Communications with the Public

Communications with the Public
Before we distinguish the types of communications, let's understand the main points:
  •  A principal (compliance officer) must approve the firm's communications and file them. 
  • The communications cannot be misleading in any way.
(1) Standards Applicable to All Communications with the Public 

(A) All member communications with the public shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any security or type of security, industry, or service. No member may omit any material fact or qualification if the omission, in the light of the context of the M4-terial presented, would cause the communications to be misleading. 

(B) No member may make any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public. No member may publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading 

(C) Information may be placed in a legend or footnote only in the event that such placement would not inhibit an investor's understanding of the communication. 

(D) Communications with the public may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast. A hypothetical illustration of mathematical principles is permitted, provided that it does not predict or project the performance of an investment or investment strategy 

(E) If any testimonial in a communication with the public concerns a technical aspect of investing, the person making the testimonial must have the knowledge and experience to form a valid opinion.

Okay. Seems fair enough - don't mislead investors through any of your communications regardless of the format. for any types of communication. Understand that all communications must be at least monitored by the firm, but that your correspondence with retail investors would not be approved before it went out. It would just be monitored, with filters and red-flag words built into the automatic monitoring system. If you send out, say 50 letters to existing retail investors, this is now considered retail communications, while in the past it would have been correspondence. The difference between correspondence—which does not have to be per-approved - and retail communications - which do - has to do with the number 25. Up to 25 retail investors = correspondence. Over 25 retail investors = retail communications.

If the communications are for only institutional investors, they are considered institutional communications. For institutional communications, each member firm simply must, "establish written procedures that are appropriate to its business, size, structure, and customers for the review by an appropriately qualified registered principal of institutional communications used by the member and its associated persons. Such procedures must be reasonably designed to ensure that institutional communications comply with applicable standards. When such procedures do not require review of all institutional communications prior to first use or distribution, they must include provision education and training of associated persons as to the firm's procedures governing institutional communications, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to."

So, correspondence is not per-approved but is monitored. Institutional communications may be per-approved or not, depending on how the firm sets up its supervisory and training system. Retail communications are subject to per-approval before being first used or filed with FINRA.

Regardless of what we call it, the communication had better not be misleading. Any statement of the benefits of an investment or strategy, for example, needs to be balanced out with the associated risks involved.

Any materials that are subject to review, approval and filing are subject to this:

(1) Date of First Use and Approval Information
 The member must provide with each filing under this paragraph the actual or anticipated date of first use, the name and title of the registered principal who approved the advertisement or sales literature,and the date that the approval was given.

This is also self-explanatory:

(7) Spot-Check Procedures
In addition to the foregoing requirements, each member's written and electronic communications with the public may be subject to a spot-check procedure. Upon written request from the Department, each member must submit the material requested in a spot-check procedure within the time frame specified by the Department.

FINRA recently changed some definitions and procedures involving communications with the public. First, they added some new definitions:

"Retail communication" means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.

"Retail investor" means any person other than an institutional investor, regardless of whether the person has an account with a member.

Then, to protect "retail investors," FINRA requires that any "retail communication" that has not already been filed with FINRA must be approved by a principal either before its first use or before filing it with FINRAs Advertising Regulation Department. And, for new member firms retail communications must be filed with FINRA at least 10 days prior to first use. This includes the content of the firm's website, and any other communication with retail investors (radio, newspaper, magazine, etc.). A retail communication could come in the form of a group email, a form letter, a chat room, or a webinar provided it involves more than 25 retail investors, it is probably a form of retail communications subject to prior principal approval.

A recent change says that firms who are intermediaries in selling investment company products (e.g., mutual funds, annuities) are not required to approve or file sales material that was already filed by someone else, usually the distributor of the fund. The intermediary selling the products could not alter the material significantly; otherwise, they would have changed it enough to require re-approval and re-filing, which is what they're trying to avoid in the first place. So, the many broker-dealers selling the American Funds TM are acting as intermediaries. Provided they don't alter the materials, they can just use the materials that have already been created and filed by the distributor of the funds, American Funds Distributors.

Members use television and other video formats to communicate with investors. Therefore, FINRA stipulates that, "If a member has filed a draft version or 'story board' of a television or video retail communication pursuant to a filing requirement, then the member also must file the final filmed version within 10 business days of first use or broadcast."


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