Communications with the Public

Every brochure, email, web page, social media post, seminar handout and research report that leaves a broker-dealer is regulated, and so are many of the things a representative says out loud. This chapter takes the communications topic to Series 7 depth. First you will learn how FINRA classifies communications, who must approve and file them, and what they may say. Then you will study the product-specific rules for funds, variable contracts, options, collateralized mortgage obligations, government securities, certificates of deposit and municipal securities, followed by research reports. Function 1 is only 9 of the 125 scored questions, and communications shares them with new issues, so expect a handful of items. They are almost always short scenarios: count the recipients, name the category, decide who must approve or file the piece, or find the statement that is not allowed.

1.1The Three Categories of Communications

Why the categories matter

If you studied our SIE course, you have seen the core idea already. FINRA Rule 2210, Communications with the Public, sorts every written communication that a member firm produces into one of three categories, and the category decides what approval, filing and recordkeeping the firm owes. The Series 7 asks you to apply that sorting to messy facts.

A communication under Rule 2210 is a written message, and written includes electronic. Letters, emails, text messages, brochures, websites, social media posts and slide decks are all written communications. The category depends on who receives the message and how many receive it, not on the format or the product.

Institutional investors and retail investors

Only retail recipients count toward the thresholds, so you must know who is institutional. An institutional investor under Rule 2210 is any of the following.

• A bank, savings and loan association, insurance company or registered investment company.
• An investment adviser registered with the SEC or with a state securities regulator.
• Any other person, including a natural person, corporation, partnership or trust, with total assets of at least $50 million.
• A governmental entity or a subdivision of one.
• A qualified retirement plan, or a 403(b) or 457 plan, with at least 100 participants. Plans offered by the same employer may be combined to reach 100. The individual participants do not become institutional investors.
• A FINRA member firm or a registered person of a member firm.
• Any person acting solely on behalf of one of the investors above.

A retail investor is anyone who is not an institutional investor, whether or not the person has an account at the firm. A retired physician with $12 million in assets is retail, because she is below the $50 million test.

The three categories

Correspondence is any written communication distributed or made available to 25 or fewer retail investors within any 30-calendar-day period. A letter to one client and a market update emailed to a dozen clients are correspondence.

A retail communication is any written communication distributed or made available to more than 25 retail investors within any 30-calendar-day period. Websites, public social media pages, newspaper and broadcast advertisements and mass mailings are retail communications. The phrase made available matters. A page that anyone can open is available to the whole public, so it is a retail communication even if few people look at it.

An institutional communication is any written communication distributed or made available only to institutional investors. It does not include a firm's internal communications, such as a memo to the firm's own staff. An internal memo is not a communication with the public at all.

Counting recipients correctly

Four counting rules decide most exam questions.

First, only retail investors count. Banks, insurance companies and other institutional recipients are ignored when you test the threshold of 25. A piece that reaches 15 retail investors and 40 institutions is correspondence, because only 15 retail investors received it.

Second, the window is any 30 calendar days, and it rolls. Look at every possible 30-day stretch. If any one stretch contains more than 25 retail recipients of the piece, it is a retail communication. Mailings more than 30 days apart do not add together.

Third, splitting a mailing to 40 retail clients into two batches of 20 does not make it correspondence if both batches go out within 30 days.

Fourth, a firm may not treat a piece as institutional if it has reason to believe the piece or an excerpt will reach a retail investor. A slide deck written for pension consultants, which the firm knows will be forwarded to individual clients, must be treated as a retail communication.

Rule 2210 sorts only written communications. Calls and face-to-face conversations are not classified, but the antifraud rules, Regulation Best Interest and the telemarketing rules in Lesson 1.4 still apply.

1.2Approval, Review, Filing and Recordkeeping

Each category raises three questions. Must a principal approve the piece before use? Must it be filed with FINRA? How long must the firm keep it? The more people a piece can reach, the more oversight it gets.

Principal approval of retail communications

A retail communication must be approved by an appropriately qualified registered principal, a supervisor registered to oversee the kind of business involved, before the earlier of its first use or its filing with FINRA. The principal's registration must fit the product. A registered options principal approves options communications, and a municipal or general securities principal approves municipal advertisements, as Lessons 1.6 and 1.7 explain.

Three exceptions to pre-use approval matter. For the first two, the firm must still supervise and review the communication the way it reviews correspondence.

• A retail communication that makes no financial or investment recommendation and does not promote a product or service of the firm. A web page that lists branch hours and directions is an example.
• A post on an online interactive electronic forum, such as a live chat or a real-time reply in a comment thread.
• A communication that another member firm has already filed with FINRA, when FINRA's review letter says it appears consistent with the standards and the using firm does not materially alter it. A fund distributor's brochure that selling firms reuse is the typical case. The using firm keeps the filing firm's name and a copy of the letter.

Review of correspondence and institutional communications

Correspondence does not need pre-use approval. Under Rule 3110, the firm's written supervisory procedures must provide for review of incoming and outgoing correspondence, and the review must be evidenced in writing. A supervising principal is responsible for the review, although some review functions may be delegated to staff who are not registered. Many firms use a risk-based approach, reviewing every email from new representatives and sampling the email of experienced ones. If the procedures do not require review of everything before it is sent, the firm must provide training, document it, and run surveillance and follow-up. The evidence of review must identify the reviewer, the communication, the date and any action taken. Merely opening a communication is not a review.

Institutional communications also need no pre-use approval. The firm must have written procedures for a principal to review them, and if those procedures do not call for review of every piece before use, the same three safeguards apply: training, documentation of the training, and surveillance and follow-up.

Filing with FINRA

FINRA's Advertising Regulation Department reviews the communications that firms file. Correspondence and institutional communications are never filed, although FINRA may ask a firm for any communication in a spot check. Only certain retail communications must be filed, and the rules sort them by timing.

• New member firms. For one year, starting on the date FINRA membership became effective, a firm must file retail communications used in public media, such as a website, newspaper, broadcast, video or billboard, at least 10 business days before first use.
• Before first use, for every firm. A fund communication that includes a ranking or comparison, where the category is not generally published or was created by the fund, its underwriter or an affiliate, must be filed at least 10 business days before use, with the supporting data. Retail communications about security futures follow the same timing.
• Within 10 business days after first use, for every firm. This post-use group covers retail communications that promote a specific registered investment company or family of investment companies, which includes mutual funds, exchange-traded funds, closed-end funds, unit investment trusts and variable insurance products. It also covers public direct participation programs, registered collateralized mortgage obligations, and registered securities derived from a single security, a basket, an index, a commodity, a debt issuance or a foreign currency.
• Options. A retail options communication used before the options disclosure document is delivered must be filed at least 10 calendar days before use, as Lesson 1.6 explains.
• FINRA orders. FINRA can require a firm that has departed from the rules to file all of its communications, or those about specific products or services, at least 10 business days before first use. The order takes effect 21 calendar days after FINRA serves written notice.

Many items are excluded from filing, including a piece already filed and used without material change, a template whose only updates are statistics, a piece that makes no recommendation and promotes no firm product, a press release for the media only, a prospectus filed with the SEC, and a post on an interactive electronic forum.

Recordkeeping

Under SEC Rule 17a-4, a firm keeps communications for at least 3 years, with the first 2 years in an easily accessible place. For a retail or institutional communication the record includes a copy and the dates of first and last use. It also shows the approving principal and the date of approval, or, if the piece was not approved before use, the person who prepared or distributed it. It identifies the source of any statistics, charts or graphs, and the data behind any fund ranking. Correspondence records show who prepared and who reviewed each outgoing item.

Try it: choose an audience, a number of recipients and a format, and see which category applies and what the firm must do. Remember that correspondence and institutional communications never require approval before use and are never filed, while retail communications are approved before use and filed only in the groups above.

1.3Content Standards

What the standards cover

Rule 2210(d) sets the content standards. The general standards apply to every communication, including institutional communications. A second layer of specific standards applies to retail communications, and some also reach correspondence. Knowing the layer helps when a question asks whether a rule applies to an institutional piece.

Fair and balanced

Every communication must be based on fair dealing and good faith, must be fair and balanced, and must give the reader a sound basis for evaluating the facts. In practice that means the following.

• Benefits must be balanced with risks. A piece that praises a bond fund's income must also explain its credit and interest-rate risk.
• A firm may not omit a material fact or qualification if the omission would make the piece misleading.
• Statements must reflect that prices fluctuate and that dividends, rates of return and yields are uncertain.
• The level of detail must fit the audience.

A communication may not contain a false, exaggerated, unwarranted, promissory or misleading statement. A promissory statement promises a result. "Guaranteed income," "you cannot lose" and "as safe as a bank deposit," used for a stock fund, are classic violations.

The ban on projections

Communications may not predict or project performance, imply that past performance will recur, or make an exaggerated or unwarranted forecast. "This portfolio will return 12% a year" is prohibited. Because this standard is in the general layer, it applies to institutional communications too. Rule 2210 allows three exceptions.

• A hypothetical illustration of mathematical principles, such as a table showing how $200 a month grows at an assumed 6% rate, provided it does not predict or project the performance of an investment or strategy.
• An investment analysis tool, or a report it produces, that meets FINRA Rule 2214. Such a tool is an interactive program that simulates outcomes. Its disclosures must state that results may vary with each use and over time, describe the criteria, methodology and key assumptions, and say that the results are hypothetical, do not reflect actual results and are not guarantees.
• A price target in a research report, if the target has a reasonable basis, the report discloses the valuation method, and the target is accompanied by disclosure of the risks that could keep it from being reached.

Specific standards for retail communications

Comparisons. A comparison in a retail communication between investments or services must disclose all material differences, such as objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features.

The firm's name and BrokerCheck. Retail communications and correspondence must prominently show the member's name, or the name under which it primarily does business. A firm's website must carry a readily apparent link to FINRA's BrokerCheck on the first page aimed at retail investors and on any page that profiles a registered person who serves retail investors.

Tax claims. A reference to tax-free or tax-exempt income must say which taxes are avoided, unless the income is free of all applicable taxes. Income or returns may not be called tax-free when tax is only deferred. A comparison of tax-deferred and taxable compounding must use identical investment amounts and identical assumed gross returns that do not exceed 10 percent a year, must use and identify actual federal tax rates, and may not assume an unreasonable period of deferral.

Testimonials. If a testimonial concerns a technical aspect of investing, the person giving it must have the knowledge and experience to form a valid opinion. A retail communication or correspondence with a testimonial about the firm's advice or performance must prominently disclose that the testimonial may not represent other customers' experience, that it is no guarantee of future performance, and, if more than $100 in value was paid for it, that it is a paid testimonial.

Recommendations. A retail communication that recommends a security must have a reasonable basis and must disclose, when applicable, that the firm makes a market in the security or will trade with customers as principal, that the firm or a directly involved associated person has a financial interest in the issuer's securities that is more than nominal, and that the firm managed or co-managed a public offering of the issuer's securities within the past 12 months. A recommendation of a corporate equity security must state the price at the time. Past profitable recommendations may be cited only through a complete list of the firm's recommendations of that type over at least one year, with a legend that future recommendations should not be assumed to be profitable. Communications that recommend only registered investment companies or variable insurance products need neither the conflict disclosures nor the list, but they still need a reasonable basis.

1.4Social Media, Seminars, Public Appearances and Telephone Contacts

Static and interactive social media

FINRA applies Rule 2210 to social media by asking whether content is static or interactive.

• Static content stays posted until someone changes it. A profile, a background page and a post on a business page are examples. Static content the public can reach is a retail communication, so a principal must approve it before it is posted.
• Interactive content is a real-time conversation, such as a chat or a reply in a comment thread. It does not need pre-use approval, but the firm must supervise it with procedures reasonably designed to prevent violations, such as sampling and keyword searches after the fact. Interactive content that is copied and posted in a static area becomes static and needs approval first.

Interactive posts are still written communications, not public appearances. A post made available to more than 25 retail investors is a retail communication that is excepted from pre-use approval and from filing, but it must meet the content standards and be supervised like correspondence. Older materials, written before Rule 2210 took its current form in 2013, called interactive forum participation a public appearance.

Third-party content: adoption and entanglement

Posts by customers or other outsiders are generally not the firm's communications. They become the firm's responsibility in two ways. A firm adopts third-party content when it explicitly or implicitly endorses or approves it. Sharing a post, linking to specific content, or liking a favorable comment about a representative is adoption. Adopted content must meet the same standards as the firm's own, and a favorable comment is treated as a testimonial. A firm becomes entangled when it takes part in developing the content, for example by paying for it or helping to prepare it. An influencer's post that the firm arranges is entangled, and it should be identified as an advertisement. A firm that co-brands a third-party site is responsible for the whole site.

Unsolicited outside comments that the firm does not endorse are not the firm's communications, and a representative's personal post that does not concern the firm's business generally is not subject to Rule 2210.

Recordkeeping and off-channel messages

The content of a message, not the device or app, determines whether the firm must keep it. A business conversation by text message, chat app or social media must be captured and retained like email, and the firm must be able to retain it before the representative uses the channel. A representative who discusses client business on a personal app that the firm cannot capture is using an off-channel communication, which violates the recordkeeping rules.

Seminars, lectures and other public appearances

A public appearance is unscripted participation in a seminar, forum, radio or television interview, or other public speaking. Rule 2210(f) sets these requirements.

• The speaker must follow the general content standards, so no projections, no promissory claims and a balanced presentation.
• A recommendation must have a reasonable basis. The speaker must disclose any financial interest in the issuer's securities that is more than nominal and any other actual, material conflict the speaker knows about. Research analysts who give the disclosures required by the research rules are excused, and so are recommendations of investment company securities or variable insurance products, which still need a reasonable basis.
• The firm must have written supervisory procedures for public appearances, including training, documentation of the training, and surveillance and follow-up.
• Scripts, slides and handouts are written communications, classified by audience, content and use like any other piece.

The invitation matters too. A mailer, newspaper ad or public social media post inviting the public to a seminar is a retail communication that a principal must approve before use. A slide deck handed to 60 members of the public is a retail communication, while a handout given to 10 attendees at a private meeting may be correspondence.

Telephone contacts

Outbound sales calls are governed by the telemarketing rules from the SIE course. FINRA Rule 3230 and the federal Telemarketing Sales Rule allow calls only between 8 a.m. and 9 p.m. in the called person's local time. A firm must keep its own do-not-call list, honor a request within 30 days, and keep the record for 5 years, and the National Do-Not-Call Registry also applies. Exemptions cover calls to an established business relationship, to a personal acquaintance, and to other broker-dealers. Sales scripts are communications the firm must retain, and MSRB Rule G-21 treats a municipal telemarketing script as an advertisement.

1.5Securities Act Section 5 and Investment Company Communications

Section 5 in brief

Section 5 of the Securities Act of 1933 shapes every communication about a security that must be registered. Section 5(c) makes it unlawful to offer a security before a registration statement has been filed. Section 5(a) makes it unlawful to sell the security until the registration statement is effective. Section 5(b) requires that, once the registration statement is filed, any prospectus used to offer the security meet Section 10, and that a final prospectus precede or accompany the security when it is delivered for sale.

The word prospectus has a broad meaning. Under Section 2(a)(10), almost any written, radio or television communication that offers a security is a prospectus. An advertisement is therefore a prospectus unless a rule says otherwise, which is why the SEC wrote rules allowing shorter, defined communications. Chapter 2 covers Rule 134, which allows a limited announcement of a new issue after filing. Rule 134a keeps general educational material about standardized options from being a prospectus, as Lesson 1.6 explains, and this lesson covers the rules for investment companies.

Why funds are different

An open-end fund offers its shares continuously, so its registration statement is effective all the time. Every advertisement or letter that promotes the fund is therefore an offer made while Section 5(b) applies. That leaves four kinds of fund material.

• The statutory prospectus, the full document that meets Section 10(a).
• The summary prospectus, a short document that Rule 498 allows to satisfy the delivery duty.
• An advertisement under SEC Rule 482, which the SEC deems a Section 10(b) prospectus so that it may be used without an accompanying prospectus. It is often called an omitting prospectus because it may leave out much of the prospectus content.
• Other sales literature, which must be preceded or accompanied by a prospectus, either statutory or summary.

SEC Rule 482 advertisements

A Rule 482 advertisement may include information not in the prospectus, but it must include the following.

• A statement advising the investor to consider the fund's investment objectives, risks, charges and expenses carefully, saying that the prospectus contains this and other information, naming where to get it, and saying to read it carefully.
• If the ad is used before the registration statement is effective, a Subject to Completion legend.
• If the ad shows performance, a legend saying that the figures are past performance, that past performance does not guarantee future results, that return and principal value fluctuate so shares may be worth more or less than cost, and that current performance may be lower or higher. The legend gives a toll-free number or website for performance current to the most recent month-end, unless the ad shows total return current to the month that ended seven business days before use.
• If the ad shows performance and a sales charge applies, the maximum sales charge, and a statement that performance would be lower if the charge were reflected and it is not.
• If the ad gives expense figures, the maximum sales load and the total annual expenses without any fee waiver, shown at least as prominently as other fee figures.

The performance itself is controlled. A non-money-market fund must show average annual total return for the one-, five- and ten-year periods, or for the life of the fund if shorter. The returns must be current to the most recent calendar quarter ended before the ad was submitted for publication and shown with equal prominence. Yield may be shown only with total return and no more prominently. An ad may not contain or be accompanied by an application to invest.

FINRA Rule 2210 adds its own layer. Any retail communication or correspondence that shows performance of a fund other than a money market fund must also prominently show the standardized Rule 482 returns, the maximum sales charge, and the total annual operating expense ratio gross of any fee waivers. In a print advertisement these items go in a prominent text box.

A money market fund ad must state that the investor could lose money, that the fund is not a bank account and is not insured or guaranteed by the FDIC or any other government agency, and that the sponsor is not required to reimburse the fund for losses. An effective yield or a tax-equivalent yield may appear only alongside the current yield.

SEC Rule 498 summary prospectus

A summary prospectus lets an open-end fund meet its delivery duty with a short document. It contains the information in Items 2 through 8 of Form N-1A, the registration form that open-end funds file with the SEC, and only that information, in the required order. It covers one fund, although it may cover several share classes. A legend tells investors where to get the statutory prospectus. The fund must post the statutory prospectus, the statement of additional information, which is a longer companion document, and the latest shareholder reports on a website free of charge, and keep current versions there for at least 90 days after delivery. Anyone who asks must receive a paper copy within three business days. The summary prospectus must be given greater prominence than any materials that accompany it. Sending it no later than delivery of the shares satisfies Section 5(b)(2), and sending it before or with later sales literature satisfies the requirement that the literature be preceded or accompanied by a prospectus.

SEC Rule 156 and misleading sales literature

Rule 156 explains when fund sales literature is materially misleading. A statement is misleading if it is untrue or omits a material fact needed to keep it from misleading. Warning signs include benefits stated without equal prominence for risks, exaggerated claims about management skill, unwarranted comparisons, claims about safety of capital or future gains, and past performance portrayed as likely to repeat. Following Rule 482 does not protect a misleading ad. A fund that holds Treasury securities cannot be called government guaranteed, because the fund's own shares are not guaranteed.

FINRA Rule 2212: fund rankings

Rule 2212 limits the rankings a retail communication may use.

• The ranking must be created and published by an independent ranking entity, one that provides general information about investment companies to the public and is not hired by the fund to assign a ranking. The only alternative is a ranking that the fund or an affiliate creates from a ranking entity's performance measurements, and a piece using a category the fund family created is filed with FINRA before use, as Lesson 1.2 explains.
• Except for money market funds, a ranking may not cover a period of less than one year unless it is based on yield.
• A category based on asset size is prohibited.
• A total return ranking must be accompanied by one-year rankings for funds at least one year old, one- and five-year rankings for funds at least five years old, and one-, five- and ten-year rankings for funds at least ten years old.
• The ranking must be current to the most recent calendar quarter ended before use or submission for publication.
• A headline may call a fund the best in its category only if it actually ranks first.
• The piece must prominently disclose the category, the number of funds, the ranking entity, the period and the criteria.

FINRA Rule 2213: bond fund volatility ratings

A bond mutual fund volatility rating is a description from an independent third party of how sensitive a bond fund's net asset value is to changes in market conditions. A retail communication may use one only if the rating is current through the latest completed calendar quarter, is not labeled a risk rating, and rests on objective factors. The piece must name the issuer of the rating, give its date and a web address for the methodology, describe the risks the rating measures, say whether anything was paid to obtain the rating, and state that there is no standard method for assigning ratings and that the fund is not guaranteed to keep the rating.

1.6Variable Contracts, Options, CMOs, Government Securities and CDs

Variable annuities and variable life insurance

A variable annuity or variable life policy combines insurance with a separate account that invests like a fund. Because the contract is a security, communications about it follow Rule 2210 and the standards in FINRA Rule 2211.

• The piece must say clearly whether the product is a variable annuity or a variable life policy. It may add a proprietary name, but it must not suggest that the product or its separate account is a mutual fund.
• The piece may not present the product as short-term or liquid. Any statement about access to value must be balanced by the costs of early redemption, such as surrender charges, tax penalties and possible loss of principal.
• Guarantees may not be overstated. They depend on the insurer's claims-paying ability, and the piece may not imply that a guarantee covers the separate account's investment return or principal.
• Growth must be described as tax-deferred and not tax-free.
• A hypothetical illustration of variable life cash values and death benefits may not predict results. It may use any combination of assumed gross returns up to 12 percent, one of which must be 0 percent, and it must reflect the maximum guaranteed mortality and expense charges.

A retail communication that promotes a specific variable contract is filed with FINRA within 10 business days after first use. FINRA Rule 2330 is not an advertising rule. It governs recommendations of deferred variable annuities and requires a principal to review each application within seven business days after the complete package reaches the supervising office. Chapter 11 covers it.

Options communications

Options communications are governed by FINRA Rule 2220 and, for exchange members, by Cboe Rule 9.15. The categories follow Rule 2210, but approval and filing differ.

• A retail options communication must be approved in advance by a registered options principal, a principal qualified for options business and designated in the firm's procedures. Completed worksheets are excepted.
• Correspondence needs no options principal's pre-use approval but is supervised and reviewed. An institutional options communication requires written procedures for review by a registered options principal.
• A retail communication about standardized options used before the options disclosure document, called the ODD, is delivered must be filed with FINRA at least 10 calendar days before use. Filing is not required for the ODD itself, for a prospectus, or for a piece in which options appear only in a list of the firm's services.
• The firm keeps the usual copies, plus the names of the people who prepared and approved the piece and the source of any recommendation in it.

An options communication may not promise specific results, make unwarranted or unlabeled forecasts, suggest that a secondary market is certain, or fail to reflect the risks of options. It must warn that options are not suitable for all investors and state that supporting documentation will be supplied on request, although institutional communications are excused from those two statements.

A piece that does not precede or accompany the ODD must be limited to general descriptions of options and give contact information for obtaining the ODD. It may not contain recommendations, past or projected performance, annualized returns or the names of specific securities. SEC Rule 134a is the Securities Act counterpart. Written options material is not a prospectus if it is limited to explanatory information about the options markets or strategies, explains the risks, uses no performance figures, makes no recommendation, names no specific security other than an exempt security or an index option, and says where to get the ODD.

Unlike Rule 2210 generally, the options rules permit projections and past results under conditions. A projection, including an annualized return, requires that the ODD accompany or precede the piece, that parameters such as strike price, premium and dividends be stated, that all costs, assumptions and risks be disclosed, and that no certainty be suggested. An annualized return must rest on at least 60 days of experience and display its formula. Historical performance also requires the ODD, a fully isolated universe covering at least the most recent 12 months, dates, prices and costs, and a statement that results are not an indicator of future performance. A registered options principal must find that the records fairly present the transactions and initial the report.

Delivery is governed by FINRA Rule 2360 and by two Cboe rules. Cboe Rule 9.9 requires a firm to deliver the current ODD to each customer at or before the time the account is approved for options trading, and to furnish each amendment to previously informed customers no later than delivery of a confirmation in the affected category of options. FINRA Rule 2360 imposes the same delivery requirements on FINRA members. Cboe Rule 9.8 says a firm may not address communications to a customer in care of another person unless the customer gave written instructions within the preceding 12 months or duplicate copies go to the customer at another address designated in writing.

Collateralized mortgage obligations

A collateralized mortgage obligation, or CMO, is a multi-class bond backed by mortgage securities or loans. FINRA Rule 2216 sets these standards for retail communications and correspondence about CMOs.

• The product name must include the words Collateralized Mortgage Obligation.
• The piece may not compare a CMO to any other investment vehicle, including bank certificates of deposit.
• Where it applies, the piece must say that government agency backing covers only face value and not any premium paid, and that yield and average life fluctuate with prepayment rates and interest rates.
• Before selling a CMO to anyone other than an institutional investor, the firm must offer educational material on characteristics, risks, structure and tranches, which are the separate classes of a CMO.
• A promotional piece that features a specific CMO or gives yield information must follow a prescribed format. It shows the title, coupon, anticipated yield and average life, tranche, final maturity and collateral, along with an unaltered statement that the yield and average life consider prepayment assumptions that may or may not be met. It must say the security is offered subject to prior sale and price change.

A retail communication about a registered CMO is filed within 10 business days after first use.

Government securities and certificates of deposit

FINRA has no separate communications rule for government securities, and they do not appear in the retail filing groups. Treasury and agency securities are exempt from Securities Act registration, but Rule 2210 and the antifraud rules still apply. Do not describe Treasury or agency securities as AAA rated, because no major rating agency rates the U.S. government AAA. Do not imply that every agency security carries the full faith and credit of the United States. Treasury securities and Ginnie Mae securities do, but Fannie Mae and Freddie Mac securities do not. A Treasury's price still fluctuates before maturity, and a fund that holds Treasuries is not itself government guaranteed.

Communications about certificates of deposit must be fair and balanced. FINRA guidance on brokered CDs adds specific points.

• FDIC insurance covers up to $250,000 per depositor, per insured bank, per ownership category. It does not protect against a loss in market value if the CD is sold before maturity.
• A piece should not claim no penalty for early withdrawal unless the issuer guarantees full face value on early redemption.
• The firm should disclose that the secondary market may be limited and that the firm may not make a market in the CD.
• For a callable CD the firm should disclose the call and the resulting reinvestment risk, and should not predict whether it will be called.

1.7Municipal Securities Advertising

MSRB Rule G-21

Municipal securities dealers follow MSRB Rule G-21, which governs advertising by brokers, dealers and municipal securities dealers. FINRA enforces it for member firms, and FINRA Rule 2210 treats a violation of an MSRB rule that applies to communications as a violation of Rule 2210. Rule G-21 defines an advertisement as any material, other than a listing of offerings, that is published or used in any electronic or other public media, or any written or electronic promotional literature distributed or made generally available to customers or the public. It names notices, circulars, reports, market letters, form letters, telemarketing scripts, seminar texts, press releases and reprints.

Two points matter. Preliminary official statements and official statements are not advertisements, although abstracts or summaries of them that a dealer prepares are. And a form letter is a letter or email distributed to more than 25 persons within any 90 consecutive days. Notice the difference from FINRA, which counts retail investors in 30 days. A letter to 25 or fewer persons in 90 days is not a form letter, though the fair dealing rule, Rule G-17, still applies to it.

Types of advertisements and content standards

A professional advertisement concerns the facilities, services or skills of a dealer with respect to municipal securities. A product advertisement concerns specific municipal securities, issues or issuers, or specific features of municipal securities. Neither may contain an untrue statement of material fact or be otherwise false or misleading.

The content standards parallel Rule 2210. Advertisements must be fair and balanced and free of false, exaggerated, unwarranted, promissory or misleading statements, and they may not predict or project performance or imply that past performance will recur. Two exceptions parallel Rule 2210: a hypothetical illustration of mathematical principles and an investment analysis tool. Rule G-21 has no price-target exception. The testimonial rules match Rule 2210, including the $100 paid-testimonial threshold. A dealer may say it is registered with the MSRB but may not imply that the MSRB or any regulator endorses it or any security.

New issue advertisements

An advertisement for a new issue other than a municipal fund security has two special duties. A syndicate member may show the initial reoffering prices or yields even if they have since changed, if the ad gives the date the issuer sold the securities to the syndicate. If it shows any other prices or yields, they must be as of the time the ad is submitted for publication. The ad must also say, when it applies, that the securities may no longer be available from the syndicate or may be available at a different price or yield.

Municipal fund securities and 529 plans

Municipal fund securities are interests in 529 college savings plans and similar pooled programs, and they carry their own advertising rules.

• Basic disclosure. The ad must say that investors should consider the investment objectives, risks, charges and expenses before investing, that more information is in the issuer's official statement, and that the official statement should be read carefully. If the dealer is the underwriter of an issue whose official statement the ad points to, the ad must say so.
• Home state benefits. An ad for a 529 plan must say that an investor should consider whether the investor's or beneficiary's home state offers tax or other benefits, such as financial aid or creditor protection, available only for that state's plan. The statement is not required for an ad distributed only to residents of the plan's own state.
• Performance. Performance must follow the Rule 482 format from Lesson 1.5, including one-, five- and ten-year average annual total returns, the legend, the maximum sales charge and the total annual operating expense ratio.
• Issuer and guarantees. The ad must name the issuer and must not suggest that a government sponsor guarantees against investment losses when it does not.
• Tax claims. An ad describing tax benefits must say they may be conditioned on meeting requirements and must list the main factors that limit them.

Generic advertisements and certain blind advertisements are excepted from the basic disclosure, and correspondence that gives performance data for municipal fund securities must follow the performance rules as if it were a product advertisement.

Approval and records

A municipal securities principal or a general securities principal must approve each advertisement in writing before first use. Interactive content posted in an interactive electronic forum is exempt from that pre-use approval, but the dealer must supervise and review it the way it reviews correspondence. The dealer keeps records of all advertisements in a separate file, and MSRB Rule G-9 requires them to be kept for four years from the date of each use. That is longer than the three-year period for FINRA communications, a contrast that exams like to test.

Rule 15c2-12 and official statements

SEC Rule 15c2-12 is the disclosure rule for municipal offerings of $1 million or more. Chapters 3 and 17 cover it. It matters here because of what customers may request. In an offering that is not competitively bid, the underwriter must send a prospective customer the most recent preliminary official statement on request no later than the next business day. In every offering, once the final official statement is available, the underwriter must do the same for that document, until the earlier of 90 days after the underwriting period ends or the time it is available from the MSRB, but never for less than 25 days after the underwriting period.

1.8Research Reports

What a research report is

A research report under FINRA Rule 2241 is a written or electronic communication that analyzes equity securities of individual companies or industries and gives enough information to base an investment decision. Broad market commentary, technical analysis of supply and demand for a sector, index or industry, statistical summaries of multiple companies and notices of rating or price target changes are not research reports, and neither are communications sent to fewer than 15 people. Debt research falls under a parallel rule, Rule 2242. Research is also a communication under Rule 2210, so the content standards apply, and a supervisory analyst may approve certain research communications in place of a principal.

Research rules wall off analysts from investment banking, so that an analyst is not tempted to praise a company the firm hopes to win as a banking client.

Quiet periods

A quiet period bars a firm that took part in an offering from publishing research on the issuer or having its analysts make public appearances about it.

• After an initial public offering, a firm that participated as an underwriter or dealer may not publish research on the issuer for 10 days.
• After a secondary offering, a firm that acted as manager or co-manager may not do so for 3 days.

These are minimums; a firm's own policies may set longer periods. The periods do not apply to offerings by emerging growth companies. The 3-day secondary period also does not stop research published under SEC Rule 139 on a company whose securities are actively traded, a term defined in Regulation M, or an analyst's public appearance about such a company. A firm may also publish a report on significant news or events during a quiet period if legal or compliance personnel authorize it first. The research quiet period is separate from the pre-filing and waiting periods under the Securities Act, which Chapter 2 covers.

Analyst independence

The rule includes many safeguards. These are the ones most likely to be tested.

• Investment banking personnel may not supervise analysts, control their compensation, or approve research before it is published.
• An analyst's pay may not be tied to a specific investment banking transaction, and a committee without investment banking representatives reviews compensation each year, weighing factors such as the accuracy of the analyst's recommendations and client ratings.
• A firm may not promise favorable research, a rating or a price target to win business, and analysts may not take part in investment banking pitches or issuer road shows.
• A subject company may review only sections of a draft, only to verify facts, and those sections may not include the research summary, the rating or the price target. A complete draft must go to legal or compliance first, and if the analyst wants to change the rating or price target after sections go to the company, legal or compliance must authorize the change in writing.

SEC Regulation AC adds a certification. Each research report must include a statement by the analyst that the views expressed accurately reflect the analyst's personal views and whether any compensation is related to the recommendations in the report.

Required disclosures

A research report must disclose conflicts clearly and prominently on its front page or by a reference there. The list includes the following.

• The analyst's or household's financial interest in the subject company's securities, and whether the analyst's pay is based on investment banking revenue.
• Whether the firm managed or co-managed a public offering of the company's securities in the past 12 months, received investment banking compensation from it in the past 12 months, or expects or intends to seek such compensation in the next three months.
• Whether the firm or its affiliates beneficially own 1 percent or more of any class of the company's common equity.
• Whether the firm makes a market in the securities at publication.
• Compensation the firm or the analyst received from the subject company in the past 12 months, and any other material conflict.

The report must also define each rating and disclose the percentage of all rated securities with buy, hold and sell ratings. Analysts who speak at a public appearance before 15 or more people must disclose similar conflicts.

Third-party research

When a firm distributes research that someone else prepared, a registered principal or supervisory analyst must review and approve each report. The firm may not distribute research it knows, or has reason to know, is not objective or reliable. It must have procedures to prevent untrue or misleading information from being distributed, and it must give or link to disclosure of material conflicts, such as investment banking relationships, 1 percent ownership and market making. The report must be clearly labeled so readers know who prepared it.

Independent third-party research gets lighter treatment. A report is independent if its producer has no relationship with the firm that is reasonably likely to influence its content and makes content decisions without the firm's input. A principal or supervisory analyst still approves it, but the firm need not review its content for untrue or misleading statements, and the conflict disclosure is not required when the firm provides it on request, through its website or in certain solicited transactions.

SEC safe harbors for research

Because research might look like an offer, the SEC provides safe harbors that treat certain research as not an offer. Rule 137 protects firms not taking part in the offering. Rule 138 lets a firm in the offering publish research on a different kind of security of the same issuer, such as common stock research during a bond offering. Rule 139 covers regularly published research, even by firms in the offering, about issuers that meet defined reporting requirements.

Chapter Summary

• Rule 2210 sorts written communications by audience. Correspondence goes to 25 or fewer retail investors in 30 days, a retail communication to more than 25, and an institutional communication only to institutional investors.
• Only retail recipients count, the window rolls across any 30 days, and a firm may not treat a piece as institutional when it expects it to reach retail investors.
• Retail communications need a principal's approval before first use, with exceptions for pieces with no recommendation, interactive forum posts and pieces already filed by another firm. Correspondence and institutional pieces are reviewed under written procedures.
• Filing is limited to certain retail communications: new firms in their first year, fund rankings before use, and specific funds, public DPPs, registered CMOs and registered structured products within 10 business days after first use. Records are kept 3 years.
• Content standards ban promissory claims and projections, with exceptions for mathematical illustrations, investment analysis tools and research price targets. Retail pieces must also meet rules on comparisons, firm name, taxes, testimonials and recommendations.
• Static social media content needs approval, interactive content is supervised, and a firm is responsible for third-party content it adopts or becomes entangled with. Seminar scripts and handouts are classified by audience.
• Fund advertising follows Rule 482, summary prospectuses follow Rule 498, and Rule 156 describes misleading sales literature. FINRA Rules 2212 and 2213 control rankings and volatility ratings.
• Variable contracts, options, CMOs, government securities and CDs each have special rules, and options may use projections only under the Rule 2220 conditions with the ODD.
• Municipal advertising is governed by MSRB Rule G-21: a form letter is more than 25 persons in 90 days, a principal approves each advertisement in writing before use, and records are kept four years.
• Research reports are subject to quiet periods of 10 days after an IPO and 3 days after a secondary offering, analyst independence rules, mandatory conflict disclosures and rules for distributing third-party research.

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