General standards

FINRA establishes many rules and communications-related requirements for financial professionals. Some are general, while others are specific to the communication type. In the next chapter, we’ll discuss various communication types and their relevant regulations. For now, we’ll cover general communication standards (rules).

Recordkeeping

FINRA requires firms to maintain a record of all communications for 3 years regardless of communication type. Additionally, communications made in the past 2 years must be easily accessible. If FINRA requests a copy of a communication made in the last 2 years, they expect to receive it quickly.

Written supervisory procedures

All forms of client communications must be governed by written supervisory procedures created by the firm. Without such written directives in place, representatives may misspeak or mislead investors, subjecting their firm to liability (lawsuits or arbitration). Most firms provide these rules in “employee handbooks” full of best practices and general guidelines for working with clients.

General standards

FINRA’s general communication standards include the following:

No false, exaggerated, unwarranted, promissory, or misleading statement or claim
This one is simple - don’t lie to investors in any way, shape, or form! Financial professionals are barred from publishing, circulating, or distributing any communication they know contains an untrue statement of material fact or is otherwise false or misleading.

Information may be placed in a legend or footnote only if such placement would not inhibit an investor’s understanding of the communication
Have you ever seen a commercial that includes a speedy reading of disclosures at the end? For example, this young voice actor’s parody of an ad for a new truck. The “good parts” of the ad (nice truck) are slow at the beginning, but all the “bad parts” are read hastily and quickly at the end. It’s quite clear - the ad creator is encouraging the listener to focus solely on the “good parts” of the ad.

Whether it’s a sped-up radio ad or an ad in print, FINRA does not want material facts about a product or service “stashed away” in the legend, footnotes, or towards the end of an ad. This type of advertisement is prohibited if the information “stashed away” is important to disclose to investors. However, relatively insignificant details can be placed in these sections of the ad.

Members must ensure that statements are clear and not misleading within the context in which they are made
Similar to the sentiment in the first guideline (don’t lie or mislead), this one discusses the other end of the rule. While members cannot lie to or mislead investors, they must also communicate clearly and precisely. Balancing discussions related to the benefits of securities with the risks they pose and the uncertainty of investing is a significant responsibility.

Members must consider the nature of the audience to which the communication will be directed
The audience plays a key part in determining the nature of public communication. Retail investors are non-professional investors who tend to invest for themselves or their families, don’t have significant capital (money) to invest, and have less access to resources. Communications distributed to these investors must avoid industry jargon and complex language while fully disclosing all relevant risks. On the other hand, institutional investors are professional investors who invest their clients’ money. These are typically large organizations with access to significant capital and resources (e.g., banks, insurance companies, and financial firms). Communications distributed to these investors can be more complex and less transparent (within reason).

Communications may not predict or project performance
Financial professionals are generally prohibited from projecting the performance of a security. For example, a registered representative would be breaking FINRA communication rules if they stated “I expect AMZN stock to rise 25% over the next year.” Given the difficulty in predicting the market’s direction, statements like these can be a disservice to an unknowing client. If the stock doesn’t perform at this level, an investor who placed a trade based on the statement will likely feel misled. It’s not a good recipe for customer satisfaction!

Regardless, FINRA does not prohibit the following:

• A hypothetical illustration of mathematical principles
  • Example: helping a client calculate a preferred stock’s current yield based on future dividends
• An investment analysis tool
  • Example: performing a retirement readiness analysis based on the growth of a portfolio over time
• A price target contained in a research report on debt or equity securities
  • A stock analyst sets a price target for AAPL stock at $200/share