Supervising representatives

Tape Recording (FINRA Rule 3170)

When firms have been disciplined, the idea is that at least some of the people in the firm did bad things. Obviously. The issue is, they don’t necessarily know who did bad things, who might have learned “bad habits”, or anything else that would need to be found, repaired, or removed from the industry. For that reason, when a firm has been disciplined, and their employees move to other firms, if there are sufficient numbers of them, the new firms may have to record the prospecting, “tape record” the prospecting of these reps in order to make sure they are following proper procedures.

It is extremely unlikely that this will ever apply to your firms; it will only apply to small firms, but you are welcome to search for the FINRA Disciplined Firms, and you will find the short list of them.

Taping Firms means;

• If they have 5-9 registered persons, if 40% or more have been associated
• A member with 10-19, where four or more have been associated
• A member with at least 20, where 20% or more have been associated

Any firm designated as a taping firm must establish, maintain, and enforce procedures for supervising telemarketing activities within 60 days of notice. The firm has 30 days from notice to reduce staffing to avoid taping requirements, and anyone fired cannot be rehired for 180 days, or the required taping will go back in force. Basically, once notified, they have 30 days to fire anyone to get below the threshold, but they can’t immediately rehire them once they are told they are no longer a designated taping firm. They have to wait 180 days to hire more employees from disciplined firms.

Communicating with the public

Advertisements generally mean any material published concerning services or products offered by the broker, dealer, or municipal securities dealer, excluding official statements and preliminary official statements.

There are primarily 3 types of communications: retail communications, correspondence, and institutional communications. We will go into detail on them, and a little more specifics on technicalities with them.

• Retail communication is any advertisement or communication sent to more than 25 retail clients in a 30 calendar day period. This could also be phrased as 26 or more. Always approved by a principal before being sent to clients.
• **Correspondence **is any advertisement or communication sent to fewer than 26 retail clients in a 30 calendar day period. This could also be phrased as 25 or less. This could be as simple as birthday cards or “thank you for the introduction” letters. Correspondence will need to be spot checked by a principal.
• Institutional communication is communication sent only to institutional investors. If the representative has a reasonable belief that the communication will be shown to retail investors, then it must be treated as retail communication, not institutional. Institutional investors include financial institutions, insurance companies, an IA registered with the SEC or State, Government entities and subdivisions, Employee Benefit Plans of at least 100 participants, Qualified plans, or any other person (natural, corporate, partnership, etc), with total assets of at least $50m.
• Internal communications is not a form of advertisement, but it could be distractors on the test. There is no FINRA or any other SRO oversight on materials published by a member firm and only distributed to employees. If clients are expected to see them, then they must be treated as retail communications.
• A form letter is a written letter distributed to more than 25 persons in a 90-day period.

Principal Approval

All retail communication is approved by a principal before clients see it, and filed with FINRA. It is not approved by FINRA, merely filed with them. When depends on how long the company has been established.

• For an established firm, the communication is written, the principal approves it, and then they can send it to clients, and within 10 days, they must send a copy to FINRA. Established firms have been around for a year and a day or longer.
• For a newly established firm, the communication is written, the principal approves it, and then they have to send it to FINRA. At least 10 days after FINRA gets its copy, the firm can send it out to retail clients. Newly established firms have been around for 1 year or less. 1 year is new, 1 year and a day is established.

Principles in advertising

All advertisements must be based on the principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts. We cannot omit material facts, primarily described as failing to state bad information that is important. The focus is on material fact, not simply any fact. In advertisements, there can also be no false or misleading claims. Footnotes and legends can be used, provided they are not placed in a way that inhibits the customer’s understanding. The broker-dealer must take into account the target audience and make it readable to them. Statements must be clear and not misleading. Advertisements may not predict performance; past performance is no guarantee of future results. Hypothetical illustrations of mathematical principles are allowed, provided they don’t predict or project performance. If an advertisement contains a testimonial, the person making it must have knowledge and experience to form the opinion, and the advertisement must disclose that;

• Testimonials may not be representative,
• No guarantee of future performance, and
• If more than $100 was paid, it was a paid testimonial.

Specific additional names of types of advertising. When discussing communications, retail communications, correspondence, and institutional communications, it would be like talking about hands and feet. Below are more details about different fingers or toes.

Professional Advertisement means advertisement concerning facilities, services, or skills with respect to securities business of the advertising firm or a similar firm. Similar to all advertisements, brokers, dealers, and municipal securities dealers can’t knowingly publish untrue statements of material fact.

Product Advertisement means any advertisement concerning one or more specific municipal securities products. No one may publish Product Advertisements that they know contain untrue statements of material fact.

Generic Advertising is when a notice, circular, advertisement, or anything similar is published or sent to any person, but it doesn’t specifically mention the securities of a particular issuer, to an issuer or investment company, or to any other securities not exempt. Basically, things like letting people know the office is moving, letting people know if they have questions about investing, there are skilled and licensed people able to help. Generic, non-descript.

Research Reports are written or electronic communications including an analysis of equity securities, individual companies, or industries, and provide information reasonably sufficient to base investment decisions. They must be prepared or approved by a qualified supervisory analyst.

Public Appearance would be “participation in a seminar, forum (including online), radio, television, or other public speaking activity, in which the person is making a recommendation or offers an opinion concerning equity securities”. Must have approval before appearance, and that approval would come from an allied member, supervisory analyst, or other similar person designated by the member firm.

Municipal Fund Securities must follow all of the standard municipal advertising rules, and some more specific rules. These are basically mutual funds, but they aren’t mutual funds, because they are municipal securities and therefore exempt. Municipal fund securities are those that would be investment companies if they weren’t municipals and exempt from being considered investment companies.

These will have an official statement that must always be provided with every sale, which contains the data and important disclosures. Any performance data has to be disclosed as past performance and not indicative of future returns.