Types

FINRA categorizes communications into specific types, usually based on who will receive them. This lets FINRA apply stricter rules to communications that reach larger, less sophisticated audiences, and lighter rules to communications aimed at smaller or more sophisticated audiences.

Correspondence

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, emails, or messages sent to small groups of investors.

Because the audience is small, correspondence is lower on FINRA’s priority list. As a result:

• Correspondence does not have to be filed* with FINRA.
• Correspondence does not require internal pre-approval by a principal (supervisor).

Even so, the firm must still supervise correspondence, and it is always subject to FINRA review**.

*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.

Retail communications

A written or electronic communication sent to more than 25 retail investors within a 30-day period is considered a retail communication. FINRA focuses more closely on these communications because they can reach a large number of non-institutional (retail) investors.

Examples include websites, commercials, newspaper ads, and billboards.

To regulate these communications, FINRA generally requires* firms to file copies with FINRA. In addition, a firm principal (supervisor) must pre-approve retail communications before they are used.

*Not all retail communications are required to be filed with FINRA. The filing exclusions are detailed below.

Sometimes retail communications compare securities or investment products. For example, see Charles Schwab’s broker comparison. When a retail communication includes comparisons like this, FINRA requires disclosures of all material differences, including:

• Investment objectives
• Costs and/or expenses
• Liquidity
• Safety
• Guarantees or insurance (if they exist)
• Fluctuations of principal or returns
• Tax implications

Retail communications must also prominently disclose the member firm’s name and any relationship between the member and any non-members named in the communication.

A testimonial is a common situation where a non-member is named. For example, a famous athlete (a non-member) endorses the trading capability of a registered broker-dealer. If a testimonial is used, FINRA requires these guidelines to be followed:

• The person providing the testimonial must have the knowledge and experience necessary to make the endorsement
• The member firm must state:
  • Testimonial may not be representative of the experience of other customers
  • Testimonial is no guarantee of future success
  • Testimonial has been paid for if the endorser has been paid more than $100*

*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 situation, the filing may be required either before first use (pre-filing) or after first use (post-filing). Here’s the breakdown:

Filed 10 business days prior to first use

• Any retail communication from a firm in its 1st year of business
• Material relating to investment companies if containing performance rankings or comparisons
• Material relating to security futures

Filed 10 business days after first use

• Material relating to investment companies if NOT containing performance rankings or comparisons
• DPP*-related communications
• CMO**-related communications
• Securities derivatives communications

*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:

• Previously filed communications that have not changed
• Previously filed communication templates, where only statistics are updated
• Communications with no mention of products, services, or recommendations
• Communications that only mention the member’s ticker symbol
• Communications that only mention the securities the member acts as a market maker for
• Disclosure-related documents (e.g., a prospectus, shareholder reports)
• Press releases only made available to the media
• Reprints or excerpts of articles made by publishers (e.g., a newspaper)
• Communications made on online interactive forums (e.g., a member replies to a comment on Instagram)

Institutional communications

Institutional communications are written or electronic communications sent to institutions. Because institutions are generally expected to evaluate information independently and recognize misleading claims, FINRA applies less stringent requirements here.

Like correspondence:

• Firms are not required to file institutional communications with FINRA.
• Institutional communications do not require principal pre-approval.

These communications must still be supervised by the firm and are always subject to FINRA review. Institutions include banks, broker-dealers, underwriters, and insurance companies.

Public appearances

FINRA defines a public appearance as:

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 is unscripted. If a registered representative gives a scripted seminar, that communication is treated as a form of retail communication (if there are more than 25 attendees).

Because public appearances are unscripted, it isn’t practical to require principal pre-approval or pre-filing with FINRA. Instead, 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.

In addition, representatives must have a reasonable basis for any recommendations made during a public appearance. In other words, they can’t make unsupported recommendations on the spot. For example, FINRA would likely discipline a representative who says, “I recommend everyone put all their money into meme stocks” during a live TV broadcast, because there is no reasonable basis for that recommendation.