FINRA Rule 2210 sets many requirements for how member firms and their representatives communicate with the public. Some requirements apply to all communications, while others depend on the type of communication. Options-specific communication rules are covered later in this unit. This chapter focuses on the general communication standards.
All client communications must be governed by written supervisory procedures created by the firm. Without clear written guidance, representatives may make inaccurate statements or unintentionally mislead investors, which can expose the firm to liability (lawsuits or arbitration). Many firms include these procedures in employee handbooks that outline best practices and general guidelines for working with clients.
FINRA’s general communication standards include the following:
No false, exaggerated, unwarranted, promissory, or misleading statement or claim
This is the core rule: communications must be truthful and not misleading. Financial professionals may not publish, circulate, or distribute 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
Disclosures can’t be technically present but practically hidden. You’ve probably seen ads where the appealing claims are presented clearly, while important limitations are rushed at the end or buried in fine print. For example, this young voice actor’s parody of an ad for a new truck.
FINRA does not want material facts about a product or service “stashed away” in a legend, footnote, or at the end of an ad in a way that keeps investors from understanding them. If the information is important for an investor to know, it must be presented clearly and prominently. Less important details may be placed in these sections.
Members must ensure that statements are clear and not misleading within the context in which they are made
Even when a statement is technically true, it can still mislead if it’s unclear or missing key context. Communications should be precise and balanced, especially when discussing potential benefits alongside risks and the uncertainty of investing.
Members must consider the nature of the audience to which the communication will be directed
The intended audience affects how a communication should be written.
Retail investors are non-professional investors who typically invest for themselves or their families. They often have less capital and fewer resources than professional investors. Communications to retail investors should avoid unnecessary jargon and complex language while still fully disclosing relevant risks.
Institutional investors are professional investors who invest client assets. They are typically large organizations with significant capital and resources (e.g., banks, insurance companies, and financial firms). Communications to institutional investors may be more complex and less simplified (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 violate FINRA communication rules by saying, “I expect AMZN stock to rise 25% over the next year.” Because market direction is difficult to predict, performance projections can easily mislead clients - especially if the client trades based on the statement and the security doesn’t perform as projected.
*FINRA allows performance projections on options contracts to be discussed when specific protocols are followed. We’ll cover these rules in a future chapter.
Regardless, FINRA does not prohibit the following:
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