Understanding Sales Practices

How To Understand Sales Practices On The Series 26 Exam
and Become an Investment Company Products/Variable Contracts Limited principal

One of the keys to passing the series 26 exam is to make sure that you have a complete understanding of how sales practices will be tested on the Series 26 Exam. This article which was produced from material contained in our series 26 textbook and will help you master the material so that you pass the series 26 exam.

Communications with the Public

Member firms will seek to increase their business and exposure through the use of both retail and institutional communications. There are strict regulations in place in order to ensure all communications with the public adhere to industry guidelines. Some communications with the public are available to a general audience and include:

• Television/radio
• Motion pictures
• Newspapers/magazines
• Telephone directory listings
• Signs/billboards
• Computer/Internet postings
• Video tape displays
• Other public media
• Recorded telemarketing messages

Other types of communications are offered to a targeted audience. These communications include:

• Market reports
• Telemarketing scripts
• Form letters and emails (sent to more than 25 people)
• Circulars
• Research reports
• Printed materials for seminars
• Option worksheets
• Performance reports
• Prepared scripts for television or radio
• Reprints of ads or sales literature

FINRA Rule 2210 Communications with the Public

FINRA Rule 2210 replaces the advertising and sales literature rules previously used to regulate member communications with the public. FINRA Rule 2210 streamlines member communication rules and reduces the number of communication categories from six to three. The three categories of member communication are: Retail communication is defined as any written communication distributed or made available to 25 or more retail investors in a 30 day period. The communication may be distributed in hard copy or in electronic formats. The definition of a retail investor is any investor who does not meet the definition of an institutional investor. Retail communications now contain all components of advertising and sales literature. All retail communications must be approved by a registered principal prior to first use. The publication of a post in a chat room or other online forum will not require the prior approval of a principal so long as such post does not promote the business of the member firm and does not provide investment advice. Additionally generic advertising will also be exempt from the prior approval requirements. All retail communication must be maintained by the member for three years. If the member firm is a new member firm which has been in existence for less than 12 months based on the firm�™s approval date in the central registration depository or CRD the member must file all retail communications with FINRA 10 days prior to its first use unless the communication has been previously filed and contains no material changes or has been filed by another member such as investment company or ETF sponsor. Member firms who have been established for more than 12 months may file retail communications with FINRA 10 days after the communication is first used. Investment companies, ETF sponsors and retail communications regarding variable annuities must be filed 10 days prior to first use. If the communication contains non standardized performance rankings. Should FINRA determine that a member firm is making false or misleading statements in its retail communications with the public, FINRA may require the member to file all of its retail communication with the public with the association 10 days prior to its first use.

Institutional Communications

Institutional communication is defined as any written communication distributed or made available exclusively to institutional investors. The communication may be distributed in hard copy or in electronic formats. Institutional communications do not have to be approved by a principal prior to first use so long as the member has established policies and procedures regarding the use of institutional communications and has trained its employees on the proper use of institutional communication. Institutional communication is also exempt from FINRA�™s filing requirement but like retail communications it must be maintained by a member for three years. If the member believes that the institutional communication or any part thereof may be seen by even a single retail investor the communication must be handled as all other retail communication and is subject to the approval and filing requirements as if it was retail communication. An institutional investor is a person or firm that trades securities for his or her own account or for the account of others. Institutional investors are generally limited to large financial companies. Because of their size and sophistication, fewer protective laws cover institutional investors. It is important to note that there is no minimum size for an institutional account. Institutional investors include:

• Broker dealers
• Investment advisers
• Investment companies
• Insurance companies
• Banks
• Trusts

Tombstone Ads

A tombstone ad is an announcement of a new security offering coming to market. Tombstone ads may be run while the securities are sill in registration with the SEC and may only include:

• Description of securities
• Description of business
• Description of transaction
• Required disclaimers
• Time and place of any stockholders meetings regarding the sale of the securities

Tombstone ads must include:

• A statement that the securities registration has not yet become effective
• A statement that responding to the ad does not obligate the prospect
• A statement as to where a prospectus may be obtained
• A statement that the ad does not constitute an offer to sell the securities and that an offer may only be made by the prospectus

Filing and Retention Requirements

A member firm must maintain all retail and institutional communication for three years and for two years in a readily accessible location. The information retained must also include the name of the preparer as well as the name of the party who approved the use of the material.

Should FINRA determine that a member firm is making false or misleading statements in its retail communication, they may require the member to file all of its retail communication with FINRA 10 days prior to its first use.

Testimonials

From time to time, firms will use testimonials made by people of national or local recognition in an effort to generate new business for the firm. If the individual giving the testimonial is quoting past performance relating to the firm’s recommendations, it must be accompanied by a disclaimer that states past performance is not indicative of future performance. If the individual giving the testimony was compensated in any way, the fact that the person received compensation must also be disclosed. Should the individual’s testimony imply that the person making the testimony is an expert, a statement regarding their qualifications as an expert must also be contained in the communication. Research prepared by outside parties must disclose the name of the preparer.

Free Services

If a member firm advertises free services to customers or to people who respond to the ad, the services must actually be free to everyone with no strings attached. The following are some examples of misleading statements that may not appear in communications:

• Excessive hedge clauses
• Implying an endorsement by FINRA, NYSE, or SEC
• Printing FINRA logo in type that is larger than the type of the member’s name
• Implying the member has larger research facilities than they actually have
• Implying an individual has higher qualifications than they actually have