Public Communications Rules in Security Industries

Instructor: Byron Yee

Byron has over 5 years of experience in banking and investments and is currently a Candidate for the Chartered Financial Analyst (CFA) Institute. He also is registered with FINRA Series 7 and 66 and has his Life & Disability Insurance producers license for WA state. Previous to his career in banking, he spent 2 years in West Africa as a Peace Corps Volunteer and 4 years in China as an English teacher and financial analyst. Byron double majored in Theatre Arts and Business Administration at Western Washington University. In his free time he enjoys hiking, cycling, running, and being in the great outdoors with his family.

This lesson defines client communication and the three major types of communication. We then go into more detail about the rules and requirements for each of the communication types.

Attempting to Soothe Fears During a Stock Market Drop

Joshua is an investment advisor who works with a large variety of clients. Over the past two days, the stock markets experienced a significant drop in prices and he is getting an overflow of worried clients calling him about their portfolios. In order to more efficiently calm the fears of his clients, he quickly writes a simple memo explaining that this drop is only temporary and that his clients' portfolios will not only recover but are expected to improve over the next 3 months. Joshua wanted to urgently reach out to his clients and didn't think it was necessary to share this memo with his supervisor before sending it. Six months later, the stock markets still had not recovered and several clients filed a lawsuit against Joshua and his firm alleging that Joshua had given them misleading information about market performance and investment advice.

Overview of FINRA Rule 2110

FINRA Rule 2110 was established by the Financial Industry Regulatory Authority (FINRA) and set up rules regarding approval and documentation of communication with clients. Communication covers almost all mediums, including written and electronic ads, sales literature, other publications, as well as forums and public appearances (defined as professional testimonials). There are different requirements depending on the type and size of the audience to which the communication is directed, which we will go through in more detail in the following sections. However, in general, it is important to remember a few things about communication with clients:

  • All communication should be passed by a supervisor before publishing: Some communication requires higher-level approval, however, it's always best practice for a supervisor to review everything, regardless. The main goal is to avoid sharing any information that is inaccurate or misleading, which could later lead to legal problems.
  • Keep documentation: In some cases, copies of communication need to be filed in advance with FINRA. Again, regardless of this requirement, it is a good practice to properly document and store any communication for future reference.
  • Communication should be appropriate for its audience: This not only refers to using basic terminology and simple explanations but also that the content itself is suitable for the audience. For example, writing a newsletter about highly volatile stocks is probably not appropriate for clients who are retired and need a low risk, steady income.
  • The person writing (or verbally delivering) the information should be qualified to talk about these topics. This means that the writer or speaker should be an expert on this topic of conversation. Listing any certifications, licenses, or registrations will also help support their qualifications.

Next, we're going to look more closely at the three major types of client communications.

Retail Communication and Correspondence

Retail communication is defined as any written form of communication that is shared with more than 25 customers or investors in a 30 day time period. Examples of communication include newsletters, investment firm brochures, or handouts on specific securities. The electronic component also includes any email blasts, online newsletters, and some blog posts as well. This is the most common type of communication produced because it reaches the largest group of people, and is therefore also the most regulated of the three types. The key thing to remember about retail communication is that any publication must be approved by the member principal, an employee of the firm who is licensed to act in a supervisory role (usually a higher-level manager). A copy of this communication also needs to be filed with FINRA within 10 business days of distribution.

Correspondence is a lighter version of retail communication that is only shared with less than or equal to 25 people within a 30 day time period. The key difference between correspondence and retail communication is that correspondence does not require approval, nor does the communication need to be filed with FINRA. Requirements are more relaxed with correspondence because it reaches a much lower number of people, and therefore the implied risks, are much lower. It is important to note that even though correspondence does not require principal approval, it is still subject to FINRA's rules on supervision. Therefore, correspondence still needs to be reviewed by a supervisor, regardless of audience size.

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