Approval and Review Procedures for Customer Communications

20.4 Approval and Review Procedures§

In the securities industry, effective communication with customers is paramount. Ensuring that all communications are compliant with regulatory standards is critical for maintaining trust and transparency. This section delves into the approval and review procedures required for customer communications, focusing on principal approval and the process for filing communications with the Financial Industry Regulatory Authority (FINRA).

Understanding Principal Approval§

Principal Approval is a crucial step in the communication process within securities firms. It involves the review and sign-off by a qualified supervisor, often a registered principal, before any communication is disseminated to the public. This procedure ensures that all materials adhere to regulatory standards and do not mislead or misinform investors.

Key Responsibilities of a Principal§

1. Reviewing Content: Principals must thoroughly review all communications to ensure accuracy, completeness, and compliance with regulatory requirements.
2. Ensuring Compliance: They must confirm that the communication complies with FINRA rules, SEC regulations, and any other applicable laws.
3. Approving Dissemination: Once satisfied with the content, the principal provides written approval, allowing the communication to be distributed.

Types of Communications Requiring Principal Approval§

• Retail Communications: Any written or electronic communication distributed to more than 25 retail investors within any 30-day period.
• Institutional Communications: Although generally exempt from prior approval, these should still be reviewed to ensure they meet the firm’s policies.
• Correspondence: Written or electronic communication sent to 25 or fewer retail investors within any 30-day period, which may require review based on firm policy.

The Principal Approval Process§

The process for obtaining principal approval involves several steps, each designed to ensure that communications are clear, fair, and not misleading. Here’s a detailed look at the typical approval workflow:

Step-by-Step Approval Process§

1. Drafting the Communication: The initial step involves creating the communication content, ensuring it aligns with the firm’s objectives and regulatory guidelines.
2. Compliance Review: The draft is reviewed by the compliance team to identify any potential regulatory issues.
3. Principal Review: If the compliance team approves, the communication is then reviewed by a registered principal.
4. Approval or Revision: The principal either approves the communication for dissemination or sends it back for revisions if it does not meet compliance standards.

Filing Communications with FINRA§

Certain types of communications require filing with FINRA, particularly those that are deemed to carry higher risks of misleading investors. Understanding when and how to file these communications is essential for compliance.

Types of Communications That Require FINRA Filing§

• Retail Communications: Particularly those involving investment companies, derivatives, or new products.
• Advertisements: Any promotional material intended for a wide audience.
• Sales Literature: Materials distributed to a targeted audience that discuss specific investment products.

The FINRA Filing Process§

1. Preparation: Ensure the communication is complete and adheres to all regulatory requirements.
2. Filing Submission: Use FINRA’s electronic filing system to submit the communication.
3. Review and Feedback: FINRA reviews the submission and provides feedback or requests for modifications.
4. Final Approval: Once FINRA is satisfied, the communication can be distributed.

Best Practices for Approval and Review§

To streamline the approval and review process, securities firms should adopt the following best practices:

• Maintain Clear Policies: Establish clear, written policies for communication approval and review.
• Regular Training: Conduct regular training sessions for staff to keep them updated on regulatory changes and compliance requirements.
• Use Checklists: Implement checklists to ensure all communications meet the necessary standards before submission for approval.
• Document Everything: Keep detailed records of all communications, approvals, and any revisions made.

Common Pitfalls and How to Avoid Them§

Despite best efforts, firms can encounter challenges in the approval and review process. Here are some common pitfalls and strategies to overcome them:

• Incomplete Reviews: Ensure that all communications undergo a thorough review by both compliance and principal staff to avoid incomplete assessments.
• Miscommunication: Foster open communication between compliance, principals, and marketing teams to ensure everyone is aligned on expectations.
• Inadequate Documentation: Maintain comprehensive records of all communications and approvals to provide a clear audit trail.

Case Studies and Real-World Applications§

Case Study 1: Misleading Advertisement

A firm released an advertisement without proper principal approval, leading to regulatory action due to misleading claims about investment returns. This highlights the importance of thorough review processes and the consequences of non-compliance.

Case Study 2: Streamlined Approval Process

A large brokerage firm implemented an automated workflow for communication approval, reducing turnaround time and ensuring compliance. This case demonstrates the benefits of leveraging technology to enhance efficiency and accuracy.

Regulatory Framework and Compliance Considerations§

Understanding the regulatory framework governing customer communications is crucial for compliance. Key regulations include:

• FINRA Rule 2210: Governs the content, approval, and filing of communications with the public.
• SEC Regulations: Provide additional guidelines on fair and balanced presentation of information.

Conclusion§

The approval and review procedures for customer communications are vital for ensuring compliance with regulatory standards. By understanding the requirements for principal approval, the process for filing communications with FINRA, and adopting best practices, firms can effectively manage their communication strategies and maintain investor trust.

Series 7 Exam Practice Questions: Approval and Review Procedures§

By mastering the approval and review procedures, you will be well-prepared to handle customer communications in compliance with regulatory standards, ensuring your success in the Series 7 Exam and your future career in the securities industry.

In this section

• Principal Approval in Securities Communications
  Explore the critical role of principal approval in securities communications, including types of communications requiring pre-approval, principal responsibilities, and compliance checklists.
• Filing with FINRA: Essential Guidelines for Series 7 Exam Success
  Master the essentials of filing communications with FINRA's Advertising Regulation Department for the Series 7 Exam. Understand the procedures, timelines, and compliance requirements critical for aspiring General Securities Representatives.