FINRA Rule 2215

FINRA Rule 2215 sits within the 2200 Communications and Disclosures subsection of the 2000 Duties and Conflicts rules, immediately following FINRA Rule 2214's Requirements for the Use of Investment Analysis Tools and immediately preceding FINRA Rule 2216's Communications with the Public About Collateralized Mortgage Obligations.

What Security Futures Are

Security futures are standardized contracts for the purchase or sale of a single equity security (a single stock future) or a narrow-based security index — settled by physical delivery or cash settlement on a specified future date. Unlike options on individual securities, which give the holder the right (but not the obligation) to buy or sell, a security futures contract creates an obligation on both the buyer and the seller. Because security futures are based on individual securities or narrow-based indices, they are regulated jointly by both the SEC (under the Exchange Act) and the CFTC (under the Commodity Exchange Act) — a dual-regulatory framework that distinguishes them from broad-based index futures (regulated only by the CFTC) and from individual equity options (regulated only by the SEC).

The Commodity Futures Modernization Act of 2000 (CFMA) authorized security futures trading in the United States beginning in late 2002, ending a long-standing prohibition on such products. FINRA and the NFA jointly developed the security futures risk disclosure statement — a uniform disclosure document required to be delivered to customers at or prior to account approval for security futures trading — reflecting the cooperative regulatory framework the CFMA established for these products. FINRA Rule 2215's communication standards are specifically designed to ensure that retail communications about security futures products accurately reflect both their potential uses and their substantial risks.

FINRA Rule 2215(a): Pre-Use Filing Requirements and Exceptions

FINRA Rule 2215(a)(1) establishes the pre-use filing requirement — as set forth in paragraph (c)(2) of FINRA Rule 2210, a member must submit all retail communications concerning security futures to FINRA's Advertising Regulation Department at least 10 business days prior to first use. This pre-use filing requirement — distinct from the post-use filing approach applicable to most other retail communications — reflects the SEC and CFTC's determination that security futures communications present sufficient investor protection concerns to warrant advance regulatory review before public distribution.

FINRA Rule 2215(a)(2) establishes two exceptions from this pre-use filing requirement. Exception (A) applies to retail communications concerning security futures that are submitted to another self-regulatory organization having comparable standards pertaining to such retail communications — addressing the situation where a member's retail communications are already reviewed by another SRO (such as a national securities exchange) with equivalent standards, such that duplicate FINRA pre-use filing would be redundant. Exception (B) applies to retail communications in which the only reference to security futures is contained in a listing of the services of a member — paralleling the incidental reference exclusion this dictionary encountered in connection with FINRA Rule 2214, where a mere mention of a service in a services listing presents minimal investor confusion risk not warranting the full pre-use filing requirement.

FINRA Rule 2215(b)(1): Communications Used Prior to Delivery of the Risk Disclosure Statement

FINRA Rule 2215(b)(1) establishes the standards applicable to communications used before the customer has received the security futures risk disclosure statement — the joint FINRA/NFA disclosure document required to be delivered at or prior to account approval for security futures trading. Such communications must be limited to general descriptions of security futures if they are to be used without accompanying or preceding the risk disclosure statement.

The specific requirements for pre-disclosure-statement general descriptions are: (i) the communication must be limited to general descriptions of security futures and the member and must not refer to specific security futures products available for purchase or sale; (ii) the text may include a brief description of the general attributes and method of operation of the exchange on which the security futures are traded, including a discussion of how a security future is priced; (iii) the communication may include any statement required by any applicable state law or administrative authority; and (iv) advertising designs and devices — including borders, scrolls, arrows, pointers, multiple and combined logos, unusual typefaces and lettering, attention-getting headlines, and photographs and other graphics — may be used, provided such material is not misleading.

These pre-disclosure-statement constraints are meaningful — they prevent member firms from marketing specific security futures products before a customer has received the comprehensive risk disclosure the FINRA/NFA disclosure statement provides. The rationale parallels the prospectus-delivery-first principles applicable to new securities offerings: retail investors should receive complete risk information before being targeted with specific product marketing.

FINRA Rule 2215(b)(2): Sales Material and Correspondence Standards — The Full Communications Framework

FINRA Rule 2215(b)(2) establishes the comprehensive content standards applicable to all security futures sales material and correspondence — applying to communications used after the customer has received the risk disclosure statement, or accompanying that statement.

Subparagraph (A) establishes the general prohibitions — communications concerning security futures shall not: (i) contain any untrue statement of a material fact or omit to state a material fact necessary to make a statement not misleading; (ii) contain promises of specific results, exaggerated or unwarranted claims, or opinions for which there is no reasonable basis; (iii) contain any statement to the effect that the registration of the security future or any other regulatory approval constitutes a finding by any regulatory authority that the contract is suitable for all investors or that any representations regarding security futures are true and complete; or (iv) fail to include a statement that supporting documentation for any claims — including claims made on behalf of security futures programs or the security futures expertise of salespeople, comparisons, recommendations, statistics, or other technical data — will be supplied upon request.

The requirements of subparagraphs (b)(2)(A)(iii) and (b)(2)(A)(iv) do not apply to institutional communications as defined in FINRA Rule 2210(a)(3) — acknowledging that sophisticated institutional counterparties do not require the same registration-approval clarification or supporting-documentation availability statement that retail investor communications must carry.

Subparagraph (C) establishes the opportunity/risk balance requirement — any statement referring to the potential opportunities or advantages presented by security futures must be balanced by a statement of the corresponding risks. The risk statement must reflect the same degree of specificity as the statement of opportunities, and must avoid broad generalities. This symmetry requirement directly prevents one-sided promotional communications — if a retail communication discusses in specific detail how a security future can be used to gain leveraged long exposure to a specific stock, it must with equal specificity describe the corresponding risk that the same leverage can magnify losses, including the possibility of losing more than the initial margin deposited.

The Performance Projection Exception for Security Futures Communications

FINRA Rule 2215(b) contains a projected performance provision that parallels FINRA Rule 2214's exception to FINRA Rule 2210(d)(1)(F)'s performance projection prohibition. Notwithstanding FINRA Rule 2210(d)(1)(F), security futures communications may contain projected performance figures (including projected annualized rates of return), provided all of the following conditions are satisfied:

(A) All such communications must be accompanied or preceded by the security futures risk disclosure statement. (B) No suggestion of certainty of future performance is made. (C) Parameters relating to such performance figures are clearly established. (D) All relevant costs, including commissions, fees, and interest charges (as applicable) are disclosed and reflected in the projections. (E) Such projections are plausible and are intended as a source of reference or a comparative device to be used in the development of a recommendation. (F) All material assumptions made in such calculations are clearly identified. (G) The risks involved in the proposed transactions are disclosed.

Additionally, where security futures communications portray records or statistics of past performance with respect to specific security futures recommendations or transactions, those records or statistics must: be confined to a specific universe that can be fully isolated and circumscribed and that covers at least a one-year period; include the date of each initial recommendation or transaction, the price and type of transaction, and the specific price and date of the recommendation or transaction; reflect all such recommendations or transactions within the identified universe; and have the performance records or statistics determined to be fairly presenting the status of the recommendations or transactions reported upon and initialed by a qualified supervisor.

These conditions collectively mirror the investor protection objectives this dictionary examined in connection with FINRA Rule 2214's investment analysis tool requirements — ensuring that projected performance figures in security futures communications are accompanied by sufficient context (cost disclosure, assumption disclosure, risk disclosure, and risk disclosure statement delivery) to prevent investors from treating projections as guarantees.

FINRA Rule 2215(b)(3): Security Futures Programs — Cumulative History Disclosure

FINRA Rule 2215(b)(3) addresses communications regarding a security futures program — an investment plan employing the systematic use of one or more security futures strategies. In communications regarding such programs, the cumulative history or unproven nature of the program and its underlying assumptions must be disclosed. This cumulative history / unproven nature disclosure requirement ensures that investors receive an honest assessment of whether a security futures program has a track record or is being presented as an untested strategy, preventing programs from being marketed as if they have established performance records when they do not.

FINRA Rule 2215(d) and (e): Worksheet Uniformity and Recordkeeping

FINRA Rule 2215(d) establishes the worksheet uniformity requirement — standard forms of worksheets (used to calculate potential profits, losses, margin requirements, and similar quantitative analyses for specific security futures strategies) must be uniform within a member. If a member has adopted a standard form of worksheet for a particular security futures strategy, nonstandard worksheets for that strategy may not be used. This uniformity requirement prevents the selective use of customized worksheets designed to present a specific strategy in the most favorable possible light for a particular customer, while standard worksheets would reveal less favorable economics.

FINRA Rule 2215(e) establishes the recordkeeping requirement — communications that portray the performance of past recommendations or actual transactions, and completed worksheets, shall be kept at a place easily accessible to the sales office for the accounts or customers involved. This accessibility requirement ensures that FINRA examination staff and the firm's own supervisors can readily access these records, connecting to FINRA Rule 4511's books and records requirements and FINRA Rule 3110's supervisory obligations applicable to security futures activities.