been issued with respect to the
[[Page 39084]]
fund; (3) to explain the reason for any change in the current rating
from the most recent prior rating; (4) to describe the criteria and
methodologies used to determine the rating; (5) to include a statement
that not all bond funds have volatility ratings; and (6) to include a
statement that the portfolio may have changed since the date of the
rating.
FINRA believes that many of these requirements are unnecessary in
light of the content requirements that still will apply to such retail
communications. For example, members still would not be permitted to
refer to a volatility rating as a ``risk'' rating, and would have to
incorporate the most recently available rating and reflect information
that, at a minimum, is current to the most recent calendar quarter end.
The criteria and methodology used to determine the rating still would
have to be based exclusively on objective, quantifiable factors, and
such communications would have to include a link to, or Web site
address for, a Web site that includes the criteria and methodology.
Communications would have to provide the name of the entity that issued
the rating, the most current rating and date for the rating, and
whether consideration was paid for the rating, as well as a description
of the types of risks the rating measures.
FINRA believes that, as long as the required disclosures are
provided, it is not necessary that they appear in a separate Disclosure
Statement. FINRA also believes it is unnecessary to disclose all other
current volatility ratings assigned to the advertised fund, since this
requirement is not imposed under other similar rules. For example,
FINRA Rule 2214 allows members to provide fund ranking information
without also requiring the member to disclose all rankings assigned by
other ranking entities. The other disclosure requirements add little
understanding about the rating presented, while adding voluminous text
to the retail communication. In addition, if an investor does seek more
information about the criteria and methodology used to create the
rating, this information will be available via a hyperlink to separate
Web site.
If the Commission approves the proposed rule change, FINRA will
announce the implementation 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 no later than 180 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,\18\ 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 will
improve efficiency and reduce regulatory burden by reducing the filing
requirements applicable to retail communications distributed by members
and streamlining the content and disclosure requirements for retail
communications that include bond mutual fund volatility ratings, while
maintaining necessary investor protections.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
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. FINRA has undertaken an
economic impact assessment, as set forth below, to analyze the
regulatory need for the proposed rulemaking, its potential economic
impacts, including anticipated costs and benefits, and the alternatives
FINRA considered in assessing how to best meet its regulatory
objectives.
Economic Impact Assessment
1. Regulatory Need
As discussed previously, based on the retrospective review of rules
governing communications with the public, FINRA has identified several
areas where updating the rules would better provide information that
may be useful to investors while maintaining important investor
protections.
2. Economic Baseline
The economic baseline used to evaluate the impact of the proposed
amendments is the current regulatory framework. This baseline serves as
the primary point of comparison for assessing economic impacts,
including the incremental benefits and costs of the proposed rule
change. To better understand the members affected by this proposal and
the filings by these members, FINRA reviewed the filing history and its
comments on the communications filed in 2014. Based on this review, 770
members filed communications with FINRA in 2014, and approximately 40%
to 50% of these members filed communications specific to the
requirements in this proposal.
In 2014, 79 members filed communications pursuant to the new firm
filing requirement, 183 filed investment company shareholder reports,
155 filed backup material for investment company performance rankings
and comparisons, 51 filed communications associated with investment
analysis tools, 218 filed updated fund fact sheets or other similar
templates, and three filed communications that included bond mutual
fund volatility ratings.\19\ Approximately 58% of the members that
filed communications specific to the requirements in this proposal were
small, whereas approximately 19% and 23% of the members were mid-sized
and large, respectively.\20\ In 2014, these members filed approximately
300 communications pursuant to the new firm filing requirement, 5,000
investment company shareholder reports, 13,500 filings of backup
material for investment company performance rankings and comparisons,
590 filings related to investment analysis tools, and approximately
23,800 filings of applicable templates. These filings were largely
concentrated amongst a few members that filed frequently. For example,
the 20 members with the highest number of filings overall accounted for
over 50% of the filings related to this proposal.
---------------------------------------------------------------------------
\19\ FINRA cannot precisely identify the number of members that
filed generic investment company communications or the number of
such filings. However, based on experience and review of filings in
2014, FINRA believes that the number of members that filed generic
communications was approximately the same as the number of members
that filed updated fund fact sheets or other similar templates.
\20\ Based on FINRA By-Law, Article I (Definitions), members
with 150 or fewer registered persons are classified as small,
members with 151-499 persons are classified as mid-size, and members
with 500 or more persons are classified as large.
---------------------------------------------------------------------------
3. Economic Impacts
The proposed amendments would impact members that are subject to
the filing, content and disclosure requirements in this proposal. As
discussed above, approximately 40% to 50% of the 770 members that in
2014 filed communications specific to the requirements in this
proposal. These members would be impacted directly by the proposed
amendments.
i. Anticipated Benefits
The amendments will benefit members by reducing their costs
associated with the filing requirements in this proposal. These cost
savings
[[Page 39085]]
would include savings on filing fees from the proposed elimination or
reduction in the scope of certain filing requirements.
Based on review of communication filings in 2014 and historical
experience with such filings, FINRA preliminarily estimates that, as a
result of the proposed amendments, there would be a reduction in the
filings of investment company shareholder reports of 5,000 filings per
year, and a potential decline in the filings of generic investment
company communications of approximately 3,000 filings per year. FINRA
further estimates that the anticipated decline in filings related to
investment analysis tools and filings of templates would be
approximately 500 and 13,000 filings per year, respectively.\21\
Overall, FINRA estimates that as a result of the proposed amendments,
the total communications filings would be reduced by 21,500 filings per
year.
---------------------------------------------------------------------------
\21\ Based on staff experience, FINRA believes that some members
would continue to file communications even after the elimination of
applicable filing requirements. FINRA's estimates for reduction in
number of filings attempt to account for such voluntary filings.
---------------------------------------------------------------------------
Accordingly, based on an average filing fee of $185 in 2014, FINRA
preliminarily estimates that the proposed amendments would reduce the
filing fees for members by approximately $4 million per year.\22\ In
addition to this reduction in filing fees, members would likely also
benefit from a decrease in other direct costs associated with filings,
such as staff, systems and infrastructure costs, or third-party legal
and consulting fees associated with the requirements applicable to this
proposal. Since these costs account for a significant proportion of
members' overall direct costs, any reduction in these costs as a result
of the proposed amendments could be material. For example, based on the
survey results from the assessment phase of FINRA's retrospective rule
review, FINRA estimates that the direct costs other than filing fees
(such as staffing, systems and infrastructure costs, third-party legal
and consulting fees) account for more than 90% of the overall
advertising-related compliance costs for most members that file
communications.\23\ Accordingly, the overall reduction in direct costs
associated with communication filings could be larger than the
anticipated reduction in filing fees discussed above. Moreover, the
proposed elimination or reduction in the scope of certain filing
requirements may also reduce disruption in members' advertising efforts
associated with these filings. In addition, the streamlined disclosure
and content requirements for the presentation of bond fund volatility
ratings in communications may save members additional costs associated
with creating and reviewing disclosure.
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\22\ As discussed above, the relevant communication filings are
largely concentrated amongst a few members that file frequently.
Accordingly, the anticipated benefits, including reduction in filing
fees and other direct costs associated with filing, would also
largely accrue to these frequent filers.
\23\ As part of the assessment phase of its retrospective review
of FINRA's communications with the public rules, the staff conducted
a survey of the entire membership to seek feedback on the
effectiveness and efficiency of the rules, including direct and
indirect costs associated with the current rules. Based on the
survey responses, FINRA estimates that for approximately 52% of the
members that file communications with FINRA, direct costs other than
filing fees, such as staff, systems and infrastructure costs, or
third-party legal and consulting fees, account for more than 90% of
their overall direct costs.
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The proposed amendments may generate benefits to the public as they
may also encourage members to communicate additional valuable
information to investors. For example, the elimination of the costs
associated with the filing requirement for generic, educational
communications regarding investment companies may encourage members to
provide more frequent and timely information to investors. Similarly,
the changes to the template exclusion from the filing requirement for
investment company communications may enable members to provide
investors with more timely explanations of market events as well as
changes in a fund's portfolio, particularly for those firms that
voluntarily file all retail communications prior to use and wait to
receive the staff's response letter before distributing retail
communications (instead of filing retail communications within 10 days
of first use as required). Under the expanded filing exception for
templates, it is likely that these firms may distribute the updated
communications without choosing to file them, thus allowing them to
communicate with investors sooner.
ii. Anticipated Costs
Members that are subject to the filing, content and disclosure
requirements in this proposal would likely incur costs associated with
updating their policies and procedures. These costs would include
training their advertising review and other staff associated with
communications with the public. Members may also need to make updates
to systems to reflect changes in the filing requirements. FINRA,
however, anticipates that these costs would likely be minimal relative
to the cost savings from the proposed amendments. FINRA would also
incur costs associated with updating its Advertising Regulation
Electronic Files (AREF) system as well as training the relevant staff
on the amendments in the proposal.
iii. Other Economic Impacts
FINRA also considered the potential negative impacts of the
proposed amendments to investors. FINRA believes that the proposed
exclusions and streamlining of filing requirements would not diminish
investor protection because the applicable communications pose little
risk to investors. For example, investment company shareholder reports,
generic investment company retail communications, and non-predictive
narrative descriptions about market events in report templates
generally are low-risk communications in FINRA's view.
Some members choose to file some mutual fund advertising materials
on a voluntary basis. Members that choose to do so base their decision
on business needs and not FINRA requirements. The proposed rule change
would not limit the ability of members to continue to make voluntary
filings if they should deem them to be valuable.
4. Alternatives
In considering how to best meet its regulatory objectives, FINRA
considered alternatives to particular features of this proposal. For
example, FINRA considered narrowing the new member filing requirement
to cover only public Web sites since new members primarily reach out to
their existing and potential customers by developing Web sites. As
discussed in more detail below, PIABA raised concerns about potential
investor harm if FINRA only reviews new members' Web sites without
reviewing other types of public media advertising, such as television
and radio commercials and newspaper advertisement. FINRA reviewed the
communications filing history and its comments on the communications
filed by new members and found that a higher proportion of new member
communications require revisions to be compliant with the applicable
standards, compared to all filed communications. As a result, to
maintain the same level of investor protection, FINRA has determined
not to narrow the new member filing requirement to public Web sites.
[[Page 39086]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Background
In May 2015, FINRA published Regulatory Notice 15-16 (the
``Notice''), requesting comment on proposed amendments that would
revise the filing requirements in FINRA Rule 2210 and FINRA Rule 2214
and the content and disclosure requirements in FINRA Rule 2213 (the
``Notice proposal''). A copy of the Notice is attached as Exhibit 2a.
The comment period expired on July 2, 2015. FINRA received 11 comments
in response to the Notice. All but one commenter supported the
proposal. A list of the commenters in response to the Notice is
attached as Exhibit 2b, and copies of the comment letters received in
response to the Notice are attached as Exhibit 2c.\24\ A summary of the
comments and FINRA's response is provided below.
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\24\ See Exhibit 2b for a list of abbreviations assigned to
commenters.
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Continuation of Retrospective Review
While many comments supported the proposal, some commenters
recommended that FINRA continue its retrospective review of the
communications rules to address other issues. Commenters urged FINRA to
update the rules governing social media, mobile devices and electronic
communications,\25\ performance advertising,\26\ the amount of
disclosure required in print advertising,\27\ the content standards
under FINRA Rule 2210(d),\28\ and options communications.\29\
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\25\ See CAI, Fidelity, SIFMA, TD Ameritrade, and Vanguard.
\26\ See TD Ameritrade.
\27\ See Fidelity and TD Ameritrade.
\28\ See FSI.
\29\ See TD Ameritrade.
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Commenters also recommended that FINRA harmonize the differences
between its communications rules and SEC rules governing investment
adviser communications, particularly with respect to rules governing
projections and performance information,\30\ and that FINRA update its
electronic filing system to allow members to file materials in other
than PDF format.\31\ Wells Fargo suggested that FINRA clarify what
constitutes a ``public appearance'' under Rule 2210(f)(3). The ICI
urged FINRA to codify clear disclosure standards for retail
communications concerning closed-end funds and eliminate the filing
requirement for these communications. The CAI recommended that FINRA
take a more risk-based approach of differentiating communications that
should be filed and reviewed, and those that should not.
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\30\ See Fidelity and Wells Fargo.
\31\ See CAI.
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While FINRA states that it appreciates these recommendations, FINRA
does not believe it is necessary to address all of these issues as part
of this proposed rule change. The amendments that FINRA has proposed in
this filing are only the first step in addressing the results of the
assessment phase of its retrospective review of the communications
rules. FINRA continues to consider additional rule changes related to
the areas raised by commenters and will address those topics as part of
its future proposed rule changes, as appropriate.
New Member Filing Requirement
In addition to changing the filing requirement for new members from
a pre-use to a post-use requirement, the Notice proposal would have
narrowed the types of retail communications subject to this
requirement. Currently new members must file all retail communications
used in electronic or other public media, including radio and
television advertisements, newspaper and magazine ads, and public Web
sites. The Notice proposal would have narrowed the new member filing
requirement to cover only public Web sites.
PIABA urged FINRA not to narrow the current new member filing
requirements. PIABA stated that if FINRA reviews only new members' Web
sites without reviewing other types of public media advertising, such
as television and radio commercials and newspaper advertisements,
investors potentially could be harmed. PIABA also noted that pre-use
filing offers more investor protection than post-use filing, since pre-
use filing allows FINRA staff to review communications prior to their
distribution.
While the deficiencies noted by FINRA staff on new members' filed
communications are still relatively low, the staff does find that a
higher percentage of new members' communications require revisions to
be compliant with applicable standards as compared with all
communications filed with FINRA. Accordingly, FINRA has determined not
to narrow the scope of public media communications required to be filed
by new members.
Nevertheless, FINRA still believes it is appropriate to allow new
members to file these communications on a post-use rather than a pre-
use basis. In this regard, a post-use filing requirement allows new
members to create and alter their public media communications in a
timely manner (such as a change to a new member's Web site) without the
need to wait for FINRA staff review before doing so. In addition, new
members still would be required to approve public media communications
prior to use, and such communications would remain subject to the
communications rules' content standards. FINRA believes this revision
appropriately balances the need to protect investors with making its
communications rules less burdensome and resource-consuming for
members.
Filing Exclusion for Shareholder Reports
FINRA currently requires members to file the MDFP portion of
registered investment company shareholder reports. The Notice proposal
would have amended FINRA Rule 2210(c)(7)(F) to exclude from filing
annual and semi-annual shareholder reports that have been filed with
the SEC.
Two commenters supported this proposed change on the ground that
members are already required to file these reports with the SEC, and
filing the MDFP with FINRA is therefore redundant and unnecessary.\32\
The ICI noted that the proposed exclusion is somewhat ambiguous, since
it appears to apply only if the report has been filed with the SEC
prior to or perhaps contemporaneously with making the report available
to prospective investors. The ICI noted that SEC rules require funds to
file their reports with the SEC ``not later than 10 days after the
transmission to stockholders.'' \33\
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\32\ See ICI and Vanguard.
\33\ See Investment Company Act Rule 30b2-1(a).
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PIABA opposed this change. PIABA asserted that SEC staff rarely
reviews shareholder reports filed with the SEC given the volume of
filings it receives on a daily basis, and that therefore FINRA should
continue to require the MDFP to be filed and reviewed by FINRA staff.
FINRA agrees that this proposed change would not require members to
file fund shareholder reports prior to or contemporaneously with making
the reports available to prospective investors, as long as the reports
are filed in compliance with SEC rule requirements. To clarify this
intent, FINRA is modifying the proposed amendment to Rule 2210(c)(7)(F)
to specify that such reports must be filed with the SEC ``in compliance
with applicable requirements.''
FINRA has found through its filing program that the MDFPs in
shareholder reports rarely have raised issues
[[Page 39087]]
requiring members to revise or withdraw reports from circulation. FINRA
also notes that, while the SEC may not review all securities-related
filings contemporaneous with their submission, the staff can review
higher risk communications as needed. FINRA believes that removing this
filing requirement would not harm investors and would allow FINRA to
allocate its staff resources more efficiently to focus on reviewing
higher risk communications more expeditiously.
Backup Ranking Data
The Notice proposal would have eliminated the current requirement
to include a copy of an investment company performance ranking or
comparison used in any retail communication that contains such a
ranking or comparison. TD Ameritrade supported the elimination of this
requirement given that this information typically is available online.
PIABA opposed this change, apparently believing that it would
completely eliminate the requirement to file retail communications that
contain performance rankings or comparisons, rather than merely
eliminating the requirement to file the backup data.
FINRA continues to believe this change is appropriate and will
relieve members of the additional burden of having to file backup
ranking data, given the online availability of such data. The proposal
will not eliminate the requirement to file retail communications that
contain performance rankings or comparisons. In addition, the proposal
would require members to maintain the backup materials for inspection.
Accordingly, FINRA believes PIABA's concerns are misplaced.
Generic Investment Company Communications
Commenters generally supported the proposal to revise the filing
requirement for retail communications concerning registered investment
companies to cover only those communications that promote or recommend
a specific registered investment company or family of registered
investment companies.\34\
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\34\ See CAI, TD Ameritrade, and Vanguard.
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The CAI had a number of recommendations for changes and
clarifications. First, it asked FINRA to confirm that the mere mention
of the name of an investment company does not necessarily constitute
the promotion or recommendation of the investment company, and that
this determination needs to be made based on the full context of the
communication. Second, it requested that FINRA clarify that the
proposed change would exclude from filing generic retail communications
concerning variable annuity contracts that do not promote or recommend
a particular contract.
Third, it noted that this proposed change might have the unintended
effect of increasing compliance costs for members, since members that
create generic investment company communications would no longer file
them, and thus other members that use these communications would no
longer be able to rely on the principal approval exception contained in
FINRA Rule 2210(b)(1)(C).\35\ The CAI recommended that FINRA revise
Rule 2210(b)(1)(C) to create an exception from the principal approval
requirements for generic retail communications created by a third
party, even if the third party has not filed it with FINRA. The CAI
also suggested that FINRA consider creating a principal approval
exception for any third-party communication that is reviewed and
approved by another member.
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\35\ Rule 2210(b)(1)(C) provides that the principal approval
requirements do not apply to a retail communication if (i) another
member has filed it with FINRA and received a letter from FINRA
stating that it appears consistent with applicable standards, and
(ii) the member using it in reliance upon this exception has not
materially altered it and will not use it in a manner inconsistent
with the conditions contained in the FINRA review letter.
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The IPA recommended that FINRA create a similar filing exclusion
for retail communications concerning unlisted real estate investment
trusts (REITs) and direct participation programs (DPPs) that do not
promote or recommend a particular product.
The determination of whether a retail communication promotes or
recommends a specific registered investment company or family of
investment companies will always be a facts-and-circumstances analysis.
Accordingly, FINRA does not believe it would be productive to speculate
whether particular types of retail communications that mention the name
of a specific investment company would have to be filed.
The filing requirement for retail communications concerning
registered investment companies applies to communications concerning
mutual funds, exchange-traded funds, variable insurance products,
closed-end funds, and unit investment trusts.\36\ Accordingly, by its
terms, this filing requirement would not apply to a retail
communication concerning a variable annuity contract unless it promoted
or recommended a specific contract or family of such contracts (e.g., a
retail communication concerning variable contracts that promoted or
recommended a specific insurance company).
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\36\ See FINRA Rule 2210(c)(3)(A).
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FINRA declines to revise the exception from the principal approval
requirements for retail communications under FINRA Rule 2210(b)(1)(C).
Part of the reason for this exception is that communications covered by
this provision must have been filed with FINRA and received a letter
stating that the communication appears consistent with applicable
standards. FINRA does not believe an exception that excludes this
filing requirement would offer the same level of investor protection.
FINRA also declines to create another filing exclusion for generic
retail communications concerning REITs or DPPs. A filing exclusion for
retail communications concerning REITs is unnecessary in FINRA's view,
since FINRA Rule 2210 currently does not require retail communications
concerning REITs to be filed. FINRA believes that DPPs often are more
complex and less familiar to retail investors than registered
investment companies; accordingly FINRA believes that a filing
requirement for generic retail communications concerning DPPs still
makes sense in light of the investor protection offered by this
requirement.
Investment Analysis Tools
TD Ameritrade supported the proposed elimination of the current
filing requirement for report templates and retail communications
concerning investment analysis tools. However, it recommended that
FINRA also eliminate the disclosure requirements in FINRA Rule 2214(c)
for retail communications that promote investment analysis tools.\37\
TD Ameritrade also stated that FINRA staff has inappropriately applied
Rule 2214 to retirement planning calculators.
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\37\ FINRA Rule 2214(c) requires written reports generated by
investment analysis tools and related retail communications to: (1)
Describe the criteria and methodology used, including the tool's
limitations and key assumptions; (2) explain that results may vary
with each use and over time; (3) if applicable, describe the
universe of investments considered in the analysis, explain how the
tool determines which securities to select, disclose if the tool
favors certain securities and, if so, explain the reason for the
selectivity, and state that other investments not considered may
have characteristics similar or superior to those being analyzed;
and (4) display a specific legend regarding the hypothetical nature
of the projections created by the tool.
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FINRA does not believe it is necessary to revise Rule 2214(c) as
suggested. Rule 2214.06 already provides that a retail communication
that contains only an
[[Page 39088]]
incidental reference to an investment analysis tool need not include
the disclosures required by Rule 2214(c). In addition, Rule 2214.06
provides that if a retail communication refers to an investment
analysis tool in more detail but does not provide access to the tool or
the results generated by the tool, the retail communication may exclude
some of the disclosures required by Rule 2214(c). FINRA believes this
provision already provides appropriate flexibility and regulatory
relief for retail communications concerning investment analysis tools.
As for the comment that FINRA staff has inappropriately applied
current Rule 2214 to retirement planning calculators, FINRA believes
that these concerns are best addressed through discussions with FINRA
staff rather than through a proposed change to Rule 2214.
Template Filing Exclusion
Multiple commenters supported the proposed change to the current
filing exclusion for templates contained in FINRA Rule 2210(c)(7)(B),
which currently does not require a member to file a retail
communication that is based on a template that was previously filed
with FINRA and where the changes are limited to updates of more recent
statistical and other non-narrative information.\38\ The Notice
proposal would have allowed a member that had previously filed a retail
communication template also to update non-predictive narrative
information that describes market events during the period covered by
the communication or factual changes in portfolio composition.
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\38\ See CAI, ICI, and TD Ameritrade.
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The CAI recommended that FINRA allow members to make non-material
changes to narrative disclosures, as well as updates to non-predictive
descriptions of market events and market commentary. Two other
commenters recommended that the filing exclusion for templates be
revised to allow members to include other non-predictive narrative
information, provided that it comes from either an independent data
provider or is sourced from an investment company's regulatory
documents filed with the SEC.\39\
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\39\ See Fidelity and ICI. The ICI suggested that this revision
only cover data received from ``ranking entities'' as that term is
defined in FINRA Rule 2212, rather than any third-party data
provider.
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PIABA opposed the proposed change to the template filing exclusion,
arguing that funds sometimes write misleading descriptions of market
events to explain losses in a fund's net asset value. PIABA gave as an
example of this practice a 2007 FINRA enforcement action involving a
fund fact sheet.
FINRA Rule 2210(c)(7)(A) already contains a filing exclusion for
retail communications that previously were filed with FINRA and that
are used without material change. Accordingly, FINRA does not believe
it is necessary to revise the proposed change to Rule 2210(c)(7)(B) to
allow non-material changes.
FINRA agrees that it makes little sense for members to refile
previously filed templates if the only changes to the template are
sourced from an investment company's regulatory documents filed with
the SEC. For example, if a fund alters the description of its
investment objectives in its prospectus and files these changes with
the SEC, and a member wants to make a corresponding change to a
previously filed fact sheet concerning the fund, there is little need
to file such an update with FINRA.
Accordingly, FINRA is revising its proposed changes to the template
filing exclusion also to cover updated information that is sourced from
an investment company's regulatory documents filed with the SEC. FINRA
declines to expand this filing exclusion also to cover any information
that comes from an independent data provider regardless of its source,
as that information is not subject to the same level of regulatory
scrutiny as information in documents required by SEC rules. Therefore,
if a narrative change to a template is not sourced from SEC filings,
FINRA believes that such changes should require the member to refile
the template, even if this information comes from an independent third-
party data provider.
FINRA recognizes that it is always possible that a member will use
this filing exclusion to include non-predictive narrative information
that is misleading in nature. Nevertheless, FINRA has found over the
years from reviewing thousands of template updates that non-predictive
narrative information concerning market events or portfolio composition
has rarely generated comments from the staff and generally has been
low-risk in nature. Based on this experience, FINRA believes the
proposed changes to the template filing exclusion will improve staff
efficiency without sacrificing investor protection. Moreover, any
updates to templates remain subject to Rule 2210's content standards.
Accordingly, if a member did prepare a misleading update to a template,
FINRA could still reach that conduct and bring an action for violation
of the communications with the public rules.
Bond Fund Volatility Ratings
PIABA urged FINRA not to modify Rule 2213's requirements applicable
to retail communications that include a bond mutual fund volatility
rating. PIABA argued that past FINRA enforcement actions involving the
sale of bond funds demonstrate that bond funds should be more highly
regulated.
FINRA disagrees with this comment. The proposed changes to Rule
2213 will not eliminate the filing requirement for any retail
communication concerning bond funds, regardless of whether such filing
includes a volatility rating. Even with the changes, members will still
be required to file retail communications that contain a bond fund
volatility rating within 10 business days of first use. Moreover, as
revised, Rule 2213 would still require members to include many
disclosures concerning the risks and limitations of such ratings.
Accordingly, FINRA believes that revised Rule 2213 still would offer
ample protection to investors and involve FINRA staff review of such
communications.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove 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 email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2016-018 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 39089]]
Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2016-018. 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 (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 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
10:00 a.m. and 3:00 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-2016-018 and should be
submitted on or before July 6, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14084 Filed 6-14-16; 8:45 am]
BILLING CODE 8011-01-P
