New Finra Rule 2210 to require filing of retail communications for structured securities

By Emma Trincal

New York, July 3 - The Financial Industry Regulatory Authority's recently released rules on communications introduce changes in the approval, filing and content standards of documents directed to the public that are likely to impact the structured product market, according to legal sources.

The new Finra Rule 2210 will be effective Feb. 3, 2013, according to Finra's regulatory notice 12-29 published in June.

"Broker-dealers should consider carefully the types of materials that they produce and how they use the materials," Anna Pinedo, partner at Morrison & Foerster LLP, told Prospect News in an email. "Assume that Finra will have an opportunity to review all of the materials that they produce, whether or not filed; keep careful records of when they submitted materials to Finra, when they first used a document, and the number of people to whom they sent the document."

The final rules are based on earlier proposals since September 2009 that market participants have reviewed and commented on.

"Now we finally have new rules in place so we can examine their impact on structured products transactions," an industry source said.

Retail communications

Finra simplified its list of communication categories, reducing their number to three from six, according to the notice.

Institutional communications and correspondence existed under the old rules, but Finra introduced a brand new one called "retail communications," which structured product market participants should pay attention to, sources said.

By the new definition, retail communication 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 communications relating to registered structured notes would need to be filed with the Finra advertising department within 10 days of their first use, according to the notice.

"This is a new requirement for structured securities," a lawyer said.

Filing

Prospectuses and similar documents that have been filed with the Securities and Exchange Commission would be exempt from this new filing requirement, according to the new Finra rules.

However, some documents already filed with the SEC would still need to be filed with Finra. Those would include

• Free-writing prospectuses that have been filed with the SEC under SEC Rule 433;

• A variety of materials prepared by structured note underwriters, such as marketing brochures and educational materials.

These filing rules for retail communications only apply to registered securities. Therefore, structured certificates of deposit and unregistered bank notes are exempt.

This is because CDs are bank products, not securities, and therefore not subject to Finra filing rules, the lawyer said.

More noteworthy, according to sources, is the fact that the filing requirements seem to leave aside one underlying asset class.

According to Finra, the new rules on retail communications focus on "any security that is registered under the Securities Act and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency."

"It looks like communications related to rates-linked products are exempt," the industry source said.

Approval, content

Another important aspect of the rules for structured products participants are the supervisory procedures and provisions governing content.

Retail communications need to be approved by an "appropriately qualified registered principal" of a Finra member prior to their use, according to the rules.

"Members must ensure that statements are clear and not misleading in context and provide balanced treatment of risks and potential benefits," Finra said.

"For example, communications must be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield."

In addition, members must consider the "nature" of the audience they are directing their communications to, and they must offer the appropriate details and explanations, according to the rules.

General standards, such as fair and balanced description of products, should apply to all documents, even internal communications such as training or educational materials that are not required to be filed, the lawyer noted.

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