Types of Communications in Securities Industry

20.1 Types of Communications

Effective communication is a cornerstone of the securities industry, ensuring that information is accurately conveyed to investors and other stakeholders. The Financial Industry Regulatory Authority (FINRA) categorizes communications into three main types: Retail Communications, Institutional Communications, and Correspondence. Each category is subject to specific regulatory requirements designed to protect investors and maintain the integrity of the financial markets. Understanding these distinctions is crucial for anyone preparing for the Series 7 Exam and pursuing a career as a General Securities Representative.

Retail Communications

Definition: Retail communication refers to any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. Retail investors are defined as any investors who are not institutional investors.

Regulatory Requirements

Retail communications are subject to the most stringent regulatory requirements due to their broad reach and potential impact on a large number of investors. Key regulations include:

• Filing and Approval: Retail communications often require prior approval by a registered principal of the firm. Certain types of retail communications must also be filed with FINRA, either before first use or within 10 days of first use, depending on the content and the firm’s status.

• Content Standards: Retail communications must be fair, balanced, and not misleading. They must provide a sound basis for evaluating the facts regarding any particular security or type of security, industry, or service. Any claims made must be substantiated, and the risks associated with an investment must be clearly disclosed.

• Disclosure Requirements: Retail communications must include all necessary disclosures, such as the potential risks of an investment, fees, and any conflicts of interest.

Examples of Retail Communications

1. Advertisements: These include TV commercials, print ads in newspapers or magazines, and online banner ads promoting investment products or services.

2. Sales Literature: Brochures, newsletters, and research reports distributed to a wide audience fall under this category.

3. Social Media Posts: Public posts on platforms like Facebook, Twitter, or LinkedIn intended to reach a broad audience of retail investors.

Institutional Communications

Definition: Institutional communication is any written (including electronic) communication that is distributed or made available only to institutional investors. Institutional investors include entities such as banks, insurance companies, registered investment companies, and other entities with total assets of at least $50 million.

Regulatory Requirements

Institutional communications are subject to fewer regulatory requirements than retail communications, reflecting the sophistication and resources of institutional investors. However, firms must still ensure that these communications are accurate and not misleading.

• Approval and Review: While institutional communications do not require prior approval by a registered principal, firms must have policies and procedures in place to ensure that these communications comply with applicable standards.

• Content Standards: Like retail communications, institutional communications must be fair and balanced. However, the level of detail and complexity may be higher, given the audience’s expertise.

Examples of Institutional Communications

1. Research Reports: Detailed analysis and recommendations on securities or market conditions intended for institutional clients.

2. Market Updates: Comprehensive updates on market trends, economic forecasts, or investment strategies shared with institutional investors.

3. Private Placement Memoranda: Documents outlining the terms and conditions of a private securities offering, intended for institutional investors.

Correspondence

Definition: Correspondence includes any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period.

Regulatory Requirements

Correspondence is subject to the least stringent regulatory requirements, reflecting its limited distribution. However, firms must still ensure that correspondence is accurate and not misleading.

• Supervision and Review: Correspondence does not require prior approval by a registered principal, but firms must have policies and procedures to supervise and review such communications to ensure compliance with applicable standards.

• Recordkeeping: Firms must maintain records of correspondence, including the content and recipients, for regulatory review if necessary.

Examples of Correspondence

1. Client Emails: Personalized emails sent to individual clients discussing their account or investment strategy.

2. Letters: Written communications sent to a small number of clients, such as account statements or personalized investment recommendations.

3. Direct Messages: Private messages sent through social media platforms to individual clients.

Practical Examples and Scenarios

Scenario 1: Retail Communication Compliance

A financial advisory firm plans to launch a new mutual fund and wants to promote it through a series of advertisements on television and social media. These advertisements must be carefully crafted to comply with FINRA’s retail communication regulations. The firm must ensure that the advertisements provide a balanced view of the fund’s potential benefits and risks. Additionally, the advertisements must be approved by a registered principal and filed with FINRA prior to their first use.

Scenario 2: Institutional Communication Strategy

An investment bank is preparing a detailed research report on the energy sector, which it plans to distribute to its institutional clients. The report includes complex data analysis and investment recommendations. While the report does not require prior approval, the bank must ensure that it adheres to content standards and that its distribution is limited to institutional investors. The bank’s compliance team reviews the report to ensure accuracy and compliance with regulatory standards.

Scenario 3: Correspondence Monitoring

A registered representative at a brokerage firm regularly communicates with a small group of clients via email, providing updates on their portfolios and personalized investment advice. While these emails are considered correspondence and do not require prior approval, the firm has implemented a system to monitor and review the communications to ensure they comply with regulatory requirements. The compliance team periodically reviews a sample of the emails to ensure they are accurate and not misleading.

Best Practices for Communications

• Ensure Accuracy: All communications, regardless of type, must be accurate and not misleading. This includes verifying facts, providing balanced information, and disclosing relevant risks.

• Maintain Records: Firms must keep detailed records of all communications, including the content, distribution, and approval process, to facilitate regulatory review.

• Regular Training: Firms should provide regular training to employees on communication standards and regulatory requirements to ensure compliance.

• Use Technology: Implement technology solutions to monitor and review communications, especially for correspondence and social media interactions.

Common Pitfalls and Challenges

• Overlooking Disclosures: Failing to include necessary disclosures in retail communications can lead to regulatory action. Ensure all communications clearly state any risks, fees, and conflicts of interest.

• Inadequate Supervision: Without proper supervision, correspondence may inadvertently contain misleading or non-compliant information. Implement robust review processes to catch potential issues.

• Misclassification of Communications: Misclassifying a communication type can lead to non-compliance. Ensure that communications are correctly categorized and adhere to the appropriate regulatory requirements.

Conclusion

Understanding the different types of communications and their regulatory requirements is essential for passing the Series 7 Exam and succeeding as a General Securities Representative. By mastering the distinctions between retail communications, institutional communications, and correspondence, you will be better equipped to navigate the regulatory landscape and communicate effectively with clients and stakeholders.

Series 7 Exam Practice Questions: Types of Communications

In this section

• Retail Communications: Understanding Compliance and Approval Processes
  Explore the intricacies of retail communications in the securities industry, focusing on compliance standards, principal approval, and FINRA filing requirements. Learn how to craft compliant communications to meet regulatory standards.
• Institutional Communications: Mastering Series 7 Exam Content
  Explore the intricacies of institutional communications in the securities industry, including definitions, regulations, and compliance tips essential for the Series 7 Exam.
• Correspondence in Securities Communication: Guidelines and Best Practices
  Explore the intricacies of correspondence in securities communication, focusing on the regulatory requirements, best practices, and compliance strategies essential for the Series 7 Exam.