FINRA Communications with the Public: Essential Guidelines for Series 6 Exam Success

2.5.3 Communications with the Public

Understanding the regulations surrounding communications with the public is crucial for anyone preparing for the Series 6 Exam. This section will delve into the definitions, standards, and requirements set forth by the Financial Industry Regulatory Authority (FINRA) under Rule 2210. This rule governs all communications by broker-dealers and registered representatives, ensuring that information disseminated to the public is fair, balanced, and not misleading.

FINRA’s Definitions of Communication Categories

FINRA categorizes communications with the public into three main types: retail communication, correspondence, and institutional communication. Each category has specific rules and requirements that must be adhered to in order to maintain compliance.

Retail Communication

Retail Communication refers to any written (including electronic) communication distributed to more than 25 retail investors within any 30-calendar-day period. Retail investors include any person other than an institutional investor. This category is subject to the most stringent review and approval requirements due to its broad audience. Examples include advertisements, sales literature, and promotional materials.

Correspondence

Correspondence is defined as any written (including electronic) communication distributed to 25 or fewer retail investors within any 30-calendar-day period. This category typically includes personalized emails, letters, or direct messages. While correspondence is subject to fewer pre-approval requirements than retail communication, it must still adhere to content standards and may be subject to spot checks by compliance departments.

Institutional Communication

Institutional Communication is any written (including electronic) communication distributed exclusively to institutional investors, such as banks, insurance companies, or investment companies. These communications are not intended for retail investors and are subject to different standards and review processes. Although institutional communications do not require pre-approval, firms must establish and maintain procedures to ensure compliance with FINRA rules.

Content Standards

FINRA Rule 2210 outlines specific content standards for all types of communications. These standards are designed to protect investors by ensuring that all information is presented fairly and accurately.

Fair and Balanced Information

All communications must be fair and balanced, providing a complete and accurate portrayal of the products and services being offered. This means including both the potential benefits and risks associated with an investment. For example, if a communication highlights the potential returns of a mutual fund, it must also disclose the associated risks, such as market volatility or management fees.

Prohibition of Misleading Statements

Communications must not contain any false, exaggerated, or misleading statements. This includes omitting material facts or using language that could mislead investors about the nature of an investment. For instance, using terms like “guaranteed” or “risk-free” inappropriately can be considered misleading.

Use of Testimonials and Recommendations

When using testimonials or recommendations, firms must ensure that they are not misleading and that they disclose any compensation paid to the person providing the testimonial. Additionally, any past performance data must be accompanied by a disclaimer that past performance is not indicative of future results.

Approval and Recordkeeping Requirements

Compliance with FINRA Rule 2210 involves specific approval and recordkeeping requirements to ensure that all communications are properly reviewed and documented.

Approval Requirements

Retail communications generally require pre-approval by a registered principal before they are distributed. This ensures that all materials meet FINRA’s content standards and do not contain any misleading information. Correspondence and institutional communications do not require pre-approval but must be subject to supervisory review.

Recordkeeping

Firms must maintain records of all communications with the public for a minimum of three years from the date of last use, with the first two years being in an easily accessible location. These records must include the name of the person who prepared the communication, the date it was first used, and evidence of approval by a principal, if applicable.

Practical Examples and Scenarios

To illustrate these concepts, consider the following scenarios:

• Scenario 1: Retail Communication: A broker-dealer creates a brochure advertising a new mutual fund. The brochure is distributed to 50 potential retail clients. This communication must be pre-approved by a registered principal and include balanced information about the fund’s potential returns and risks.

• Scenario 2: Correspondence: An investment advisor sends a personalized email to a client discussing a potential investment opportunity. Since this email is sent to fewer than 25 retail investors, it is classified as correspondence and does not require pre-approval but must comply with content standards.

• Scenario 3: Institutional Communication: A firm prepares a detailed report on market trends for distribution to its institutional clients. While this communication does not require pre-approval, the firm must have procedures in place to ensure compliance with FINRA rules.

Real-World Applications

In practice, ensuring compliance with FINRA’s communication rules involves collaboration between marketing, compliance, and legal teams within a firm. Regular training and updates on regulatory changes are essential to maintain compliance and protect both the firm and its clients.

Best Practices and Common Pitfalls

• Best Practices: Implement a robust review process for all communications, provide regular training for staff on content standards, and maintain detailed records of all communications and approvals.

• Common Pitfalls: Failing to disclose risks, using misleading language, and neglecting to update communications to reflect current information are common issues that can lead to compliance violations.

References and Further Reading

• FINRA Rule 2210: Communications with the Public
• Securities and Exchange Commission (SEC) guidelines on advertising and communications
• Industry publications and compliance newsletters for updates on regulatory changes

By understanding and adhering to these guidelines, you will be well-prepared for the Series 6 Exam and equipped to handle communications with the public in a compliant and professional manner.

Series 6 Exam Practice Questions: Communications with the Public

By mastering the intricacies of communications with the public, you will be better prepared for the Series 6 Exam and equipped to navigate the regulatory landscape of the securities industry effectively.