FINRA categorizes communications into specific categories, typically based on the audience. This system allows audience-specific rules to be imposed. Generally, communications to less knowledgeable and larger audiences are regulated by strict rules (and vice versa). Let’s dive into the specifics!
A written or electronic communication sent to 25 or fewer retail investors within a 30-day period is considered correspondence. This typically includes personal letters, e-mails, or letters sent to small groups of investors. Due to the small audience size, correspondence is low on FINRA’s watch list. Accordingly, correspondence is not required to be filed* with FINRA and does not require any internal pre-approval by a principal (supervisor). Regardless, correspondence should be actively monitored by the firm and is always subject to review by FINRA**.
*Filing with FINRA essentially means sending them a copy of the communication. This provides easy access to the communication in case the regulators are suspicious or receive an investor complaint.
**“Subject to review” means FINRA can request a copy of the communication.
A written or electronic communication sent to more than 25 retail investors within a 30-day period is considered a retail communication. FINRA is more concerned about these communications because of the volume of non-institutional (retail) investors that may see them. Websites, commercials, newspaper ads, and billboards all fall into the definition of retail communications. To properly regulate and enforce their laws, FINRA generally requires* firms to file copies of these communications with them. Additionally, firm principals (supervisors) must pre-approve these communications before sending them.
*Not all retail communications are required to be filed with FINRA. The filing exclusions are detailed below.
Sometimes retail communications make comparisons of securities or investment products. For example, look at Charles Schwab’s broker comparison on their website. FINRA requires retail communications with comparisons like this to include disclosures of all material differences, including:
Additionally, retail communications must always prominently disclose the member firm’s name and any relationship between the member and any non-members named in the communication. A testimonial is an example of a situation in which a non-member would be named in a retail communication. For example, a famous athlete endorses the trading capability of a registered broker-dealer (the celebrity is a non-member). If a testimonial is used, FINRA requires these guidelines to be followed:
*The payment for the testimonial may not necessarily involve cash. For example, a broker-dealer gives a watch valued at $100,000 to a celebrity providing a testimonial. Although no cash traded hands, the celebrity was paid well over $100 in value. The testimonial must be identified as “paid for.”
Many retail communications must be filed with FINRA. Depending on the circumstance, retail communications may be required to be pre or post-filed. Here’s the breakdown of what you need to know:
Filed 10 business days prior to first use
Filed 10 business days after first use
*A direct participation program (DPP) is a type of business structure that allows the investor to “directly participate” in the gains and losses of the business. The most commonly mentioned type of DPP is a limited partnership, which you may recall learning about on the SIE exam. Regardless, they’re not generally tested on the exam, except for knowing their relation to FINRA’s public communication rules.
**A collateralized mortgage obligation (CMO) is a specific type of mortgage-backed security. Like DPPs, they’re not generally tested on the Series 6, except for knowing their relation to FINRA’s public communication rules.
Not all retail communications are required to be filed. FINRA specifically identifies these as excluded from filing requirements:
Institutional communications are precisely what they sound like; they’re written or electronic communications with institutions. Because institutions can generally care for themselves and spot fraud when they see it, FINRA does not impose strict rules on this form of communication. Like correspondence, firms are not required to file their institutional communications or have them pre-approved by principals. These communications should still be supervised by the firm and are always subject to FINRA review. Institutions include banks, broker-dealers, underwriters, and insurance companies.
Let’s explore FINRA’s definition of a public appearance:
When sponsoring or participating in a seminar, forum, radio or television interview, or when otherwise engaged in public appearances or speaking activities that are unscripted
The key word here is ‘unscripted.’ If a registered representative were to give a seminar in which their presentation was scripted, it would be defined as a form of retail communication (if there were more than 25 attendees). Due to the unscripted nature of public appearances, obtaining principal pre-approval or pre-filing these communications with FINRA is impossible. FINRA requires firms to establish written supervisory procedures for representatives to follow when engaging in this type of communication:
Such procedures must provide for the education and training of associated persons who make public appearances as to the firm’s procedures, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available to FINRA upon request.
Additionally, representatives must have a reasonable basis for making any recommendations in a public appearance. Another way of saying - “don’t shoot from the hip.” For example, FINRA would likely punish a representative saying, “I recommend everyone put all their money into meme stocks” during a live TV broadcast, as there is no reasonable basis for this recommendation.
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