FINRA groups communications into categories based mainly on who the audience is. 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.
A written or electronic communication distributed 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, FINRA generally treats correspondence as lower risk. As a result:
Even so, the firm should still supervise and monitor correspondence, and it is always subject to review by FINRA**.
*Filing with FINRA essentially means sending a copy of the communication to the regulator. 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 focuses more closely on these communications because they can reach a large number of non-institutional (retail) investors.
Examples of retail communications include websites, commercials, newspaper ads, and billboards.
To regulate these communications, FINRA requires firm principals* (supervisors) to pre-approve retail communications before they are distributed.
In addition, communications covering derivative securities (e.g., options) must be filed with FINRA. If a firm distributes an options-related communication to an audience that has not received the Options Disclosure Document (ODD), it must file the communication for approval from FINRA’s Advertising Regulation Department ten (10) calendar days before the communication is sent.
*Only a Registered Options Principal (ROP; Series 4) can pre-approve options communications.
Not all options communications are required to be approved by FINRA before distribution. These communications are exempt from this rule:
*A prospectus is a disclosure document distributed to potential investors when a security is offered in the primary market.
Institutional communications are written or electronic communications with institutional investors. Because institutional investors are generally more sophisticated and better equipped to evaluate information, FINRA imposes fewer restrictions on this category.
Like correspondence:
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.
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 seminar using a scripted presentation, 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 punish a representative who says, “I recommend everyone put all their money into meme stock options” during a live TV broadcast, because there is no reasonable basis for that recommendation.
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