In February 2021, FINRA released its report on its Examination and Risk Monitoring Program (see Mayer Brown's REVERSEInquiries Newsletter, Volume 04, Issue 02); it addressed Communications with the Public, FINRA Rule 2210. The report reminds firms that all communications must be fair, balanced and not misleading, and explain, if applicable, associated risks. It also reflects FINRA's concerns relating to the use of digital communications and digital assets. On September 30, 2021, FINRA updated its "Frequently Asked Questions ("FAQs") About Advertising Regulation" to provide further guidance. These updates include additions in Section D., "Content Standards," and also updated Section F., "Public Appearances."

The FAQs cover other issues, but the following focuses on areas of interest to the structured products industry.

Section D. Content Standards

D.5 USE OF HYPERLINKS IN ELECTRONIC COMMUNICATIONS

D.5.1 Q. Does FINRA Rule 2210(d)(1)(A) permit a firm to include in electronic communications hyperlinks to content that provides additional information related to the communication in a fair and balanced manner?

The response by FINRA states that yes, a firm can use a hyperlink to provide additional information or explanations. This is permitted if the initial communication itself that contains the hyperlink is consistent with FINRA Rule 2210(d)(1)(A), which requires firm communications to be fair, balanced and not omit any material fact or qualification that would make the communication misleading. FINRA's response clarifies that a firm may not use linked information to correct a misleading, exaggerated or promissory communication (FINRA Rule 2210(d)(1)(B)). Additionally, within the communication, the text that introduces the link or the link itself should, to the extent practicable, explain what will be provided in the link.

The response also mentions FINRA's previous interpretations of Rule 2210 to permit hyperlinks to provide further information, including using hyperlinks within banner advertisements in order to generate interest and provide further information. FINRA Rule 2210 also permits firms to link to required information about testimonials. FINRA notes that their treatment of hyperlinks is similar to the SEC's recent Investment Adviser Marketing rule; the SEC's release states that this rule is closely related to FINRA's use of "fair and balanced" in Rule 2210 standards.

D.7 PROHIBITION ON PREDICTIONS OR PROJECTIONS OF INVESTMENT PERFORMANCE

D.7.1 Q. May a firm include in a private placement communication a "target return" if the communication also includes assumptions and key risks underlying the return?

In response, FINRA states that, consistent with FINRA Rule 2210(d)(1)(F), firms cannot include metrics that reflect targeted returns to investors in communications regarding private placements. That rule prohibits predictions or projections of performance, implications that past performance will recur, and exaggerated or unwarranted claims, opinions or forecasts. FINRA claims that targeted returns promote assumed receipt of future cash flows by investors and warns that forward-looking cash flows may have unknown risks and uncertainties, and that actual performance may differ from projections.

Section F. Public Appearances

F.1 SUPERVISION

F.1.2 Q. Our firm's registered representatives may meet with groups either in person or using online conferencing platforms. How should firms supervise these meetings?

FINRA states that firms must supervise registered representatives' live meetings with customers, both online and in-person. They must do so in a way that follows relevant securities laws and FINRA rules. In their response, FINRA specifically cited Rule 2210(f), which sets supervision and content stands for public appearances, such as various forms of public speaking activities that are not retail communications or institutional communications or correspondence.

F.1.3 Q. If a registered representative uses visual aids, such as a whiteboard or dynamic charts, or a chat or instant messaging feature during a live, unscripted online conference, how should a firm supervise these aspects of the presentation?

FINRA states that it depends on the number of persons, nature of the meeting, and the purpose of these visual aids. Visual aids may be considered correspondence, retail communications or institutional communications and must comply with applicable FINRA standards. For instance, under Rules 2210(a), 2210(b) and 3110(b)(4), content must also comply with standards set in FINRA Rule 2210(d).

FINRA provides three examples:

  1. If a representative meets with less than 25 retail investors and uses the chat feature online for a live question and the content of the chat is defined as correspondence (see FINRA Rule 2210(a)(2)), the firm must review the chat under FINRA Rule 3110(b) and 3110.06 through 3110.09.
  2. If in a meeting of more than 25 retail investors, a representative uses the chat feature to post an electronic file of a new mutual fund, this is considered a retail communication under FINRA Rule 2210(a)(5). The firm must also submit the electronic file within ten business days to FINRA's Advertising Regulation Department, as required by FINRA Rule 2210(c)(3), since it promotes a registered investment company. However, if in a similar meeting, a representative responds to the audience using a whiteboard feature, such as showing differences between a bond and stock, it would also be considered a retail communication under FINRA Rule 2210(a)(5). Although it would not have to be approved prior to use because the whiteboard content was created and posted during an online interactive electronic forum, it would be reviewed under the supervising rules (FINRA Rule 3110(b) and 3110.06 through 3110.09).
  3. If a broker-dealer of ETFs hosts a webinar attended by 100 other broker-dealers and the distributor uses an interactive poll and then shows the results to the attendees, this would be deemed an institutional communication under FINRA Rule 2210(a)(3). The poll would need to be reviewed under the firm's supervisory procedures that comply with Rule 2210(b)(3).

F.1.4 Q. If a third party, such as a fund distributor or program sponsor, presents information or speaks with clients during a presentation, either in person or using an online conferencing platform, during which a representative of a broker-dealer also speaks or presents, what must the representative disclose about that third party?

In reference to FINRA Rule 2210(f)(1), in unscripted public appearances, persons associated with broker-dealers must follow the standards of FINRA Rule 2210(d)(1). The registered representative should clearly explain the intent of the meeting, the identity of the third party, whether a third party paid for the meeting and the relationships between the parties.

F.1.5 Q. If our registered representatives use communications with the public that direct customers to in-person or online presentations hosted by a third party, what supervision requirements apply?

Under FINRA Rule 2210, firms are responsible for third-party content if it is adopted or entangled with the content. If a firm directs investors to third-party presentations relating to securities or other products, FINRA considers the firm to have adopted the content. If it also includes involvements such as paying for, arranging for, or being involved in the presentation in another manner, the firm would still be responsible even if they did not direct customers to the event, as the firm would have been entangled with the presentation. FINRA reiterates that the event would need to comply with its content and supervision standards.

Originally published in REVERSEinquiries: Volume 4, Issue 5.
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