Posted On: December 26, 2024

FINRA Communication Standards Explained

Have you ever wondered about the rules that govern how financial professionals communicate with their clients? FINRA's communication standards play a crucial role in ensuring that investors receive accurate and unbiased information. From written materials to electronic communications, these standards help to maintain the integrity of the securities industry. In this blog, we will define FINRA's communication standards and explain their role in regulating the securities industry.

What Is FINRA?

FINRA, or the Financial Industry Regulatory Authority, is a self-regulatory organization (SRO) in the United States that oversees brokerage firms and their employees. It is a private, self-regulatory organization (SRO) that is responsible for regulating the securities industry to ensure fair and honest conduct in financial markets.

What Is FINRA’s Role in Regulating the Securities Industry?

FINRA's role in regulating the securities industry is multifaceted. It acts as a self-regulatory organization (SRO), overseeing and enforcing rules that govern the conduct of broker-dealer firms and their registered representatives.

Some of their responsibilities include:

Rulemaking: FINRA develops and promulgates rules that cover a wide range of activities, including sales practices, suitability standards, recordkeeping requirements, and advertising.
Enforcement: FINRA investigates and enforces its rules through disciplinary proceedings. This can involve fines, suspensions, or even revocations of licenses.
Examination: FINRA conducts regular examinations of broker-dealer firms to ensure compliance with its rules and to identify potential violations.
Investor protection: FINRA works to protect investors by promoting fair and honest practices in the securities industry. This includes educating investors and providing resources to help them understand the markets and make informed decisions.

What Are FINRA’s Communication Standards?

FINRA's communication standards are a set of rules and guidelines that govern how financial professionals communicate with clients and the public. These standards are designed to ensure that investors receive accurate, fair, and understandable information.

Key elements of FINRA's communication standards include:

Content requirements: The standards specify what information must be included in communications, such as disclosures, suitability information, and risk factors.
Recordkeeping obligations: Financial professionals are required to maintain records of their communications, including written materials, emails, and phone calls.
Sales practices: The standards address sales practices, such as suitability determinations and the use of sales tactics.
Advertising: FINRA has rules governing advertising and marketing materials used by financial professionals.

What Is the Purpose of FINRA’s Communication Standards?

FINRA's communication standards are designed to safeguard investors and maintain the integrity of the securities markets. By preventing fraud and abuse, ensuring fair treatment of investors, promoting investor confidence, and protecting the reputation of the industry, these standards play a crucial role in creating a trustworthy and transparent investment environment.

What Are FINRA’s Communications Standards?

FINRA's communication standards, as outlined in its rules, are designed to ensure that communications by brokerage firms and registered representatives are fair, balanced, and not misleading. These standards apply to a wide range of communications, including advertisements, sales literature, and other promotional materials. The goal is to protect investors by ensuring that they receive accurate and transparent information.

Here’s an overview of FINRA's key communication standards:

1. Rule 2210: Communications with the Public

This is the primary rule governing communications with the public. It categorizes communications into three types:

Retail Communications: Any written (including electronic) communication distributed to more than 25 retail investors within a 30-day period.
Correspondence: Any written (including electronic) communication distributed to 25 or fewer retail investors within a 30-day period.
Institutional Communications: Communications solely with institutional investors, such as banks, insurance companies, and government entities.

2. Fair and Balanced Communication

Accuracy: All communications must be based on principles of fair dealing and good faith. They must be fair and balanced and must not omit any material fact or qualification that would cause the communication to be misleading.
No False Claims: Communications must not contain false, exaggerated, or unwarranted statements or claims.
Balanced Presentation of Risks and Benefits: When discussing investments, communications must present a balanced view of potential risks and benefits. This includes providing adequate information about the risks associated with a product or service.

3. Suitability and Targeting

Appropriate for the Audience: Communications should be tailored to the audience's level of sophistication and understanding. For instance, materials intended for retail investors should be simpler and more explanatory than those meant for institutional investors.
No Misleading Comparisons: Comparisons between different products or services must be fair, accurate, and not misleading. They should be based on complete and consistent data.

4. Disclosure of Conflicts of Interest

Transparency: Any potential conflicts of interest must be clearly disclosed. This includes information about fees, compensation, and any affiliations that could influence the recommendations or views expressed in the communication.

5. Performance Information

Past Performance: If past performance is mentioned, it must be presented fairly and include appropriate disclaimers, such as the fact that past performance does not guarantee future results.
Hypothetical Performance: Any hypothetical or simulated performance data must be clearly labeled as such, and it must include disclosures about the limitations and assumptions underlying the data.

6. Promotions and Offers

No Deceptive Promotions: Promotions, offers, and contests must not be deceptive or misleading. They must clearly disclose all material terms and conditions, including any limitations on the offer.

7. Supervision and Recordkeeping

Supervisory Review: Firms are required to have policies in place to review and approve all retail communications before they are used or filed with FINRA, except in specific situations.
Recordkeeping: Firms must retain records of all communications with the public for at least three years, and these records must be readily available for inspection by FINRA.

8. Filing Requirements

Pre-Use Filing: Certain retail communications, particularly those involving new products or services, may need to be filed with FINRA for review before they are distributed.
Post-Use Filing: In other cases, communications may need to be filed with FINRA within 10 days of first use. This is common for materials related to mutual funds, ETFs, and other investment products.

9. Use of Testimonials

Disclosure: If a testimonial is used in a communication, it must disclose whether the person giving the testimonial is compensated and, if so, in what manner. Testimonials must also reflect the honest opinion of the person giving them and must not be misleading.

10. Electronic Communications

Social Media and Digital Platforms: FINRA's communication standards also extend to digital and social media. Firms must supervise and review communications on these platforms to ensure compliance with FINRA's rules. The same standards for accuracy, balance, and disclosure apply.

How to Comply with FINRA Communication Standards

Complying with FINRA communication standards can help financial firms maintain regulatory compliance, avoid penalties, and protect their reputation. To ensure you’re following these regulations, you can:

Understand FINRA Rule 2210 and Related Rules

Familiarize yourself with the specific requirements of FINRA Rule 2210 (Communications with the Public) and any other related rules that apply to your firm’s communications. This includes knowing how to categorize communications (retail, correspondence, institutional) and understanding the specific requirements for each category.

Develop Clear Internal Policies and Procedures

Create comprehensive policies that outline how your firm will comply with FINRA communication standards. These should include procedures for the review, approval, and archiving of all public communications.

Designate a Compliance Officer

Assign a compliance officer or team responsible for reviewing and approving all communications before they are distributed. This ensures that materials are vetted for compliance with FINRA rules.

Maintain Proper Records

Keep detailed records of all communications, including the review and approval process, for at least three years as required by FINRA. This includes maintaining copies of the final versions of communications and documenting any changes made during the review process.

Provide Regular Training for Employees

Offer regular training sessions to ensure that employees, particularly those involved in creating and distributing communications, are aware of FINRA’s standards and know how to comply with them.

Stay Compliant With 360training

In navigating the complex landscape of FINRA communication standards, understanding the key principles and requirements can help you stay compliant and protect your firm from regulatory risks. By mastering these standards, you can create clear, compliant, and effective communications that build trust with your clients and avoid costly pitfalls. If you're ready to deepen your knowledge and ensure your communications meet all regulatory requirements, consider enrolling in our comprehensive online FINRA Communication Standards course. This course is designed to provide you with the tools and insights you need to confidently manage all aspects of your firm's public communications. Get started today!