Retail Communications: Understanding Compliance and Approval Processes

20.1.1 Retail Communications

In the fast-paced world of securities, effective communication is crucial. Retail communications, which encompass a wide array of materials directed at retail investors, play a significant role in how firms convey information about their products and services. Understanding the regulatory landscape surrounding these communications is essential for any General Securities Representative, especially those preparing for the Series 7 Exam.

Understanding Retail Communications

Retail communications are defined by FINRA as any written (including electronic) communication distributed or made available to more than 25 retail investors within any 30-calendar-day period. This broad category includes advertisements, sales literature, and any other promotional material. Given their public nature, these communications are subject to stringent regulatory standards to ensure they are fair, balanced, and not misleading.

Content Standards and Approval Process

Content Standards

The content of retail communications must adhere to several key standards to ensure that they are not misleading:

1. Fair and Balanced Presentation: Communications must present a fair and balanced view of the potential risks and benefits of an investment. This means that any claims made must be supported by facts, and any potential risks must be clearly disclosed.

2. Clarity and Understandability: The language used should be clear and understandable to the intended audience. Avoiding technical jargon and ensuring that explanations are straightforward is crucial.

3. No False or Misleading Statements: Communications must not contain any false, exaggerated, or misleading statements or claims. This includes ensuring that any comparisons made are fair and not misleading.

4. Prominent Risk Disclosure: Any risks associated with the investment must be prominently disclosed, particularly if the communication discusses the potential for high returns.

5. Use of Testimonials: If testimonials are used, they must be accompanied by a disclaimer stating that the experience may not be representative of other clients and that past performance is not indicative of future results.

Approval Process

Before retail communications can be used, they must undergo a rigorous approval process:

1. Principal Approval: A registered principal must approve all retail communications before they are distributed. This involves a thorough review to ensure compliance with all applicable regulations and standards.

2. Documentation and Recordkeeping: Firms must maintain records of all retail communications, including evidence of principal approval, for a minimum of three years. This documentation should be readily accessible for regulatory review.

3. Periodic Review: Firms should periodically review their retail communications to ensure ongoing compliance with regulatory standards and to update any information that may have changed.

Principal Approval Before Use

The role of the principal in the approval process is critical. Principals are responsible for ensuring that all retail communications comply with FINRA rules and other applicable regulations. This involves:

• Reviewing Content for Accuracy: Ensuring that all statements and claims are accurate and supported by evidence.
• Assessing Risk Disclosures: Verifying that all necessary risk disclosures are included and are prominently displayed.
• Ensuring Compliance with Regulatory Standards: Confirming that the communication adheres to all relevant FINRA and SEC rules, including those related to advertising and sales literature.

Filing Requirements with FINRA

In addition to internal approval, certain retail communications must be filed with FINRA:

1. Pre-Use Filing: Some types of communications, such as those related to investment companies, options, and certain types of structured products, may need to be filed with FINRA at least 10 business days before first use.

2. Post-Use Filing: Other communications may be filed within 10 business days of first use. This typically applies to communications that do not fall into the pre-use filing category.

3. Exemptions: Certain communications, such as those that have been previously filed and approved, may be exempt from additional filing requirements.

4. Filing Fees: FINRA charges a fee for the review of filed communications, which varies based on the type and complexity of the communication.

Crafting Compliant Retail Communications

Creating compliant retail communications requires a thorough understanding of both the content standards and the approval process. Here are some best practices to consider:

• Understand Your Audience: Tailor your communication to the knowledge level and interests of your target audience. This will help ensure that your message is both clear and engaging.

• Focus on Clarity: Use simple language and avoid jargon. Ensure that your message is easy to understand and that key points are highlighted.

• Balance Risks and Benefits: Provide a balanced view of both the potential benefits and risks of the investment. Avoid making exaggerated claims about potential returns.

• Include Necessary Disclosures: Ensure that all required risk disclosures are included and are prominently displayed. This is particularly important for complex products or those with significant risks.

• Review and Revise: Regularly review your communications to ensure they remain compliant with current regulations and reflect any changes in product offerings or market conditions.

• Leverage Technology: Use technology to streamline the approval and filing process. Many firms use automated systems to track communications and ensure they are reviewed and approved in a timely manner.

Practical Examples and Scenarios

Example 1: Mutual Fund Advertisement

Consider an advertisement for a mutual fund that highlights its past performance. To comply with FINRA rules, the advertisement must include:

• A statement that past performance is not indicative of future results.
• A balanced discussion of the fund’s risks, including market volatility and potential loss of principal.
• A clear explanation of any fees or charges associated with the fund.

Example 2: Options Trading Brochure

A brochure promoting options trading must:

• Clearly explain the risks involved, including the potential for significant loss.
• Include a disclaimer that options are not suitable for all investors.
• Provide a link to the Options Disclosure Document (ODD) for more information.

Example 3: Social Media Post

A social media post promoting a new investment opportunity must:

• Be approved by a principal before posting.
• Avoid making exaggerated claims or guarantees about returns.
• Include a link to more detailed information and disclosures.

Real-World Applications and Regulatory Scenarios

In practice, ensuring compliance with retail communication standards involves navigating a complex regulatory landscape. Here are some real-world scenarios to consider:

• Scenario 1: Regulatory Review: A firm receives a request from FINRA to review its retail communications. The firm must provide documentation of principal approval and evidence that all communications comply with regulatory standards.

• Scenario 2: Market Volatility: In response to market volatility, a firm updates its communications to include additional risk disclosures. This requires a review and approval by a principal before the updated communications can be distributed.

• Scenario 3: New Product Launch: A firm launches a new structured product and creates promotional materials. These materials must be filed with FINRA for review before they can be used.

Conclusion

Retail communications are a vital component of the securities industry, serving as a primary means of communicating with retail investors. Understanding the regulatory requirements and approval processes is essential for ensuring that these communications are compliant and effective. By adhering to content standards, obtaining principal approval, and meeting FINRA filing requirements, firms can create communications that are both informative and compliant, ultimately enhancing investor trust and confidence.

Series 7 Exam Practice Questions: Retail Communications

By understanding and applying these principles, you will be well-prepared for the Series 7 Exam and equipped to handle retail communications in your professional career. Remember, the key to success in this area is a thorough understanding of the regulations and a commitment to maintaining high standards of communication with investors.