
[Federal Register Volume 81, Number 181 (Monday, September 19, 2016)]
[Notices]
[Pages 64240-64247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22418]



[[Page 64240]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78823; File No. SR-FINRA-2016-018]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Granting Accelerated Approval of a Proposed Rule Change Amending 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), as Modified by Partial Amendment 
No. 1

September 13, 2016.

I. Introduction

    On May 25, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed 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).
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on June 15, 2016.\3\ The public comment period closed on July 
6, 2016. On July 19, 2016, FINRA extended the time period in which the 
Commission must approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change to September 13, 2016. 
The Commission received five comment letters in response to the 
Notice.\4\ On September 1, 2016, FINRA responded to the comment letters 
received in response to the Notice and filed a partial amendment to the 
proposed rule change (``Partial Amendment No. 1'').\5\
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    \3\ See Exchange Act Release No. 78026 (June 9, 2016), 81 FR 
39081 (June 15, 2016) (``Notice'').
    \4\ See Letters from Hugh Berkson, Public Investors Arbitration 
Bar Association, dated July 5, 2016 (``PIABA Letter''); Alexander C. 
Gavis, Fidelity Investments, dated July 6, 2016 (``Fidelity 
Letter''); Dorothy Donohue, Investment Company Institute, dated July 
6, 2016 (``ICI Letter''); Timothy W. Cameron and Lindsey Weber 
Keljo, Securities Industry and Financial Markets Association, dated 
July 6, 2016 (``SIFMA Letter''); and Erica A. Green, FOLIOfn 
Investments, Inc., dated July 7, 2016 (``FOLIO Letter''). Comment 
letters are available at www.sec.gov.
    \5\ See Letter from Joseph P. Savage, Vice President and 
Counsel, Office of Regulatory Policy, FINRA, to the Commission, 
dated September 1, 2016 (``FINRA Letter''). The FINRA Letter and the 
text of Partial Amendment No. 1 are available on FINRA's Web site at 
http://www.finra.org, at the principal office of FINRA, and at the 
Commission's Public Reference Room; the text of the FINRA letter is 
also available at the Commission's Web site at https://www.sec.gov/comments/sr-finra-2016-018/finra2016018-6.pdf.
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    This order provides notice of filing of Partial Amendment No. 1 and 
approves the proposal, as modified by Partial Amendment No. 1, on an 
accelerated basis.

II. Description of the Proposed Rule Change

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.\6\ 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.
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    \6\ See Retrospective Rule Report, Communications with the 
Public, December 2014.
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    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.

Original Proposal

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.
    In its initial proposal, FINRA stated its belief that 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, but that 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. 
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 stated that such a delay may hinder its ability 
to communicate important information to its existing and prospective 
customers.
    FINRA stated that it believed it could 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 had 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 initially proposed 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.\7\ As explained in more detail below, 
upon consideration of comments received on the proposal, FINRA has 
determined not to amend these requirements at this time, and filed a 
Partial Amendment No. 1 with the Commission to that effect.\8\
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    \7\ 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.
    \8\ See FINRA Letter at 3; see also Partial Amendment No. 1.
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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.\9\ FINRA has

[[Page 64241]]

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.
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    \9\ 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.'').
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    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,\10\ 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.\11\ 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 with FINRA. 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.
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    \10\ See Section 30 of the Investment Company Act of 1940 and 
Rules 30a-1 and 30b1-1 thereunder.
    \11\ 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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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.\12\ 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.\13\
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    \12\ See FINRA Rule 2210(c)(3)(A).
    \13\ See proposed amendments to FINRA Rules 2210(b)(4)(A)(vi) 
and 2210(c)(3)(A).
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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,\14\ 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 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.\15\
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    \14\ See Notice to Members 04-86 (November 2004).
    \15\ See proposed amendments to FINRA Rules 2210(c)(3) and 
2214(a).
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Filing Exclusion for Templates
    Members are not required to file retail communications that are 
based on templates that were previously filed

[[Page 64242]]

with FINRA but changed only to update recent statistical or other non-
narrative information.\16\ 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.
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    \16\ See FINRA Rule 2210(c)(7)(B).
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    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.\17\
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    \17\ See proposed amendments to FINRA Rule 2210(c)(7)(B).
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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.\18\
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    \18\ FINRA Rules 2210(c)(2)(C) and 2213(b) and (c).
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    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,\19\ 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.
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    \19\ See Notice to Members 00-23 (April 2000).
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    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.\20\
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    \20\ 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.
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    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.\21\
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    \21\ 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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    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 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

[[Page 64243]]

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 a 
separate Web site.

Proposed Partial Amendment No. 1

    In response to comments \22\ (discussed below), FINRA has 
determined not to amend its current new member filing requirements, as 
set forth in FINRA Rule 2210(c)(1)(A), at this time. It has therefore 
deleted the proposed changes to FINRA Rule 2210(c)(1)(A). Although 
FINRA believes that it is a close balance between the investor 
protection benefits provided by pre-use review and the burden of 
complying with the existing rule, FINRA believes that it is more 
prudent to defer making the change to post-use filing of new member 
retail communications at this time. FINRA will continue to accumulate 
more data on the frequency and types of revisions required for new 
member retail communications before determining whether to consider any 
changes to this requirement in the future.\23\
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    \22\ See PIABA Letter at 2.
    \23\ See FINRA Letter at 3.
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III. Comment Summary and FINRA's Response

    As noted above, the Commission received five comment letters on the 
proposed rule change \24\ and a response letter from FINRA.\25\ As 
discussed in more detail below, four of the commenters generally 
supported the proposal, but had some suggestions for changes.\26\ One 
commenter opposed the proposal.\27\
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    \24\ See supra note 4.
    \25\ See supra note 5.
    \26\ See Fidelity Letter, FOLIO Letter, ICI Letter, and SIFMA 
Letter.
    \27\ See PIABA Letter.
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Continuation of Retrospective Review

    While two commenters generally supported the proposal, both 
encouraged FINRA to continue its retrospective review of its rules 
governing communications with the public to address other areas.\28\ 
One commenter recommended that FINRA update its rules governing social 
media, mobile devices, and electronic communications, to address the 
amount of disclosure FINRA requires in print advertising, and to 
eliminate to the extent possible differences among the rules governing 
broker-dealer and investment adviser communications, particularly with 
respect to communications containing projections or performance 
information.\29\ Another commenter recommended that FINRA codify a set 
of clear disclosure standards for closed-end fund marketing materials 
and to eliminate the filing requirement for these communications.\30\
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    \28\ See Fidelity Letter and ICI Letter.
    \29\ See Fidelity Letter.
    \30\ See ICI Letter.
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    In its response, FINRA stated that it continues to consider 
additional action on its retrospective review of the communications 
rules, including those raised by commenters on this proposal.\31\
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    \31\ See FINRA Letter at 2.
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New Member Filing Requirements

    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. The initial 
proposal would have modified this requirement to permit new members to 
file these retail communications 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.\32\
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    \32\ The 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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    One commenter strongly opposed the proposed change to the new 
member filing requirement.\33\ The commenter stated that the proposed 
change would eliminate the proactive investor protection that the 
current rule affords customers, and that post-use review of all new 
member retail communications by FINRA will not provide adequate 
investor protection for customers.\34\ The commenter also argued that 
the pre-use filing requirement provides a deterrent effect to potential 
bad actors, and that a post-use filing requirement would embolden new 
members to prepare riskier retail communications.\35\
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    \33\ See PIABA Letter at 1-3.
    \34\ See id. at 2-3.
    \35\ See PIABA Letter at 2-3. As FINRA stated in its response, 
``PIABA also criticized the proposed changes to the new member 
filing requirement based on the apparently mistaken belief that the 
proposal would differentiate its application between new member Web 
sites, and other widely disseminated retail communications.'' See 
FINRA Letter at 3 n.5. FINRA therefore clarified that ``although an 
earlier version of the proposal contained such a distinction, the 
version FINRA filed with the Commission for comment did not.'' Id.
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    Another commenter supported the proposed change to the new member 
filing requirement from a pre-use to a post-use requirement, but argued 
that FINRA should go further and eliminate the filing requirement 
entirely in some circumstances.\36\ This commenter asserted that other 
rules and requirements currently in place are sufficient to offer the 
important investor protections contemplated by the new member filing 
requirement, citing as an example FINRA's new member application 
process pursuant to NASD Rule 1013.\37\ The commenter suggested that 
FINRA impose the filing requirement only on new members that do not 
have compliance or supervisory personnel with at least five years of 
experience directly related to sales practice requirements that would 
be responsible for reviewing and approving the firm's retail 
communications.\38\ Alternatively, the commenter suggested narrowing 
the new member filing requirement to exclude generic retail 
communications and retail

[[Page 64244]]

communications that contain non-predictive narrative descriptions.\39\
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    \36\ See FOLIO Letter at 1-2.
    \37\ See id.
    \38\ See id.
    \39\ See id.
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    In response to the suggestion by one commenter that FINRA eliminate 
the new member filing requirement in certain circumstances and narrow 
it in others, FINRA noted that the current rule already contains a 
mechanism to provide regulatory relief in the kinds of circumstances 
the commenter cited.\40\ FINRA stated in its response that it is 
authorized conditionally or unconditionally to grant an exemption from 
the new member filing requirement for good cause shown.\41\ Thus, if a 
member makes a persuasive case that the new member filing requirement 
should not apply to the firm, such as where the new firm is the 
successor to an existing firm and its compliance personnel have 
demonstrated familiarity with the communications rules, FINRA may 
consider granting an exemption from the filing requirement.\42\ In 
addition, FINRA noted that even new members are not required to file 
retail communications where those communications do not make a 
financial or investment recommendation or otherwise promote a product 
or service of the member.\43\ Thus, FINRA's view is that truly generic, 
non-promotional retail communications need not be filed under this 
requirement.\44\
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    \40\ See FINRA Letter at 3.
    \41\ See FINRA Rule 2210(c)(9)(A).
    \42\ See FINRA Letter at 3.
    \43\ See id.; see also FINRA Rule 2210(c)(7)(C).
    \44\ See FINRA Letter at 3.
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    After considering all of the comments, FINRA stated that it has 
determined not to amend its current new member filing requirements at 
this time.\45\ Although FINRA believes that it is a close balance 
between the investor protection benefits provided by pre-use review and 
the burden of complying with the existing rule, FINRA believes that it 
is more prudent to defer making the change to post-use filing of new 
member retail communications at this time.\46\ FINRA stated that it 
will continue to accumulate more data on the frequency and types of 
revisions required for new member retail communications before 
determining whether to consider any changes to this requirement in the 
future.\47\
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    \45\ See FINRA Letter at 3.
    \46\ See id.
    \47\ See id.
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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. 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.
    Two commenters supported this proposed change.\48\ One commenter 
noted that this exclusion would make FINRA's rule less burdensome on 
asset management firms by eliminating redundant filing 
requirements.\49\ Another commenter opposed this change on the ground 
that Commission staff does not fully review all regulatory filings made 
on the EDGAR system, which is where filings of fund shareholder reports 
are made.\50\
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    \48\ See FINRA Letter at 4.
    \49\ See SIFMA Letter at 2.
    \50\ See PIABA Letter at 4.
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    In its response, FINRA stated that it maintains that the MDFP 
portion of shareholder reports should be excluded from the filing 
requirements.\51\ FINRA stated that it has found through its filing 
program that the MDFPs in shareholder reports rarely have raised issues 
requiring members to revise or withdraw reports from circulation.\52\ 
FINRA acknowledged that Commission staff may not review all securities-
related filings contemporaneous with their submission, but pointed out 
in its response that Commission staff can review higher risk 
communications as needed.\53\ FINRA stated its belief that this change 
would not appreciably impact investor protection and would allow FINRA 
to allocate its staff resources more efficiently to focus on reviewing 
higher risk communications more expeditiously.\54\
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    \51\ See FINRA Letter at 4.
    \52\ See id.
    \53\ See id.
    \54\ See id.
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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.
    Two commenters supported this proposed change.\55\ However, one 
commenter requested that FINRA clarify how this filing exclusion 
interrelates with Securities Act Rule 482.\56\ In response to this 
request, FINRA stated in its response that it intends the registered 
investment company filing requirement to apply to any retail 
communication that is governed by either Securities Act Rule 482 or 
Investment Company Act Rule 34b-1, or that otherwise promotes or 
recommends a specific registered investment company or family of 
registered investment companies.\57\ To the extent that a retail 
communication qualifies as a generic investment company advertisement 
under Securities Act Rule 135a, FINRA stated that a member would not be 
required to file the retail communication.\58\
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    \55\ See FOLIO Letter at 3; see also SIFMA Letter at 3.
    \56\ See SIFMA Letter at 3.
    \57\ See FINRA Letter at 4-5.
    \58\ See FINRA Letter at 5.
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Filing Exclusion for Templates

    Under current rules, 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.\59\ 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 narrative 
information contained in the prior filing.
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    \59\ See FINRA Rule 2210(c)(7)(B).
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    FINRA's proposal would expand the template filing exclusion also to 
allow members to include updated, non-predictive narrative descriptions 
of market events that occurred during the period covered by the 
communication and factual descriptions of portfolio changes without 
having to re-file the template. Similarly, a template could include 
information that is sourced from a registered investment company's 
regulatory documents filed with the Commission without triggering a 
requirement to re-file.
    Two commenters supported this proposed change, but recommended 
amending the proposal.\60\ One of these commenters recommended that the 
exclusion cover any non-predictive narrative information that comes 
from either an independent data provider or is sourced from an 
investment company's regulatory documents filed

[[Page 64245]]

with the Commission.\61\ This commenter recommended that, at the very 
least, this filing exclusion cover non-predictive narrative information 
that is (1) purchased or licensed directly from a third-party data 
provider, and (2) sourced from a Commission document.\62\
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    \60\ See Fidelity Letter at 2-3; see also ICI Letter at 3-4.
    \61\ See Fidelity Letter at 2-3.
    \62\ See id. at 2.
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    The second commenter recommended that the filing exclusion cover 
modifications limited to narrative factual changes provided by any 
``ranking entity,'' as such term is defined in FINRA Rule 2212(a).\63\ 
The commenter also recommended that FINRA broaden the reference to 
``non-predictive narrative information that describes market events'' 
to expressly permit commentary.\64\ Finally, the commenter argued that 
otherwise the proposal could be unduly narrow and difficult for members 
to apply.\65\
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    \63\ See ICI Letter at 3.
    \64\ See id. at 4.
    \65\ See id.
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    One commenter opposed this change entirely, arguing that FINRA 
should review any narrative descriptions included in retail 
communications for misleading information.\66\ The commenter cited 
several recent FINRA enforcement cases involving misleading retail 
communications as grounds for maintaining FINRA's current template 
filing exclusion.\67\
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    \66\ See PIABA Letter at 4-5.
    \67\ See id.
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    In its response, FINRA disagreed that Rule 2210 should exclude from 
filing any template updates that are based on any non-predictive 
narrative information that is sourced from an independent data 
provider.\68\ FINRA stated its belief that such a standard could 
potentially permit inclusion of non-predictive narrative information 
that is intended to promote future sales of a fund, which FINRA 
believes should be re-filed.\69\ However, FINRA stated if a member 
updates a template based on information that is sourced from a 
registered investment company's regulatory documents filed with the 
Commission, the update would qualify for this filing exclusion.\70\ 
FINRA stated that this exclusion would apply even if an independent 
data provider supplies the information that is sourced from the 
Commission filings.\71\
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    \68\ See FINRA Letter at 6.
    \69\ See id.
    \70\ See id.
    \71\ See id.
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    Further, FINRA stated that it does not agree that the template 
filing exclusion should be based on whether narrative factual changes 
are provided by a ranking entity as defined in Rule 2212.\72\ FINRA 
stated its belief that the better test is whether the information is 
sourced from Commission filings, rather than basing it on the 
provider's business model.\73\
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    \72\ See id.
    \73\ See id.
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    FINRA stated that it does not agree that the template filing 
exclusion also should cover commentary.\74\ As one commenter 
acknowledged, commentary often includes forward looking statements 
about the market or a particular fund.\75\ Accordingly, FINRA believes 
these kinds of narrative updates should be re-filed.\76\
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    \74\ See id.
    \75\ See ICI Letter at 4 n.10.
    \76\ See FINRA Letter at 6.
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    Finally, FINRA stated that it does not believe the enforcement 
cases cited by one commenter support its opposition to revising the 
template filing exclusion.\77\ Those cases did not involve updates of 
templates, but rather instead involved misleading marketing materials 
that members would continue to be required to file even after the 
proposed change to the template filing exclusion.\78\ FINRA noted that 
its members are already required to file mutual fund retail 
communications, and to the extent a member is using a retail 
communication that becomes misleading due to changes in market 
conditions, the member must either cease using the communication or 
revise the communication to make it accurate.\79\ If the revision 
constitutes a material change to the retail communication, the member 
must re-file it.\80\
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    \77\ See FINRA Letter at 6.
    \78\ See id.
    \79\ See id.
    \80\ See FINRA Rule 2210(c)(7)(A).
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    Moreover, FINRA noted, the FINRA Rule 2210 content standards apply 
regardless of whether a member re-files a retail communication with 
FINRA.\81\ FINRA believes existing standards, even after this change to 
the template filing exclusion, strongly protect retail investors from 
receiving potentially misleading communications.\82\ Accordingly, FINRA 
stated that it is not revising its proposed changes to the template 
filing exclusion.\83\
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    \81\ See FINRA Letter at 6.
    \82\ See id.
    \83\ See id.
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Bond 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 a bond mutual fund's portfolio to 
changes in market conditions and the general economy, subject to a 
number of requirements. These requirements include that the 
communication be accompanied or preceded by the fund's prospectus, that 
it be filed at least 10 business days prior to use with FINRA, and that 
it include a number of disclosures. FINRA has proposed to revise these 
requirements by no longer requiring such communications to be 
accompanied or preceded by a fund prospectus, by allowing members to 
file such communications within 10 business days of first use rather 
than 10 days prior to use, and by streamlining some of the content 
standards and required disclosures.
    One commenter opposed these changes on the ground that recent 
enforcement actions involving the sale of bond funds demonstrate that 
bond funds should be highly regulated.\84\ FINRA responded that 
although it agrees that bond funds and members' sales of such funds 
should be effectively regulated, it disagrees that the proposed changes 
would undermine this goal.\85\ FINRA noted that the commenter did not 
allege that any of its cited cases involved communications that 
included bond fund volatility ratings, and additionally pointed out 
that FINRA has not brought any enforcement actions involving violations 
of FINRA Rule 2213.\86\
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    \84\ See PIABA Letter at 5-6.
    \85\ See FINRA Letter at 7.
    \86\ See FINRA Letter at 7.
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    In addition, FINRA stated that the proposed changes would not alter 
a FINRA member's obligation to file retail communications concerning 
bond mutual funds.\87\ FINRA stated that the only filing change would 
be that retail communications that included a bond fund volatility 
rating would have to be filed within 10 business days of first use, 
similar to any other retail communication concerning a specific fund or 
fund family, rather than at least 10 business days prior to use.\88\ 
Finally, FINRA stated that Rule 2213 also would continue to impose 
content and disclosure requirements that will provide investors with 
significant information about the meaning and limitations of volatility 
ratings.\89\
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    \87\ See id.
    \88\ See id.
    \89\ See id.
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IV. Discussion and Commission Findings

    After careful review of the proposed rule change, as modified by 
Partial Amendment No. 1, the comment letters,

[[Page 64246]]

and FINRA's response to the comments, the Commission finds that the 
proposal, as modified by Partial Amendment No. 1, is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to a national securities 
association.\90\ Specifically, the Commission finds that the rule 
change is consistent with Section 15A(b)(6) of the Exchange Act,\91\ 
which requires, among other things, that FINRA rules 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.
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    \90\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \91\ 15 U.S.C. 78o-3(b)(6).
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    As stated in the Notice, FINRA believes that the proposal will 
``enhance the efficiency'' of its communications with the public rules 
``with no reduction in investor protection.'' \92\ Specifically, 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.'' \93\ With respect to the proposal for 
amending the new member filing requirements in FINRA Rule 
2210(c)(1)(A), FINRA stated in its response upon consideration of the 
comments that were filed in opposition to the proposal, that ``it is 
more prudent to defer making the change to post-use filing of new 
member retail communications at this time.'' \94\ It therefore filed 
Partial Amendment No. 1 on September 1, 2016, in which it proposed that 
the new member pre-use filing requirements in FINRA Rule 2210(c)(1)(A) 
remain unchanged.\95\
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    \92\ Notice at 39081.
    \93\ Notice at 39084.
    \94\ FINRA Letter at 3.
    \95\ Partial Amendment No. 1.
---------------------------------------------------------------------------

    Taking into consideration the comments and FINRA's response and 
proposed partial amendment, the Commission believes that the proposal 
is consistent with the Exchange Act. The Commission believes that the 
proposal promotes regulatory efficiency by selectively streamlining 
content and disclosure requirements for retail communications without 
undermining strong regulatory protections for investors.
    The Commission further believes that FINRA's response, as discussed 
in more detail above, appropriately addressed commenters' concerns and 
adequately explained its reasons for modifying its proposal to maintain 
the current pre-use filing requirement for new member retail 
communications. The Commission believes that this modification responds 
to one of the primary concerns raised by the commenter opposing the 
proposal on the grounds that changing to a post-use filing requirement 
for new members would not provide adequate investor protection, and 
that a pre-use filing requirement has a deterrent effect on bad 
actors.\96\ As noted above, FINRA plans to continue to ``accumulate 
more data on the frequency and types of revisions required for new 
member retail communications before determining whether to consider any 
changes to this requirement in the future.'' \97\ The Commission 
believes that the approach proposed by FINRA is appropriate and 
designed to protect investors and the public interest, consistent with 
Section 15A(b)(6) of the Exchange Act. For these reasons, the 
Commission finds that the proposed rule change is consistent with the 
Exchange Act and the rules and regulations thereunder.
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    \96\ See PIABA Letter at 2-3.
    \97\ FINRA Letter at 3.
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V. Solicitation of Comments on Partial Amendment No. 1 to the Proposed 
Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, as 
modified by Partial Amendment No. 1, is consistent with the Exchange 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to 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 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the 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 20549-1090, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing will also 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 October 11, 2016.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Partial Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Partial Amendment No. 1, prior to the thirtieth 
day after the date of publication of notice of the amended proposal in 
the Federal Register. The revisions made to the proposal in Partial 
Amendment No. 1 will provide that the current pre-use filing 
requirement for new member retail communications remains unchanged, as 
currently set forth in FINRA Rule 2210(c)(1)(A). As noted above, the 
Commission believes that this modification responds to one of the 
primary concerns raised by the commenter opposing the proposal on the 
grounds that changing to a post-use filing requirement for new members 
would not provide adequate investor protection,\98\ and notes that 
FINRA plans to continue to accumulate more data before determining 
whether to consider any changes to this requirement in the future.\99\
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    \98\ See PIABA Letter at 2-3.
    \99\ See FINRA Letter at 3.
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\100\ to approve the proposed rule change, 
as modified by

[[Page 64247]]

Partial Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VII. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) \101\ of the 
Exchange Act that the proposal (SR-FINRA-2016-018), as modified by 
Partial Amendment No. 1, be and hereby is approved on an accelerated 
basis.
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    \101\ Id.
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    \102\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\102\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22418 Filed 9-16-16; 8:45 am]
 BILLING CODE 8011-01-P


