FINRA Rule 2213

FINRA Rule 2213(a): The Definition of Bond Mutual Fund Volatility Ratings

FINRA Rule 2213(a) defines the foundational term — for purposes of this Rule and any interpretation thereof, the term "bond mutual fund volatility rating" is a description issued by an independent third party relating to the sensitivity of the net asset value of a portfolio of an open-end management investment company that invests in debt securities to changes in market conditions and the general economy, and is based on an evaluation of objective factors, including the credit quality of the fund's individual portfolio holdings, the market price volatility of the portfolio, the fund's performance, and specific risks, such as interest rate risk, prepayment risk, and currency risk.

This definition establishes three foundational characteristics of a qualifying volatility rating. First, it must be issued by an independent third party — the same independence principle this dictionary examined in connection with FINRA Rule 2212's Ranking Entity definition. A volatility assessment created by the fund itself, its underwriter, or an affiliate would not qualify as a bond mutual fund volatility rating under this definition regardless of its methodology.

Second, it must relate to the sensitivity of the net asset value to changes in market conditions and the general economy — confirming that the rating must assess NAV volatility, not credit quality, performance, or other fund characteristics separately from their effect on NAV sensitivity. Third, it must be based on an evaluation of objective factors including the specifically identified categories — credit quality, market price volatility, fund performance, and specific risks such as interest rate risk, prepayment risk, and currency risk.

The enumeration of interest rate risk, prepayment risk, and currency risk as the specifically identified types of specific risks reflects the three primary drivers of bond fund NAV volatility in ordinary market conditions. Interest rate risk — the inverse relationship between interest rates and bond prices, amplified by duration — is the fundamental source of volatility for investment-grade bond funds. Prepayment risk — the risk that mortgage-backed and other callable bond components of a fund's portfolio will be paid off early when interest rates fall, depriving investors of higher-coupon income — is particularly relevant for mortgage-backed securities-focused funds. Currency risk addresses the NAV sensitivity of funds holding non-dollar-denominated bonds to exchange rate movements, relevant for international bond funds. Together, these three categories span the principal risk dimensions that a comprehensive bond fund volatility rating would be expected to address.

FINRA Rule 2213(b): Conditions for Use — The "No Risk Rating" Requirement

FINRA Rule 2213(b) establishes the conditions under which a member or person associated with a member may distribute a retail communication that includes a bond mutual fund volatility rating. The most distinctive condition is that the rating must not identify or describe volatility as a "risk" rating.

This prohibition on "risk rating" language reflects a regulatory determination that the term risk rating carries misleading connotations that could distort investor decision-making. A "volatility rating" describes one specific dimension of a fund's profile — the sensitivity of its NAV to market changes — without comprehensively addressing all risks relevant to the investment. If such a rating were labeled a "risk rating," investors might reasonably (and incorrectly) infer that a low volatility rating means the fund has low overall risk or is low-risk as an investment generally, when in fact a fund with low NAV sensitivity to interest rate changes might still carry significant credit risk, liquidity risk, or other risks not captured by the volatility assessment. FINRA Rule 2213(b)'s prohibition ensures that the rating is characterized accurately — as a volatility assessment, not a comprehensive risk evaluation.

FINRA Rule 2213(c): Required Disclosures — The Current Post-2016 Framework

FINRA Rule 2213(c) establishes the disclosures that must accompany each bond mutual fund volatility rating in a retail communication. The 2016 amendments significantly streamlined these disclosures from the predecessor rule's more extensive requirements, eliminating the prior requirements to include all current volatility ratings that have been issued with respect to the fund, to explain changes from prior ratings, to include ratings within a separate Disclosure Statement, and to accompany the communication with the fund's prospectus.

Under the current post-2016 framework, the following disclosures are required:

(A) The name of the entity that issued the rating. This source-identification requirement enables investors to seek additional information about the rating methodology and to assess the independence and credibility of the rating entity, paralleling FINRA Rule 2212's Ranking Entity name disclosure requirement.

(B) The most current rating and date of the current rating. This currency requirement ensures investors see the rating that reflects the fund's current portfolio characteristics, not a historical rating that may no longer accurately represent the fund's NAV sensitivity profile. The date requirement enables investors to assess how recently the rating was assigned — important because bond fund portfolio composition can change materially between rating assessments.

(C) A link to, or website address for, a website that includes the criteria and methodologies used to determine the rating. This web-reference requirement replaced the prior rule's requirement to describe in detail the criteria and methodologies used to determine the rating, reflecting a recognition that detailed methodology descriptions embedded in retail communications may be unwieldy without meaningfully informing investors, while a web reference provides access to the complete methodology information for investors who wish to review it. This approach parallels the approach modern disclosure frameworks increasingly take — providing an online destination for detailed information rather than requiring all details to be embedded in the communication itself.

(D) A description of the rating in narrative form, containing the following specific disclosures:

(i) A statement that there is no standard method for assigning ratings. This disclosure directly addresses the risk that investors might assume bond mutual fund volatility ratings, like credit ratings from established rating agencies, follow a standardized, universally-accepted methodology. Unlike Moody's or S&P credit ratings (which, while assigned by different agencies, share broadly understood conventions), bond fund volatility ratings are assigned by various entities using differing methodologies. The no-standard-method disclosure prevents investors from treating different entities' ratings as directly comparable.

(ii) Whether consideration was paid in connection with obtaining the issuance of the rating. This paid-consideration disclosure addresses the potential conflict of interest where a fund or its affiliate pays a rating entity to assign or review a volatility rating. As with FINRA Rule 2212's corresponding fee waiver disclosure, this provision ensures investors are aware of any financial relationship between the fund and the rating entity that might bear on the rating's independence, even if that relationship does not disqualify the entity from providing a rating under FINRA Rule 2213's definition (which requires only independence from the fund, not an absence of any compensation arrangement).

(iii) A description of the types of risks the rating measures (e.g., short-term volatility). This risk-types description ensures investors understand precisely what dimension of risk the rating addresses — short-term NAV volatility, long-term volatility, or some other specific measure — preventing over-generalization of the rating's significance. The e.g., short-term volatility example in the rule text confirms that a volatility rating may address a specific timeframe's volatility rather than a comprehensive all-period assessment, with investors needing to understand that distinction to interpret the rating correctly.

(iv) A statement that there is no guarantee that the fund will continue to have the same rating or perform in the future as rated. This forward-looking disclaimer parallels the no-guarantee disclosure FINRA Rule 2212 requires for investment company performance rankings, confirming that a current volatility rating is a snapshot of the fund's current portfolio characteristics and not a guarantee of future portfolio stability or performance.

The 2016 Amendments: From Burdensome to Workable

The 2016 amendments to FINRA Rule 2213 — driven by FINRA's retrospective review finding that firms had rarely, if ever, filed communications containing bond fund volatility ratings — represent a meaningful regulatory recalibration. The prior rule required: (1) that the rating appear only in supplemental sales literature (not in any retail communication); (2) that such supplemental sales literature accompany or be preceded by the fund's prospectus; (3) that a separate Disclosure Statement contain all required disclosures; (4) that all current volatility ratings from the rating entity be disclosed (not just the most recent); and (5) that explanations of any rating changes be included.

The 2016 amendments eliminated requirements (1) through (5) in their entirety, replacing them with the streamlined current framework under which: (A) bond fund volatility ratings may appear in any retail communication, not just supplemental sales literature; (B) no prospectus accompaniment is required; and (C) the required disclosures are the four specific items in paragraph (c), rather than the more extensive prior disclosure regime.

This streamlining reflects FINRA's determination that the investor protection goals of the rule — ensuring investors understand what a volatility rating measures, who issued it, and its limitations — can be achieved through the streamlined disclosures without imposing the operational burdens that caused firms to simply avoid using volatility ratings altogether. A rule so burdensome that it effectively eliminates the use of potentially valuable investor information does not serve investor protection purposes; the 2016 amendments calibrated the requirements to permit beneficial use while maintaining meaningful disclosure.

Filing Requirements Under FINRA Rule 2210

The 2016 amendments also changed the filing treatment of retail communications containing bond fund volatility ratings. The prior rule required filing at least 10 business days prior to first use, with the communication withheld from publication until FINRA reviewed any specified changes. The 2016 amendments aligned the filing treatment with other retail communications about registered investment companies — specifically, retail communications containing bond fund volatility ratings are now subject to the standard within-10-business-days-of-first-use post-use filing requirement of FINRA Rule 2210(c)(3), rather than the prior pre-use filing requirement.

This shift from pre-use to post-use filing eliminates the delay that the prior filing requirement imposed on firms' ability to publish communications containing volatility ratings. Combined with the elimination of the prospectus accompaniment requirement, this change removes the two most operationally burdensome aspects of the prior rule that the retrospective review identified as causing non-use of volatility ratings.

Connection to FINRA Rules 2210, 2212, 2214, 2215, 2216, and 3110

FINRA Rule 2213 connects directly to FINRA Rule 2210 — as a specific supplement to Rule 2210's general retail communications standards, with any violation of Rule 2213's requirements also constituting a violation of Rule 2210's prohibition on misleading communications, and with Rule 2210's filing framework governing when communications containing bond fund volatility ratings must be filed with the Advertising Regulation Department. It connects to FINRA Rule 2212 — as the immediately preceding product-specific communications rule within the same 2200 subsection, sharing the independence-of-source principle (Ranking Entity for Rule 2212; independent third party for Rule 2213) and the no-guarantee-of-future-performance disclosure theme. It connects to FINRA Rule 2214 — the immediately following product-specific rule addressing investment analysis tools, amended in the same 2016 SR-FINRA-2016-018 filing that amended Rule 2213. It connects to FINRA Rules 2215 and 2216 — the other product-specific communications rules in the 2200 subsection, all addressing specific categories of retail communications where the general Rule 2210 framework is supplemented by product-specific requirements. And it connects to FINRA Rule 3110 — whose supervisory requirements must address the bond fund volatility rating advertising compliance obligations Rule 2213 establishes, with member firms that offer bond mutual funds required to have procedures for reviewing retail communications containing volatility ratings against Rule 2213's current requirements.

Examination Relevance and Key Takeaways

FINRA Rule 2213 is tested on the Series 7 and Series 24 examinations as the bond mutual fund volatility rating requirements framework — appearing explicitly in the Series 7 content outline as a covered rule under the communications and disclosures topic area.

The key points to retain are these: 

FINRA Rule 2213(a) defines a bond mutual fund volatility rating as a description issued by an independent third party relating to the sensitivity of the NAV of an open-end management investment company investing in debt securities to changes in market conditions and the general economy, based on objective factors including credit quality, market price volatility, fund performance, and specific risks such as interest rate risk, prepayment risk, and currency risk; FINRA Rule 2213(b) permits use of such ratings in retail communications provided the rating does not identify or describe volatility as a "risk" rating; FINRA Rule 2213(c) requires four disclosures accompanying each volatility rating — the name of the rating entity, the most current rating and its date, a link to a website with the rating criteria and methodologies, and a narrative description containing four specific statements: that there is no standard method for assigning ratings, whether consideration was paid for the rating, what types of risks the rating measures, and that there is no guarantee the fund will continue to have the same rating or perform as rated; the 2016 amendments eliminated prior requirements including the prospectus accompaniment requirement, the requirement to disclose all current ratings, and the pre-use filing requirement, replacing them with a streamlined framework aligned with other registered investment company retail communications; and the rule was adopted via SR-FINRA-2011-035 and amended via SR-FINRA-2016-018 effective November 2016 per Regulatory Notice 16-41, with selected notices 00-17, 00-23, and 12-29 associated with the rule's history.