FINRA Rule 2210
FINRA Rule 2210 comprehensively covers how broker-dealers and brokerage firms can communicate with the public, including how they can advertise their services. It also imposes recordkeeping obligations on firms that deal in securities.
Complying with the requirements and obligations of Rule 2210 takes constant vigilance. The securities litigation and FINRA defense attorneys at the national law firm Oberheiden P.C. have guided numerous brokerage firms and securities professionals through the intricacies of FINRA Rule 2210, and have defended them against allegations that they have violated the Rule.
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An Overview of FINRA Rule 2210
FINRA Rule 2210 focuses on how securities firms and professionals are allowed to communicate with the public. In subsection (a)(1), the Rule lays out three types of public communications:
- Retail communications,
- Correspondence, and
- Institutional communications.
The difference between each is whether they target retail or institutional investors, and how widely they are distributed.
Each type is subjected to different rules and requirements.
Retail Communications
Retail communications are written or electronic information that are distributed to at least 25 retail investors in any 30-day period. Newly created retail communications have to be approved by a supervising principal or a qualified Supervisory Analyst at the firm before it is either used or filed with FINRA’s Advertising Regulations Department. Retail communications that have been previously approved by the Department can be used again, so long as they have not been materially altered and are going to be used in ways that fall within the Department’s prior approval.
There are several exceptions to these requirements, though. These are for:
- Communications that do not make a financial or investment recommendation and that constitute a “research report” under FINRA Rule 2241(a)(11)(A) or a “debt research report” under Rule 2242(a)(3)(A)
- Retail communications that are posted in an online forum
- Communications that do not make a financial or investment recommendation or promote the company’s services or products
These types of retail communications still have to go through the review process described in FINRA Rule 3110(b) and 3110.06 through 3110.09.
Correspondence
Correspondence is written or electronic information that is distributed to fewer than 25 retail investors in any 30-day period. This makes it identical to retail communications, but less widely distributed.
Under FINRA Rule 2210(b)(2), correspondence only has to pass through the supervisory review process of Rules 3110(b) and 3110.06 through 3110.09.
Institutional Communications
Institutional communications are written or electronic information that only gets distributed to or made available to institutional investors. The brokerage’s internal communications are not included.
Because these communications are only made to institutional investors who can presumed to be knowledgeable about the risks and benefits of the securities field, the regulations pertaining to them are far more relaxed.
FINRA Rule 2210(b)(3) merely requires brokerage firms to have written procedures for these communications that are appropriate for its:
- Business model
- Size
- Structure
- Customers
The only requirements for those written procedures are for the institutional communication to be reviewed by a qualified principal, and for the procedures to be reasonably designed to ensure that the communications comply with applicable standards.
Strict Content Standards
Rule 2210 includes some generalized as well as some particular rules regarding the content of the communications that can be shared or distributed to the public.
Some of the general rules forbid communications that:
- Are false, exaggerated, unwarranted, or misleading
- Contain information or statements of material fact that the distributor knows, or has reason to know, are false or misleading
- Are not clear or are misleading in the context in which they are provided
- Predict or project performance in non-hypothetical ways
Some of the more specific rules are that:
- Information cannot be hidden in chart legends or footnotes
- Explanations in the communications must be tailored to the sophistication of the intended audience
- Any testimonials provided must be made by someone with sufficient knowledge to make a valid opinion
The rules for what cannot be included in communications, as well as what has to be included, are far more detailed when it is a retail communication. Because this audience is less savvy when it comes to the securities field, the potential for defrauding retail investors through the use of misleading marketing materials is far higher than for institutional investors. Just a few of the requirements include:
- Required disclosures about the name of the brokerage firm behind the communication
- Information about which income taxes apply to a given security or investment strategy
- A prohibition against calling income “tax free” if the tax liabilities are merely deferred or postponed
- Adequate disclaimers and disclosures whenever a testimonial is used
This is just the tip of the iceberg. The standards for content distributed among retail investors, whether it is a “correspondence” or a “retail communication,” are strict, thorough, and meticulous. Ensuring that you are complying with the detailed instructions in FINRA Rule 2210 often takes the legal experience of a FINRA defense and compliance lawyer.
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Rule 2210’s Recordkeeping Requirements
FINRA Rule 2210 also requires brokerage firms to keep records of all of their retail and institutional communications under the requirements of SEA Rule 17a-4(b) (17 C.F.R. § 240.17a-4(b)). This regulation stipulates that the covered records have to be preserved for at least three years, with the first two of those years being in an easily-accessible place.
The records that have to be retained under this Rule include:
- A copy of the communication distributed, as well as the dates of its first and last uses
- The name of the principal who approved the communication, as well as the date it was approved
- If the communication was not approved by a principal before its first use, the name of the person who prepared it
- Citations for any illustrated statistic used
- If the communication did not need approval because it had been used before, the name of the securities professional who filed the earlier version with FINRA’s Advertising Regulations Department, as well as a copy of the Department’s letter of review
- If a retail communication mentions a performance ranking or comparison of an investment company, a copy of that material
Failure to do so can lead to sanctions from the agency.
Some Frequently Asked Questions About FINRA Rule 2210 and Oberheiden P.C.
What is an Institutional Investor?
The concept of an institutional investor is crucial for FINRA Rule 2210. It determines whether a communication is considered “correspondence” or a “retail communication” or if it is an “institutional communication.” The applicable level of scrutiny changes drastically.
FINRA Rule 2210(a)(4) defines an “institutional investor” as any of the following:
However, if a registered broker-dealer or brokerage firm has a reason to believe that an institutional communication, or even an excerpt of one such communication, will be made available to a retail investor then it can no longer be treated as an institutional communication. This subjects the communication to stricter scrutiny.
What is a Retail Investor?
A retail investor is anyone who is not an institutional investor, as described above. It does not matter whether the person has an account with the brokerage firm or not.
Why Should I Trust Oberheiden P.C.?
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FINRA Defense Lawyers at Oberheiden P.C.
Complying with the detailed and nuanced requirements of FINRA Rule 2210 is not always easy. The Rule exists primarily to protect retail and inexperienced investors from misleading communications about certain securities, investment strategies, and brokerage firms. For those brokerage firms, though, the obligations imposed by Rule 2210 can be onerous and can cripple their ability to effectively communicate their services.
The FINRA compliance and defense lawyers at Oberheiden P.C. have helped numerous securities firms and professionals comply with Rule 2210 so they can run their business effectively and grow accordingly. They have also helped defend regulated securities professionals who have been accused of violating the Rule.
Contact Oberheiden P.C. online or call their law office at (888) 680-1745.