Prohibited Content in Customer Communications for Series 6 Exam

7.2.2 Prohibited Content

In the realm of securities and investment communication, ensuring that all content is compliant with regulatory standards is paramount. The Financial Industry Regulatory Authority (FINRA) has established specific rules to safeguard investors from misleading or deceptive information. This section delves into the types of content that are prohibited under FINRA Rule 2210(d), focusing on the importance of maintaining integrity and transparency in all client communications.

Understanding Prohibited Content

The foundation of ethical communication in the securities industry is built upon honesty and clarity. FINRA Rule 2210(d) outlines several categories of content that are explicitly prohibited in communications with the public, including but not limited to:

False or Misleading Statements

• Definition: Misleading statements are those that can deceive or misinform investors, leading them to make decisions based on incorrect or incomplete information.
• Examples: Claims that a particular investment is “guaranteed to double your money” or “risk-free” are inherently misleading.
• Regulatory Reference: FINRA Rule 2210(d)(1)(B) explicitly prohibits any communication that contains false, exaggerated, unwarranted, or misleading statements or claims.

Promises of Specific Results or Guarantees Against Loss

• Definition: Any statement that promises specific investment results or guarantees against financial loss is prohibited.
• Examples: Assurances such as “you will earn a 10% return annually” or “this investment will never lose value” are not allowed.
• Reasoning: The securities market is inherently uncertain, and such guarantees are not only misleading but also impossible to substantiate.

Unwarranted Claims or Statements

• Definition: Unwarranted claims are those that lack a reasonable basis or are not supported by evidence.
• Examples: Statements like “this is the best investment option available” without any comparative analysis or evidence.
• Impact: These claims can create unrealistic expectations and lead to investor dissatisfaction.

Use of Exaggerated or Flamboyant Language

• Definition: Exaggerated language can include hyperbolic or flamboyant expressions that overstate the benefits or downplay the risks of an investment.
• Examples: Describing an investment opportunity as “once in a lifetime” or “the safest bet you’ll ever make.”
• Regulatory Reference: FINRA Rule 2210(d)(1)(A) requires that all communications be fair and balanced, avoiding exaggerated claims.

Avoidance of Testimonials

Testimonials can be a powerful tool in marketing; however, their use in the securities industry is heavily regulated:

• Disclosure Requirements: If testimonials are used, they must meet specific disclosure requirements, including the fact that the testimonial may not be representative of the experience of other customers and that it is not a guarantee of future performance.
• Potential Issues: Testimonials can create a misleading impression if they suggest that the experience of one investor is typical or guaranteed for others.
• Compliance: Firms must ensure that any use of testimonials is accompanied by appropriate disclosures to avoid misleading potential investors.

Compliance Checks and Procedures

To prevent the dissemination of prohibited content, firms must implement robust compliance checks:

• Pre-Approval Processes: All public communications should undergo a compliance review process before dissemination. This includes review by a registered principal to ensure adherence to regulatory standards.
• Regular Training: Employees should receive regular training on compliance standards and the importance of adhering to FINRA rules.
• Monitoring and Auditing: Ongoing monitoring and periodic audits of communications can help identify and correct any non-compliant content.
• Documentation: Maintaining detailed records of all communications and compliance reviews is essential for regulatory audits and investigations.

Glossary

• Misleading Statements: Information that can deceive or misinform investors, leading them to make decisions based on incorrect or incomplete information.

Practical Examples and Case Studies

Case Study 1: Misleading Performance Claims

A brokerage firm published a brochure claiming that its mutual fund had “never lost money” over the past decade. Upon investigation, it was found that the fund had experienced losses during specific periods. This claim was deemed misleading because it presented an incomplete picture of the fund’s performance.

• Outcome: The firm was fined and required to issue a correction to all clients who received the brochure. This case underscores the importance of accurate and complete performance reporting.

Case Study 2: Exaggerated Language in Marketing

An investment advisor used the phrase “guaranteed success” in a social media post promoting a new investment product. This language was flagged during a compliance review for being exaggerated and potentially misleading.

• Resolution: The advisor was required to remove the post and undergo additional training on communication standards.

Real-World Applications and Regulatory Scenarios

• Scenario 1: A firm is preparing a new marketing campaign for a variable annuity product. To ensure compliance, the firm’s compliance officer reviews all promotional materials for prohibited content, focusing on avoiding any language that could be construed as guaranteeing returns or minimizing risks.

• Scenario 2: An advisor is preparing a presentation for a client seminar. They must ensure that all claims about investment performance are backed by data and that any forward-looking statements are clearly identified as such, with appropriate disclaimers.

Best Practices and Common Pitfalls

• Best Practices:

  • Always substantiate claims with data and evidence.
  • Use clear, concise, and balanced language in all communications.
  • Regularly update compliance training to reflect changes in regulatory standards.

• Common Pitfalls:

  • Overlooking the need for compliance review of social media posts.
  • Failing to provide necessary disclosures when using testimonials.
  • Using outdated or incomplete performance data in communications.

Exam Strategies and Tips

• Focus on Understanding FINRA Rule 2210: Familiarize yourself with the specific language and requirements of FINRA Rule 2210(d) as it relates to content standards.
• Practice Identifying Prohibited Content: Use practice questions and scenarios to test your ability to identify prohibited content in sample communications.
• Memorize Key Prohibitions: Use mnemonic devices to remember key prohibitions, such as “No Guarantees, No Misleading, No Exaggeration.”

Summary

Understanding and adhering to the guidelines on prohibited content is crucial for anyone preparing for the Series 6 Exam. By ensuring that all communications are truthful, balanced, and compliant with FINRA Rule 2210(d), you can protect both your clients and your firm from potential regulatory issues. Remember, the key to success in the securities industry is maintaining integrity and transparency in all interactions.

Series 6 Exam Practice Questions: Prohibited Content