In this, the second of a two-part series, the focus is on communications with the public.(1) While many of these points below appear more important to managing broker-dealers and product manufacturers (sponsors), retail broker-dealers may value the information in connection with their own materials and review of materials provided by sponsors. Retail firms’ obligations are independent – if your registered reps are distributing a piece of marketing material, you are on the hook for it. A retail firm may have some mitigating factors that help it avoid a big problem (like pointing back at the sponsor), but use of problematic material nonetheless will cause the firm grief.
Picking up from last week’s comments about balance, context, proximity and do’s and don’ts, here are a few more tips before we tackle more substance:
- If you are highlighting something like a calculated number, consider whether there is anything that the reader should know about that number. What are the underlying assumptions, what could throw it off, what could change? Are the underlying assumptions or leaning too aggressive? Did the market do something special in the period you are presenting?
- If you are making a positive performance statement (in numbers or words), is there a negative statement nearby to provide balance?(2)
- Completely identify the source to data or a quote, e.g., Source: Wall Street Journal, June 1, 2010 at page A1; Source: Name of Story, Washington Post Online, May 1, 2010, www.washingtonpost.com/business/story.html (visited May 15, 2010).
- You may not predict or project performance, imply that past performance will reoccur or make any exaggerated or unwarranted claim, opinion or forecast.(3)
- Certain hypothetical illustrations of mathematical principles are permitted, provided that they do not predict or project the performance of an investment or strategy.(4)
- Any comparison between investments must disclose all material differences between them, including (as applicable) investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features.(5) While comparisons sound easy and straightforward, comparisons are one of those areas where an after-the-fact regulatory reviewer will always find something to be unhappy about.
- All material should disclose the name of the broker-dealer – not just the name of a sponsor or issuer which is not a broker-dealer. When the goal of the material in question is to promote the sale of a security, name the broker-dealer (plus Member SIPC to comply with the SIPC Bylaws).
Clarity counts and you should strive to make the material clear. Obviously, a statement made in an unclear manner can cause a misunderstanding. Likewise, a complex or overly technical explanation may be more confusing than providing too little information. Find a good balance and put yourself in the shoes of the reader.(6)
I’ve heard the excuse many times from sales and marketing departments, “…but, it is broker-dealer use only.” Broker-dealer use only material is generally subject to the same requirements as material that is distributed to customers.(7) There is a slight amount of flexibility because you are able to consider the nature of the audience to which the communication will be directed. Different levels of explanation or detail may be necessary depending on the audience to which a communication is directed. However, you must keep in mind that it is not always possible to restrict the audience that may have access to a particular piece of material.(8) Additional information or a different presentation of information may be required depending upon the medium used for a particular communications and the possibility that the communication will reach a larger or different audience that the one initially targeted.
The bottom line on BD Use Only material – don’t expect to get a free pass. Also, consider whether it is really worth it to have separate BD Use Only material. Since your customer material is so well written, balanced and chock full of appropriate disclosure, why is it that you need separate BD Use Only material? To tell them what their commission is? They probably know that already. Spend your resources creating useful and compliant investor materials and then train the sales team and registered representatives how to use them to make sales.
What about BD Use Only’s cousin: Internal Use Only? Firms need to train their sales forces. However, for a long time stretching back to the 1980’s partnership issues, regulators have become wise to focus on materials that are used to train the sales people. Instead of having one problem here and there with a rogue salesperson, problematic Internal Use Only material can pollute an entire sales force. Think more recently about how auction rate securities were sold. It was not that all of those registered reps individually decided to sell them incorrectly; the problem was that the firms trained their reps to sell them incorrectly. Train your sales team, but keep in mind the balance and content standards. Also, make sure that Internal Use Only material is clearly marked – and downright ugly; no pictures and fancy layouts. If it looks like marketing material, there is a higher probability that it will leak beyond the intended audience.
Document security is another tip. Lock those PDFs. Now that you have created a great piece of marketing material with good disclosure, don’t fall to people who cut it up, paste and forward. As above, if it is Internal Use Only – make it ugly and lock it. If it is BD Use Only – mark it prominently and lock it. This is especially important if it is the kind of material that could be used with a customer. While you cannot absolutely prevent a registered rep from showing a customer improper material, you can slow them down with prominent markings and by combining documents in a single file. This latter technique is important with electronic documents. If you want to ensure that the prospectus goes with the color brochure – combine them in the same PDF and lock it down. Don’t distribute separate files if you don’t have to. Consider how your material could be misused and devise ways to make it difficult. Be ready to trumpet your controls to examiners along with proving up your in-house material flow procedures and approval system (documented with control sheets).
To file or not to file, that is the question. Filing will not make you completely bullet-proof, but it is close. Filing comes with risks and headaches and delays, but the “appears consistent with applicable standards” letter is a great thing to have in the file at exam time. Filing helps you learn the boundaries. While certain items are subject to mandatory filing, many are not. You may file some optional material, but not all; you may file more up front and less as time goes on and you build a library of disclosure and templates. Consider it. (Also, if you have never filed anything, file something to get the clock on the one year rule ticking).(9) You should know your advertising analyst’s name. It is as important for your firm to have a relationship with its advertising analyst in Rockville as it is with your local FINRA district office.
I’d like to wrap up with a question that we occasionally receive: “Can’t you just give me some standard language that I can use on everything?” No. That is not just to sell more legal services. Rather, it gets to the heart of one of the most important tips: customization of disclosure and analysis of each piece is important – because that is the way that the regulators and plaintiff’s lawyers are going to look at it after the fact…
- To review the previous practice update, please visit the Resources Section of Evans & Kob’s website at http://eklawpc.com/resources/.
- NASD Rule 2210(d)(1)(A).
- NASD Rule 2210(d)(1)(D).
- NASD Rule 2210(d)(2)(B).
- Remember, you must consider the nature of the reader or audience – different levels of explanation or detail may be necessary depending on the audience to which a communication is directed. See NASD IM 2210-1.
- NASD Rule 2211(d)(1).
- Keep in mind, NASD Rule 2211 states that “[n]o member may treat a communication as having been distributed to an institutional investor if the member has reason to believe that the communication or any excerpt thereof will be forwarded or made available to any person other than an institutional investor.”
- NASD Rule 2210(c)(5)(A).
Contact Evans & Kob for experienced regulatory and legal counsel regarding any sales literature or advertising review and filing, responding to any regulatory inquiry, or any other regulatory or arbitration related legal matter at firstname.lastname@example.org.