Chapter 3 Customer Communications

FINRAS COMMUNICATION RULES

How does FINRA categorize communications?

• Correspondence

• Institutional Communication

• Retail Communication

What is a correspondence?

• Written/electronic communication sent to 25 retail customers or less within 30-calendar day period

What is an institutional Communication?

Does an individual with over $50MM in assets qualify as an institutional client?

• Written or electronic communications available only to institutions (does not include internal comms)

• Yes

Can institutional clients forward their communications to retail clients?

• No, member firms should have policies to ensure this is not happening

What happens if it is known that an institutional client is forwarding communications to a retail client?

• That institutional client should be treated as a retail client going forward

What should firm’s include on their institutional communications so customer’s know they are for institutions only?

• “For Use by Institutional Investors Only”

What is a retail communication?

• Written or electronic communications distributed to more than 25 retail investors within a 30-day calendar period

What happens if the audience is not known?

• If the audience is not known, it should be treated as a retail communication

How are the use of social networking sites considered?

• They are considered as advertising so the actual site requires principal approval

Are posts on these sites considered advertisements?

Do they require approval?

• No, they are interactive content

• They require supervision but no official approval

What if an employee is using social media for personal reasons?

What if an RR posts a link to a firm fundraiser?

• Personal use is not subject to FINRA rules unless promoting the firm

• Fundraisers aren’t business so they don’t count either

Can a BD post a 3rd party hyperlink?

When would this be considered advertising?

What if there are no securities mentioned?

• Yes

• If the BD helped prepare the material or adopted it

• It’s considered educational not advertising

What if a link is posted to another firm who posts another link to a 3rd firm?

• This is not considered advertising

When is a 3rd party post considered advertising?

When is a 3rd party post not?

• If the firm has become entangled/adopted it in some way

• If the ad just shows up on their site but they are not entangled

Can a firm post a 3rd party site they know has misleading info?

• NO

COMMUNICATIONS - INTERNAL REVIEW PROCEDURES

What types of communications need to be preapproved by principal?

• Correspondence and institutional communications do not

• Retail communications must

How long do firms need to keep approved communications on file?

What needs to be kept on file?

• 3 years total, first 2 years need to be easily accessible

  • Copy of communication

  • first/last date used

  • Name of approving principal

  • Date of approval

  • If exempt form preapproval, name of preparer needs to be kept for 3YRs

What will the principal need to approve a retail communication?

• They will need the corresponding series # exam for the contents of the communication

What would the term “static” indicate?

• This is likely a good indicator that preapproval is needed

What would the term “interactive” indicate?

• This is likely a good indicator that preapproval is not needed

• Think like a chat room

Are there any exceptions for when a retail communication does not need preapproval? (3 of them)

• Another firm already filed it with FINRA and it hasn’t been materially changed

• Posted to online interactive forum

• Doesn’t make any recs or promote the firm and is not research

Should a retail communication or correspondence include the firm’s name?

• Yes, unless it is for blind recruiting

FINRA FILING AND REVIEW REQUIREMENTS

Are institutional communications required to be filed with FINRA?

• No but they will be spot checked by them

Are all retail communications subject to pre approval from FINRA?

• No, FINRA NEVER ACTUALLY APPROVES

Do all retail communications need to be filed with FINRA prior to use?

Are these ever approved?

• Not all, some require filing 10 days prior to use while others require filing within 10 days

• NO, FINRA NEVER APPROVES, JUST ACCEPTS

What forms of retail communications that need to be filed 10 business days prior to use? (There’s 3)

• RIA companies that include rankings created by themselves

• Security Futures

• Bond mutual funds with volatility rankings

What forms of retail communications that need to be filed within 10 business days of use? (There’s 4)

• RIA that don’t include comparison or rankings

• Publicly traded DPP

• SEC registered CMOs

• Derivatives, ETFs, ETNs

Are 1st year FINRA member firms subject to any special rules?

What if they are a firm that faced disciplinary action in the past?

• Both may need to file 10 days prior regardless of the type of retail communiation

If a firm has already filed a draft version of a video/TV retail communication, what needs to be done with the final version?

• The final version needs to be filed within 10 business days of first use

When filing a retail communication with FINRA, what needs to be included?

• Name, title, and CRD # of the principal

Does FINRA ever spot check?

• Yes, FINRA will engage in spot checking

Are there any exclusions for filing requirements?

• Yes, there is a list in notes, but the main theme is that if you are not making recommendations to individuals, then it is excluded

• If there is a retail recommendation that has been filed in the past and it has not been materially changed, it is excluded

COMMUNICATIONS REGARDING INVESTMENT COMPANIES

What is the Omitting Prospectus Rule (482)?

Who are the main users?

• There are some ads that are published that meet the definition of a prospectus

• Mutual Funds

What does one of these omitted prospectus contain?

Can performance be included?

• It is essentially a summary of the statutory prospectus

• Performance can be included under certain standards

What cannot be included in an omitted prospectus?

• An application to invest

What are the general required disclosures for an omitted prospectus? (Dont really need to memorize)

• Investors must consider investment objects, risks, etc

• Prospectus includes all information

• Prospectus should be read prior to investing

• Where to find the prospectus

What performance information disclosures need to be provided for an omitted prospectus? (Dont really need to memorize)

• Past does not indicate future

• Returns fluctuate so the redeemed value may be different than original cost

• Phone # or website to get current performance for that month’s end if not included

• If a sales load or non-recurring a fee is charged and its max, and that the performance data is not net of the fees

If annual performance is shown, what other periods need to be shown?

• 1 year (if existed or at least 1 years)

• 1 and 5 years (if existed or at least 5 years)

• 1, 5, 10 years (if existed or at least 10 years)

SEC RULE 156 - INVESTMENT COMPANY SALES LITERATURE

When can an IA provide written sales material?

What kind of mediums does this cover?

• If the IA is registered, it can provide written sales material if a prospectus if provided prior or at the same time

• Written, TV, radio, internet

Does this include materials that are shared with issuers, UWs, and dealers?

• Yes, if it may end up with prospective investors

Under rule 156 how do IAs need to show past performance? (3 of them)

• Past performance is not indicative of future performance

• 1,5,10 years of performance, if not around for 10Yrs then life of fund

• Always shown after fees deducted but before taxes paid

What does a fund need to do if their name suggests they invest in a specific security or industry?

• At least 80% of their assets must be allocated there

Can a fund claim they are backed by the US government in their name?

• NO

USE OF INVESTMENT COMPANIES RANKINGS IN RETAIL COMMUNICATIONS

Do these rules apply if the firm is reposting an article from an unaffiliated party?

No

What types of rankings can an Investment company use in retail communications?

• Rankings from ranking entities

• Rankings from an investment company or affiliate if the metrics are from a ranking entity

If using rankings based on yield, what does the SEC require?

• Money market funds use a 7 day standardization

• Bond funds us a 30 day standardization yield

What needs to be disclosed for retail communications that contain investment rankings?

• There are a whole bunch of disclosures based around the type of fund and what they were compared against

• (List probably not important)

What if there are multiple classes of shares within the fund?

• Need to disclose if using different types of shares within the same fund

BOND MUTUAL FUND VOLATILITY RANKINGS

What is a bond mutual fund volatility ranking?

When can it be used?

• Rating from 3rd party on how sensitive a funds NAV is to changes in market

• In supplement sales literature

Can supplemental sales literature be used without a prospectus?

• No, only if a prospectus has been provided or will be

• (There is also a list of standards that need to be met for sales literature, probably not important)

COMMUNICATIONS REGARDING VARIABLE PRODUCTS

What do communications need to include regarding variable insurance products?

Can they mention similarities with mutual funds?

• Must identify the product as a variable annuity or variable life insurance policy

• Variable products can never imply that they are mutual funds

Can variable insurance products ever be described as short term?

What if taking a loan out against the product is mentioned?

• Never, because they have fees for early redemption

• Must disclose the impacts of early withdrawal

If a guarantee is made about minimum death benefits, what should not be implied?

• It should not be implied that these cover their sperate accounts

Are life insurance companies allowed to “predict” future results?

• Not technically, but they can use hypothetical illustrations to show how their policies work

What disclosures need to be included when using illustrations? (3 of them)

• Purpose is to show how the policy works

• Its hypothetical

• Does not predict actual results

OPTIONS COMMUNICATIONS

What is an options disclosure document?
When does this need to be provided?

• Brochure describing options market and their risks

• At or prior to the actual account opening

Do options related retail communications need to be pre approved by principal?

What about an options correspondence?

• Yes

• No

If the options disclosure document has not been provided, but the retail communication has been principal approved, what needs to be done?

Does this apply to existing clients?

• Needs to be sent to exchange or FINRA at least 10 days prior to use

• No because they theoretically should have already gotten the ODD when the account was opened

What needs to be done if the retail communication discusses projections?

• Needs to be pre-approved

• Needs to be accompanied by ODD if not provided before hand

MSRB RULES - COMMUNICATIONS

What does the MSRB consider a communication?

• Anything that is not a listing of offerings that is published in electronic or written promo literature

Do ads related to municipal funds/securities need to be pre approved?

• Yes, they need to be pre approved by the proper principal

Is the official statement summary considered an ad?

What if it is summarized?

• No because it is for the issuer

• It is considered an ad because it was altered

What must an UW do prior to recommending a muni security?

• Review the official statement prior to purchase of the securities

• For negotiated offering, the most recent prelim offering must be sent to a customer with one business day of request

• Must work with the issuer to get enough final statements within 7 business days after the agreement to buy/sell the security

Can the issuer/obligated person upload continued disclosures for material changes?

Yes, but the UW must disclose it to the MSRB

When advertising a 529 municipal securities plan, what needs to be done?

What needs to be disclosed about tax benefits?

• There is a list of disclosures in book (probably not important)

• That the investor should look to see if there are any tax breaks in the beneficiaries home state

What needs to be done if prior performance is mentioned?

• “past performance doesn’t indicate future results”

If a sales load or non recurring fee is charged, what needs to be done?

• The maximum needs to be quoted

For a generic 529 ad, what can be in the ad? What cant?

• Can describe what a 529 plan is

• Cannot mention any specific funds

COMMUNICATIONS REGARDING COLLATERALIZED MORTGAGE OBLIGATIONS

What needs to be included in the name for both retail comms and correspondences relating to CMOS?

Must include “collateralized mortgage obligation” in the product name

Is the face value and premium paid backed by a given agency?

• No, only the principal

Can CMOs be compared to other products?

No, they are to complex

What do the life and yield of a CMO depend on?

• Rate of prepayment from mortgage owners

• Changes in current interest rates

If the standard FINRA format is used for the ad, does it need to be filed still?

Yes, still needs to be filed with FINRA

Do firm's need to provide further info on CMOs is requested?

• Yes, firms must provide a list of further info outlined in the book if requested by the customer

When do CMOs need to be filed with FINRA and approved by principal?

• Within 10 days of its first use

RESEARCH ANALYST AND RESEARCH REPORTS

Do the research and IB department overlap?

No, they should be supervised separately

What happens if an employee of the research department comes into contact with non-public information?

• It needs to be disclosed to the compliance department

What is considered a public appearance?

• A speaking engagement with 15 or more people or 1 or more reps of the media where an opinion is provided via TV, radio, or print

Are any disclosures required to be made during a public appearance?

Yes, there is a list in the book, basically if the firm or employee has a COI

What is a quiet period?

• Following an IPO or secondary offering, there is a period where research cannot mention that IBD client

What is the quiet period for the manager and participating firms for an IPO?

• Manager: 10 calendar days

• Participating Firms: 10 calendar days

What is the quiet period for the manager and participating firms for a secondary?

• Manager: 3 calendar days

• Participating Firms: None

What is the hot new exception rule?

• Quiet period can be broken if something unexpected happens

What is a 3rd party research report?

Does it need to be approved?

Do discloures need to be made?

• Done by an affiliate of the BD

• Yes, by a supervisor

• Yes, about compensation and COIs

What is an independent 3rd party research report?

Does it need to be approved?

Do disclosures need to be made?

• Has no affiliation

• No approval needed for distribution

• No, the firm preparing the report does it