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FINRA’s recommended changes to NASD rule 2210 and 2211

  

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With the integration of social media into business practices, industries have had a hard time categorizing, monitoring and controlling what companies post and how they communicate with the public. It is for this reason that FINRA – the largest independent securities regulator in the U.S. - has recommended changes to its NASD rules 2210 and 2211 as well as the Interpretive Materials that follow rule 2210.

Current NASD rule 2210 divides communication into six specific categories: Advertisement, Sales literature, correspondence, Institutional sales material, Independently prepared reprint, and Public appearance. Under the current rule, members must have a principal approve all advertisements, sales literature and independently prepared reprints prior to use – with certain exceptions[1].

The proposed rule changes would see those six categories merged into three:

• Institutional Communication: this would include “previous institutional sales material under NASD Rule 2211(a)(2): written (including electronic) communications that are distributed or made available only to institutional investors.  “Institutional investor” generally would have the same definition as under NASD Rule 2211.” (Financial Industry Regulatory Authority, Inc., 2011, p. 9)
• Retail Communication: would include “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.  “Retail investor” would include any person other than an institutional investor, regardless of whether the person has an account with the member.” (Financial Industry Regulatory Authority, Inc., 2011, p. 9)  
• Correspondence: would include “any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.” (Financial Industry Regulatory Authority, Inc., 2011, p. 9). This category would not require a principal to approve prior to use communications distributed to 25 or more existing retail customers within a 30 calendar-day period.

Amongst the many changes encompassing these new categories, the one that is drawing the most debate due to its complex nature is the definition of Correspondence. The point of contention by several financial institutions is that the 25-investor cutoff to them is arbitrary. It would be extremely challenging to monitor whether a communication is limited to 25 or fewer prospective customers, given the nature of social media communications.

Fidelity and the ICI suggested a fourth category to include real-time interactive communications made through social media websites and to be supervised similar to correspondences; however, FINRA does not believe a new category would be necessary. Instead, it has decided to modify its method of approval of retail communications, those posted in online interactive electronic forums would be allowed to be supervised in the same manner as correspondence. Participation in these forums comes under the definition of “public appearance” under NASD Rule 2210 and do not require prior approval by a registered principal.

This could be good news for those businesses that are attempting to interact with customers through social media as it simplifies the requirements for communication through sites such as Facebook and Twitter. The dangers of being able to communicate through live forums without prior approval are evident; thus, companies need to constantly monitor compliance with its social media policies. FINRA’s Regulatory Notice 11-39 (August 2011) states that “When feasible, some firms also have chosen to randomly spot check websites to help them monitor compliance with firm policies.”

BrandProtect will closely monitor the development of these proposed Rule Changes.  We will continue to provide news as they unfold. Stay tuned for updates on brand protection and FINRA developments!