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 distributed 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, 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 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 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 requires firm principals* (supervisors) to pre-approve these communications before sending them. Additionally, 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 precisely what they sound like; they’re written or electronic communications with institutional investors. 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 stock options” during a live TV broadcast, as there is no reasonable basis for this recommendation.
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