Additional communications

Using FINRAs name

Rule #1 for this topic: FINRA has not approved of any firm, any employee of the firm, any security, or any recommendation that any firm, or employee of any firm makes. Any statement to the contrary would be a criminal offense. With that said, firms can use FINRA’s name, provided it doesn’t break rule #1 in applying approval.

Having on communications that it has been “reviewed by FINRA” is perfectly acceptable, as it has been reviewed in the filing. It has not been approved by FINRA. Explaining in written form that “this transaction or communications confirms to FINRA code such and such”, would also be acceptable use of their name. Finally, on the members website, linking to FINRAs BrokerCheck, or FINRAs actual website, as in “Achievable Investments is a registered broker dealer and member of FINRA (www.finra.org)”, is perfectly acceptable Pre- and Post-filing

Most of the time, you want to think about how advertising, and retail communications in general, will have to be filed within 10 days after first use. That means you can send it to the clients, and then FINRA gets a copy.

That is for established firms, firms that have been in business more than 1 year, 1 year and a day or longer. Newly established firms have different rules. Newly established firms have to prefile, file at least 10 days before they can send the communications to the retail client.

In both cases, these are filings with FINRA. FINRA, like the SEC, and every other regulator, never approves anything. FINRA is not approving these communications, we are simply filing them with FINRA, usually 10 days after use, sometimes 10 days before use.

As always there are of course exceptions. The primary one would be some calculation, some “new technology” the firm itself created. Some new system, chart, calculator, or any other similar “technology” to analyze, invest, rank, recommend, or otherwise suggest or try and convince investors to invest in something. If the firm uses a third party technology, there are not problems, but if the firm makes their own, that will always need to be prefiled with FINRA, even for established firms.

Predicting the future

Projections of performance need to be handled very carefully. The easiest answer would be “the worst case”, if you have a choice, most of the time, go with what would look worst. Should we show the most likely charge with the deposit, or the maximum charge? Well, the maximum charge would obviously look worse, and that is what we therefore have to always show.

Obviously, no lies, no false or misleading statements, no misstatements of material facts, or any similar fraudulent statements can be made about the securities or the recommended strategy.

No hypotheticals, illustrations, or projections can imply that past performance will continue or repeat. “Past performance is no guarantee of future results”, is something that should be tattooed on the brains of every financial representative.

• We can use hypotheticals of mathematical principles, showing dollar cost averaging, or other similar principles related to the investment or recommendation.
• We can also use investment analysis tools, or reports, generally created by an independent ranking agency, or similar organization, provided all necessary disclosures are included.

Comparisons need to be explained carefully. Comparisons need to explain material differences between what is being compared, including objectives, tax consequences, fees, potential additional costs and expenses, any potential guarantees or insurances, and any other necessary details. Some comparisons are easier and more logical to make, small cap growth vs small cap value, or municipal bond fund vs corporate bond fund. Some comparisons are much harder, and could be a red flag. For example, comparing a bank savings account to a mutual fund.

Considering Taxes

When referencing tax-free, tax-exempt, tax-equivalent, or any other investment or strategy that involves taxes, it must explain which taxes apply. Tax-deferred must be explained as postponement or deferral, which is not the same as exemption or free. When illustrations are created of taxable vs non-taxable compounding investments, both computations must use the same assumed investment principal amounts, and gross rate of return on the investment, which can be at most 10%. As with all communications, firms must try and understand their target audience, and should use tax bracket estimates for their target audience, and explain that in the included disclosures.

All illustrations, with taxes, without taxes, must state that the return is not guaranteed, and must explain all potential risks.

Testimonials

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Taping Rule

Certain firms, if they hire too many new employees from a disciplined firm, may have to put procedures in place to monitor, more closely, the prospecting of these new employees. Basically, we don’t know if these employees picked up “bad habits”, and we need to make sure that even though they worked for a company that did something bad, that is why it is disciplined, they didn’t learn and continue to do bad things. This is only going to affect the smallest of firms, and the number of employees that work for disciplined firms at any point, is very small. Feel free to google “list of FINRA disciplined firms”, and you will find a list of 3-6 companies you’ve never heard of, and never will again.

When a firm is notified by FINRA that they have to begin tape recording, they have 60 days to put procedures into place to monitor the prospecting of all affected new representatives. They would have 30 days from that notification to reduce staffing, to fire enough of the new reps that cause taping to be required, in order to avoid having to put those procedures into place. If they do fire any of those reps to prevent taping, they will have to wait 180 days before they can hire any additional reps from disciplined firms.

A taping firm is one that would fit any of the following descriptions;

• A firm with at least 5 but fewer than 10 registered persons, where 40% or more of the registered persons have been associated with a disciplined firm in the past 3 years, or
• A firm with at least 10 but fewer than 20 registered persons, where 4 or more of its registered persons have been associated with a disciplined firm in the past 3 years, or
• A member with at least 20 registered persons, where 20% or more of it registered persons have been associated with a disciplined firm in the past 3 years.

If the registered person was associated with a disciplined firm for 90 days or less and do not have a disciplinary history, they do not count. If they have been associated with a disciplined firm for more than 90 days and/or have a disciplinary record, they would fall into the affected registered persons.