Supervision of retail communication

In this article we are going to review a significant amount of information relating to the supervision of retail communications.  As you prepare to take your principal level exam, you  will want to make sure that you have mastered these topics. This information has been taken directly from our textbooks, video lectures and feedback from recent test takers. A substantial amount of your exam is going to evaluate your ability to effectively supervise this critical area of a broker dealer’s business. Knowing what communications are filed with FINRA and when they are filed with FINRA can present challenges for many test takers. The information that is contained in the communication and its intended recipients dictate when or if  the communication is filed with FINRA. Exempt from FINRA’s filing requirements are:

  • Recruiting and generic advertisements
  • Retail Communications created from a template  previously filed with FINRA
  • Retail Communications that do not promote a product or service
  • Retail Communications that merely contain a list of products the member offers
  • Retail Communications that do not contain investment advice 
  • Mutual fund profiles 
  • Reprints and excerpts of articles published by non-affiliated third parties
  • Press releases issued only to media outlets 
  • Institutional communications
  • Correspondence
  • Internal communications 
  • Tombstone ads, preliminary and statutory / final prospectus  filed with the SEC 

It is important to note that while preliminary and statutory prospectus that are filed with the SEC are exempt from being filed with FINRA, free writing prospectus prepared by the broker-dealer are required to be filed with FINRA as part of retail communication. Additionally, if any part of institutional communication becomes accessible to retail investors, the communication must be reclassified as retail communication and would be subject to all of the rules covering retail communications. The example on your test may detail a case where an institutional client receives institutional communication and makes it available to its own retail clients. In this scenario the communication would now be classified as retail communication. 

The following types of retail communication must be filed with FINRA within 10 days of first being used:

  • Storyboards for television or video Communications
  • Mutual fund communications that do not include raking information
  • Communications containing information relating to publicly traded direct participation programs and sec-registered collateralized mortgage obligations
  • SEC registered securities whose value is based on an index, a basket of securities, commodities, debt securities, or currencies. This includes ETFs, ETNs  and other publicly offered structured products 
  • Free writing prospectus is prepared by the broker-dealer 
  • Report templates created from an investment analysis tool

Investment analysis tools allow individuals to input a set of criteria and have a computer software program model portfolios, potential outcomes or hypothetical returns using statistical analysis. If  a member firm allows retail investors to access investment analysis tools,the firm must provide access to that tool to FINRA’s advertising department within 10 days of its first use.

FINRA members are required to pre file the following retail communications 10 days prior to use:

  • Communications containing single stock and other security futures
  • Communications containing mutual fund ranking or comparisons created by the investment company
  •  Communications containing volatility ranking information concerning bond funds
  •  Communications prepared by member firms less than 1 year old
  •  Communications prepared by sanctioned firms or firms directed to pre-file my FINRA 

For most retail communications, the term first use means when it is first published, broadcast,  distributed or made available by the member. All retail communications must be maintained for three years from the date of the last use. A copy should be readily accessible for the first two years and the file should contain the name of the principal who approved communication as well as the date it was first and last used. Member firms are also required to maintain records of the use of all social media for business purposes for 3 years regardless of the device the rep uses to post to a social media account.  This is true even if the representative uses a personal cell phone or other personal electronic device. All text messages, chat logs and posts for business purposes are subject to the retention requirement.

An interesting situation can arise when a registered representative sends personalized communications to a client and links to information made available by the firm but does not promote the business of the firm. In this case, the communication would not be deemed communications with the public. Such is the case when the firm sponsors a golf outing, tennis match for charity event.  

Representatives need to be particularly careful when liking or sharing social media posts. These social media activities are subject to FINRA’s communication rules and in some instances liking and sharing can raise to the level of a testimonial. If the activity is deemed to be a testimonial, a link to the important testimonial information must be clearly displayed

If the firm assisted in the preparation of the post, the broker-dealer has become subject to  entanglement. If the firm explicitly or otherwise endorsed or approved the content posted by a third party, the broker-dealer is considered to have adopted the content. By posting a link on its website or sharing a link through email, a broker-dealer will be considered to have adopted the full content of the site or article. However, the broker-dealer will not be considered to have adopted the content accessible through an external link from the adopted content . If a firm adopts or becomes entangled with posts or links to third party websites, it becomes responsible  for the content. Further, firms may not link to third party sites the firm believes or has reason to believe contain misleading information. 

This information is highly testable on the series 4, Series 10, series 24  and series 26 exams.

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Good luck on your exam!

The Securities Institute of America

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