Study guide
Function 1 of the official FINRA Series 6 outline, Seeks Business for the Broker-Dealer, supplies 12 of the exam's 50 scored questions, making it the second-largest topic area. It tests how you may contact prospects and what you may say, show, and send when the products are mutual funds and variable contracts. Nearly everything here traces back to FINRA Rule 2210, the SEC's fund advertising rules, and telemarketing law.
Three Categories of Communications Under FINRA Rule 2210
FINRA Rule 2210 sorts every communication a firm sends into three categories, and the category determines who must approve it and when. A retail communication is any written or electronic communication distributed or made available to more than 25 retail investors within any 30 calendar-day period; a retail investor is anyone who does not meet the definition of an institutional investor. Correspondence is the same kind of communication sent to 25 or fewer retail investors within 30 calendar days. An institutional communication goes only to institutional investors, such as banks, insurance companies, registered investment companies, other broker-dealers, government entities, employee benefit plans with at least 100 participants, and persons with total assets of at least 50 million dollars. The category drives the approval requirement. A retail communication generally must be approved by an appropriately qualified registered principal before the firm uses it or files it with FINRA. Correspondence and institutional communications do not require approval in advance, but they must be supervised and reviewed under the firm's written procedures, and if the firm has reason to believe an institutional communication will be forwarded to retail investors, it is treated as a retail communication from the start. Example: Dana emails a mutual fund flyer to 40 customers over two weeks. That is a retail communication and needs prior principal approval; the identical flyer sent to 12 customers would be correspondence. All three categories share the same content standards: communications must be fair and balanced, must provide a sound basis for evaluating the facts, and may not contain false, misleading, promissory, or exaggerated statements or, with narrow exceptions, performance projections.
Filing Requirements and Advertising Fund Performance
Certain communications must also be filed with FINRA's Advertising Regulation Department. A firm in its first year of FINRA membership must file its retail communications at least 10 business days before first use. Established firms must file retail communications concerning registered investment companies, including mutual funds and variable products, within 10 business days of first use, and a piece containing a performance ranking the firm or fund created itself, rather than one from an independent ranking entity, generally must be filed before use. When an advertisement quotes fund performance, SEC Rule 482 controls the presentation. Performance must appear as average annual total returns for one, five, and ten years, or for the life of the fund if it is younger, current to the most recent calendar quarter end; a money market fund instead quotes its current seven-day yield. The ad must state that past performance does not guarantee future results, that investment return and principal value fluctuate, and that shares may be worth more or less than their original cost when redeemed. Performance advertisements must also disclose the fund's maximum sales charge and gross expense ratio. Rankings must identify the ranking entity, the category, the number of funds in the category, and the period measured. Variable products call for extra care: they may never be described as mutual funds, surrender charges and insurance-related fees must be disclosed, and any guarantee rests on the claims-paying ability of the issuing insurance company, never on the performance of the separate account.
Prospectus Delivery and the Omitting Prospectus
Mutual fund shares are in continuous registration under the Securities Act of 1933, so every purchase is part of a primary offering and every buyer is entitled to a prospectus no later than delivery of the trade confirmation. Most funds satisfy this with a summary prospectus under Rule 498, a short document covering objectives, fees, principal risks, and performance, so long as the full statutory prospectus is available free online and is mailed on request. A deeper reference document, the Statement of Additional Information, must also be provided free on request. Rule 482 creates what the exam calls the omitting prospectus: an advertisement that is legally deemed a prospectus but is permitted to omit most of the detail a statutory prospectus must contain. A Rule 482 ad may show performance in the standardized format described earlier, must advise investors to consider the fund's investment objectives, risks, charges, and expenses carefully before investing, must explain how to obtain a prospectus, and may not include an application to buy shares; if an investor could purchase directly from the piece, the piece would have to be an actual prospectus. Separately, Rule 135a permits generic advertising that promotes investment company securities or the firm's services in general terms without naming a specific fund. Because no fund is named, a generic ad contains no performance figures, and it must name the firm to contact for further information. Example: a billboard reading that mutual funds can help investors pursue long-term goals, sponsored by Harborlight Securities, is generic advertising; the moment it names the Harborlight Growth Fund, Rule 482 applies.
Telemarketing, Do-Not-Call, and Digital Prospecting
FINRA Rule 3230 mirrors federal telemarketing law. Cold calls to prospects may be made only between 8 a.m. and 9 p.m. in the time zone of the person called, and the caller must promptly give their name, the firm's name, a contact address or phone number, and the purpose of the call. Firms must maintain a firm-specific do-not-call list, and once a person asks not to be called, that request must be honored. Firms must also scrub calling lists against the National Do-Not-Call Registry at least every 31 days. Numbers on the registry may still be called in limited cases: an established business relationship, meaning a transaction within the past 18 months or an inquiry within the past 3 months; prior express written consent; or a personal relationship with the caller. Callers may not block caller ID. Digital prospecting follows Rule 2210 logic. Static social media content, such as a profile page or a posted article, is a retail communication requiring principal approval before use. Real-time interactive posts, such as replies in a live chat, are treated like correspondence, supervised and retained but not pre-approved. Either way, business-related messages must be captured and retained by the firm, so a representative may not conduct business through personal texting apps the firm cannot archive. Seminar slides and scripts distributed to more than 25 retail investors are retail communications, and even unscripted public appearances must stay fair and balanced.
Selling on Bank Premises: Networking Disclosures
Under FINRA Rule 3160, when a broker-dealer conducts business on the premises of a bank, credit union, or other financial institution where retail deposits are taken, a networking arrangement exists and special rules apply. The brokerage operation must be clearly identified as separate from the institution and, wherever practical, physically distinct from the area where deposits are taken. At or before the opening of a customer account, the firm must disclose, orally and in writing, that the securities products are not insured by the FDIC, are not deposits or other obligations of the institution and are not guaranteed by it, and are subject to investment risks, including possible loss of the principal invested. These are commonly summarized as the not-insured, no-bank-guarantee, may-lose-value disclosures, and the firm must make reasonable efforts to obtain the customer's written acknowledgment of them. Advertisements and signs at the location must carry the same message and must not suggest that the bank stands behind the investments. Example: Priya is a registered representative working at a desk in a credit union lobby. A member whose certificate of deposit has matured asks about a bond fund paying more than the CD. Priya must make clear that unlike the CD, the fund is not federally insured, its price will fluctuate, and the member can lose money. Exam questions on this topic usually hinge on a missing disclosure or on a customer who believes a mutual fund purchased at a bank is a deposit.
Key terms
- Retail communication
- — Any written or electronic communication distributed or made available to more than 25 retail investors within any 30 calendar-day period; generally requires prior principal approval.
- Correspondence
- — A written or electronic communication sent to 25 or fewer retail investors within 30 calendar days; supervised and retained, but not pre-approved.
- Institutional communication
- — A communication distributed only to institutional investors, such as banks, insurers, registered investment companies, broker-dealers, and persons with at least 50 million dollars in assets.
- Registered principal
- — A supervisor qualified to approve communications, accounts, and transactions; retail communications generally need a principal's approval before first use.
- Omitting prospectus (Rule 482)
- — A fund advertisement legally deemed a prospectus that may show standardized performance but omits most prospectus detail and cannot include a purchase application.
- Summary prospectus
- — A short-form prospectus under Rule 498 covering a fund's objectives, fees, risks, and performance, permitted when the statutory prospectus is available online and on request.
- Statement of Additional Information (SAI)
- — A supplemental fund disclosure document with expanded financial and operational detail, provided free upon request.
- Standardized performance
- — Average annual total returns for 1, 5, and 10 years (or fund life), current to the most recent calendar quarter end, required whenever a fund ad quotes performance.
- Established business relationship
- — A telemarketing exception permitting calls to a registry-listed number based on a transaction within 18 months or an inquiry within 3 months.
- National Do-Not-Call Registry
- — The federal list of consumers who may not be cold-called; firms must scrub calling lists against it at least every 31 days.
- Networking arrangement
- — A broker-dealer operating on the premises of a bank or similar institution, triggering required disclosures that products are not FDIC insured, not bank guaranteed, and may lose value.
- Fair and balanced standard
- — The core Rule 2210 content requirement: communications must give a sound basis to evaluate facts and may not be misleading, promissory, or exaggerated.
Exam tips
- Count and clock: more than 25 retail investors within 30 calendar days makes a piece a retail communication; 25 or fewer makes it correspondence. Watch for questions that quietly spread the sends across several weeks, because the 30-day window still catches them.
- Performance quotes must be standardized: 1-, 5-, and 10-year average annual total returns current to the most recent quarter end. An ad quoting only the fund's best year, or omitting the maximum sales charge, is a violation.
- New FINRA member firms file retail communications 10 business days BEFORE first use; established firms file fund retail communications within 10 business days AFTER first use. The before/after distinction is a favorite trap.
- In any bank-setting question, look for the three disclosures: not FDIC insured, no bank guarantee, may lose value. An answer choice implying the bank backs the fund is always wrong.
- Cold-calling hours are 8 a.m. to 9 p.m. in the customer's time zone, not the representative's, and a firm-specific do-not-call request must be honored even if the person is not on the national registry.