Chapter 11.2

Question 1

General Prohibition - Members may not use investment company rankings in any retail communication other than:

Answer 1

• Rankings created and published by Ranking Entities or
• Rankings created by an investment company or an investment company affiliate but based on the performance measurements of a ranking entity

Question 2

Rankings in retail communications also must conform to the following requirements. Required disclosures include:

Answer 2

• Headlines/Prominent statements: A headline or other prominent statement must not state or imply that an investment company or investment company family is the best performer in a category unless it is actually ranked 1st in the category.
• Required Prominent disclosure: All retail communications containing an investment company ranking must disclose prominently:
  
  • The name of the category
  • The number of investment companies or, if applicable, investment company families, in the category
  • The name of the ranking entity and, if applicable, the fact that the investment company or an affiliate created the category or subcategory
  • The length of the period and its ending date
  • Criteria on which the ranking is based
  • The fact that past performance is no guarantee of future results
  • For investment companies that assess front-end sales loads, whether the ranking takes those loads into account
  • If the ranking is based on total return or the current SEC standardized yield, and fees have been waived or expenses advanced during the period on which the ranking is based, and the waiver or advancement had a material effect on the total return or yield for that period, a statement to that effect
  • The publisher of the ranking data
  • If the ranking consists of a symbol rather than a number, the meaning of the symbol

Question 3

Time Periods for Current Rankings

Answer 3

Any investment company ranking included in a retail communication must be, at a minimum, current to the most recent calendar quarter ended prior to use or submission for publication. If no ranking that meets this requirement is available from the ranking entity, then a member may only use the most current ranking available from the ranking entity unless use of the most current ranking would be misleading, in which case no ranking from the ranking entity may be used.

Question 4

Rankings time periods; use of yield rankings - except for money market mutual funds

Answer 4

• Retail communications may not present any ranking that covers a period of less than one year, unless the ranking is based on yield.
• An investment company ranking based on total return must be accompanied by rankings based on:
  
  • Total return for a 1 year period for investment companies in existence for at least one year
  • Total return for 1 and 5 year periods for investment companies in existence for at least 5 years; and
  • Total return for 1, 5 and 10 year periods for investment companies in existence for at least 10 years supplied by the same ranking entity
• An investment company ranking based on yield may be based only on the current SEC standardized yield and must be accompanied by total return rankings for the time periods specified above.

Question 5

An investment company ranking must be based only on what?

Answer 5

• A published category created by a ranking Entity or
• A category created by an investment company or an investment company affiliate, but based on the performance measurements of a ranking entity.

Question 6

What can’t retail communications use for a category?

Answer 6

A category that is based upon the asset size of an investment company or investment company family, whether or not it has been created by a ranking entity.

Question 7

Multiple Class/Two-tier funds

Answer 7

Investment company rankings for more than 1 class of investment company with the same portfolio must be accompanied by prominent disclosure of the fact that the investment companies or classes have a common portfolio and different expense structures.

Question 8

Investment company families

Answer 8

Retail communications may contain rankings of investment company families, provided that these rankings comply with this Rule.

Question 9

Definition of bond mutual fund volatility Ratings

Answer 9

A description issued by an independent 3rd 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.

Question 10

B/D’s and persons associated with a B/D may use a bond mutual fund volatility rating when the following requirements are satisfied:

Answer 10

• The rating does not identify or describe volatility as a “risk” rating.
• The sales literature incorporates the most recently available rating and reflects information that, at a minimum, is current to the most recently completed calendar quarter ended prior to used
• The criteria and methodology used to determine the rating must be based exclusively on objective, quantifiable factors. The rating and the disclosure statement that accompanies the rating must be clear, concise, and understandable.
• The entity that issued the rating provides detailed disclosure on its rating methodology to investors through a toll-free telephone number, a website, or both

Question 11

A member that offers or intends to offer an investment analysis tool must, within 10 business days of first use:

Answer 11

• Provide FINRA’s advertising regulation department access to the investment analysis tool and,
• File with the department any template for written reports produced by, or retail communications concerning, the tool.

Question 12

Definition of investment analysis tool

Answer 12

An interactive technological tool that produces 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, thereby serving as an additional resource to investors in the evaluation of the potential risks and returns of investment choices.

Question 13

Use of investment analysis tools and related written reports and retail communications

Answer 13

A member may provide an investment analysis tool, written reports indicating the results generated by such tool and related retail communications only if the tool, written report or related retail communication:

• Describes the criteria and methodology used, including the investment analysis tool’s limitations and key assumptions
• Explains that results may vary with each use and over time
• If applicable, describes the universe of investments considered in the analysis, explains how the tool determines which securities to select, discloses if the tool favors certain securities and, if so, explains the reason for the selectivity, and states that other investments not considered may have characteristics similar or superior to those being analyzed; and
• displays the following additional disclosure “Important: The projections or other information generated by [name of investment analysis tool] regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.”
• Firms are required to provide FINRA staff with access to investment analysis tools upon request

Question 14

Product identification about variable life insurance and variable annuities

Answer 14

In order to assure that investors understand exactly what security is being discussed, all communications must clearly describe the product as either a variable life insurance policy or a variable annuity, as applicable. Member firms may use proprietary names in addition to this description. Considering the significant differences between mutual funds and variable products, the presentation must not represent or imply that the product being offered or its underlying account is a mutual fund.

Question 15

Liquidity of variable life insurance and variable annuities

Answer 15

Considering that variable life insurance and variable annuities frequently involve substantial charges and/or tax penalties for early withdrawals, there must be no representation or implication that these are short-term, liquid investments. Presentations regarding liquidity or ease of access to investment values must be balance by clear language describing the negative impact of early redemption. Examples of this negative impact may be the payment of contingent deferred sales loads and tax penalties, and the fact that the investor may receive less than the original invested amount. With respect to variable life insurance, discussions of loans and withdrawals must explain their impact on cash values and death benefits

Question 16

Claims about guarantees on variable life insurance and variable annuities

Answer 16

Insurance companies issuing variable life insurance and variable annuities provide a number of specific guarantees. For example, the insurance company might guarantee a minimum death benefit. The relative safety resulting from such a guarantee must not be overemphasized or exaggerated as it depends on the claims-paying ability of the issuing insurance company. There must be no representation or implication that a guarantee applies to the investment return or principal value of the separate account. It must not be represented or implied that an insurance company’s financial ratings apply to the separate account

Question 17

Fund performance predating inclusion in the variable product

Answer 17

In order to show how an existing fund would have performed had it been an investment option within a variable life insurance policy or variable annuity, communications may contain the fund’s historical performance that predates its inclusion in the policy or annuity. Such performance may only be used provided that no significant changes occurred to the fund at the time or after it became part of the variable product. However, communications may not include the performance of an existing fund for the purpose of promoting investment in a similar, but new, investment option available in a variable contract. The presentation of historical performance must conform to applicable FINRA and SEC standards. Particular attention must be given to including all elements of return and deducting applicable charges and expenses.

Question 18

Product Comparisons of variable life insurance and variable annuities

Answer 18

A comparison of investment products may be used provided the comparison complies with requirements in the rules

Question 19

Use of rankings on variable life insurance and variable annuities

Answer 19

A ranking which reflects the relative performance of the separate account or the underlying investment option may be included in advertisements and sales literature if they comply with the rules

Question 20

Discussions regarding insurance and investment features of variable life insurance

Answer 20

Communications on behalf of single premium variable life insurance may emphasize the investment features of the product provided an adequate explanation of the life insurance features is given. Sales material for other types of variable life insurance must provide a balanced discussion of these features.

Question 21

Hypothetical illustrations of rates of return in variable life insurance sales literature and personalized illustrations

Answer 21

• Hypothetical illustrations using assumed rates of return may be used to demonstrate the way a variable life insurance policy operates
• An illustration may use any combination of assumed investment returns up to and including a gross rate of 12%, provided that one of the returns is a 0% gross rate.
• The illustrations must reflect the maximum(guaranteed) mortality and expense charges associated with the policy for each assumed rate of return
• Preceding any illustration there must be a prominent explanation that the purpose of the illustration is to show how the performance of the underlying investment accounts could affect the policy cash value and death benefit. The explanation must also state that the illustration is hypothetical and may not be used to project or predict investment results.

Question 22

Sales literature which includes hypothetical illustrations

Answer 22

Member firms may provide a personalized illustration which reflects factors relating to the individual customer’s circumstances. A personalized illustration may not contain a rate of return greater than 12% and must follow all of the standards.

Question 23

Is it appropriate to compare a variable life insurance policy with another product?

Answer 23

No