Series 6 Practice Exam

Answer: Retail communication

FINRA Rule 2210(a) sets three categories by audience. Correspondence goes to 25 or fewer retail investors in any 30-calendar-day period. Retail communication goes to more than 25 retail investors in that period. Institutional communication goes only to institutional investors as defined in Rule 2210(a)(4), a list that includes the Rule 4512(c) institutional accounts plus others such as governmental entities and member firms. The count is per 30 calendar days, and it is the retail recipients that are counted.

The Trap: Treating the 25-recipient line as a rule about how important the piece is, rather than the exact category boundary between correspondence and retail communication.

• Correspondence: Misconception: correspondence is written or electronic communication distributed to 25 or fewer retail investors within any 30-calendar-day period. Forty exceeds that ceiling.
• Institutional communication: Misconception: this assumes audience size alone makes a piece institutional. Institutional communication is defined by the recipient's status (institutional investors), not by how many people receive it, and retail investors can never be institutional recipients.
• Public appearance: Misconception: a public appearance is an unscripted participation in a seminar, interview, or similar live forum. A written piece mailed or emailed to investors is not a public appearance.

Verified against: FINRA Rule 2210(a)(2)-(a)(5)

Answer: File it within 10 business days of first use

FINRA Rule 2210(c)(3)(A) requires a member to file retail communications that promote or recommend a specific registered investment company or fund family with the Advertising Regulation Department within 10 business days of first use. Rule 2210(c)(1) imposes the more burdensome regime, filing at least 10 business days prior to first use, on members in their first year of membership, and Rule 2210(c)(2) adds withholding until FINRA's changes are made for a narrow list of pieces. A retail communication like this one also requires prior principal approval under Rule 2210(b)(1) and is retained under Rule 4511.

The Trap: Collapsing the pre-use filing rule for new member firms into the post-use filing rule that applies to an established firm's fund advertising.

• File it only if it contains performance rankings: Misconception: rankings trigger extra content standards under Rule 2212, but the filing requirement attaches to any retail communication promoting a specific fund, ranking or not.
• File it at least 10 business days before first use and withhold it until FINRA comments: Misconception: pre-use filing applies to a firm in its first year of FINRA membership, and pre-use filing with withholding until FINRA's changes are made applies to a narrow list, such as fund rankings or comparisons in a category that is not generally published or was created by the fund or an affiliate. An established firm's ordinary fund piece is not pre-filed.
• Retain it for three years but file nothing: Misconception: retention is required for all communications, but retail communications promoting a specific fund carry a separate, additional filing obligation. Retention does not substitute for filing.

Verified against: FINRA Rule 2210(b)(1), 2210(c)(1), 2210(c)(2) and 2210(c)(3)(A)

Answer: Rule 135a under the Securities Act of 1933

Rule 135a permits generic advertising about investment companies generally. A generic ad may explain what mutual funds are and invite inquiries, and it must give the name and address of the sponsor, but it may not name a specific fund being offered, quote performance, or contain an offer to sell. An advertisement that does offer a specific fund is an omitting prospectus governed by Rule 482, which carries standardized performance and disclosure requirements.

The Trap: Assuming any fund-company advertisement without performance data is a Rule 482 ad, when the absence of any offer of a specific security is what makes it generic under Rule 135a.

• Rule 498 under the Securities Act of 1933: Misconception: Rule 498 is the summary prospectus rule. A summary prospectus is a delivery document for a specific fund, not a generic advertisement.
• Rule 156 under the Securities Act of 1933: Misconception: Rule 156 is an anti-fraud guidance rule telling issuers when sales literature is misleading. It is not an exemption a firm relies on to publish a piece.
• Rule 482 under the Securities Act of 1933: Misconception: Rule 482 governs an omitting prospectus, an advertisement that does offer a specific fund and therefore must carry prescribed disclosures, plus standardized performance whenever it quotes performance. This piece offers nothing.

Verified against: SEC Rule 135a and Rule 482 under the Securities Act of 1933

Answer: Average annual total return for 1, 5, and 10 years, current to the most recent calendar quarter

Rule 482 requires a fund advertisement quoting performance to present standardized average annual total return for the 1-, 5-, and 10-year periods, or the life of the fund if shorter, computed to the most recent calendar quarter. The ad must also disclose that past performance does not guarantee future results, that current performance may be lower or higher than the data quoted, and that investment return and principal value fluctuate, and it must direct the investor to the prospectus and its fee and expense information.

The Trap: Substituting cumulative or cherry-picked returns for the standardized 1/5/10-year average annual total return Rule 482 requires.

• The highest 12-month return the fund has produced, clearly labeled as the best year: Misconception: cherry-picking a best period is exactly what standardized performance exists to prevent. Under Rule 482(d)(5) a non-standard figure may appear only alongside the standardized 1-, 5-, and 10-year returns and with no greater prominence, so on its own it fails whatever the label.
• Cumulative total return since inception only: Misconception: a single since-inception cumulative number is not the standardized presentation. It may accompany the required figures but cannot replace them.
• Average annual total return for 1, 3, and 5 years, current to the most recent month end: Misconception: this borrows the 1/3/5 periods used in other performance contexts. Rule 482's standardized periods are 1, 5, and 10 years. Month-end figures do play a role, since the ad must either show returns current to a recent month-end or give a toll-free number or website where they can be obtained, but that never changes the required 1-, 5-, and 10-year periods.

Verified against: SEC Rule 482 under the Securities Act of 1933

Answer: Because the fund is registered with the SEC, investors can rely on the SEC's approval of its quality

Rule 156 lists factors that make investment company sales literature misleading, including representations about the significance of government registration. The SEC does not approve, endorse, or pass on the merits of any security; registration means a disclosure document has been filed and declared effective. Every prospectus carries the disclaimer saying so, and a sales piece that contradicts it is misleading.

The Trap: Reading SEC registration as a quality stamp rather than as a disclosure requirement.

• The fund's expense ratio and sales charge schedule are stated with a reference to the prospectus: Misconception: disclosing costs and pointing to the prospectus is exactly what the rule encourages, not what it forbids.
• Past performance is shown for the 1-, 5-, and 10-year periods with the required disclaimer: Misconception: standardized performance with the Rule 482 disclaimer is the compliant presentation.
• The fund's investment objective is described alongside the principal risks of the strategy: Misconception: pairing objective with risk is balanced presentation, the opposite of a Rule 156 problem.

Verified against: SEC Rule 156 under the Securities Act of 1933

Answer: Not represent or imply that the contract is a mutual fund or a short-term liquid investment

FINRA Rule 2211 sets content standards for communications about variable life insurance and variable annuities. Among them: the piece must clearly identify the product as a variable annuity or variable life policy and must not represent or imply that it or its underlying account is a mutual fund; must not represent or imply that it is a short-term, liquid investment, and must balance any discussion of access to money with the costs of early withdrawal, such as surrender charges and tax penalties; and must not represent or imply that the insurer's guarantees apply to the investment return or principal value of the separate account.

The Trap: Selling a variable annuity by analogy to a mutual fund, which the rule specifically prohibits because it hides the insurance charges and the surrender period.

• Present the contract as a mutual fund with an insurance wrapper: Misconception: describing a variable contract as a mutual fund misstates the product. The rule prohibits representing or implying that a variable contract is a mutual fund or a short-term liquid investment.
• Omit any discussion of fees so the piece stays balanced: Misconception: omission is a Rule 156 problem, not balance. Material charges must be disclosed, not hidden.
• Guarantee the separate account's investment results because an insurer issues the contract: Misconception: this confuses the insurer's guarantee of certain contract features, such as a minimum death benefit, with a guarantee of separate account performance. Separate account investment results are never guaranteed.

Verified against: FINRA Rule 2211

Answer: Be shown with its category name and the number of funds in that category

FINRA Rule 2212 governs the use of investment company rankings in retail communications. A ranking must be created and published by a Ranking Entity that is independent of the fund and its affiliates, or be created by the fund or an affiliate from a Ranking Entity's performance measurements. The communication must prominently disclose the category name, the number of funds in the category, the Ranking Entity's name (and whether the fund or an affiliate created the category), the period covered, and the criteria used. Except for money market funds, a ranking covering less than one year is not permitted unless it is based on yield.

The Trap: Assuming an impressive ranking can be used as long as it is accurate, when the rule turns on the independence of the ranking entity and the disclosure of the category.

• Be created by the fund's own distributor to ensure accuracy: Misconception: nothing requires the fund's distributor to create the ranking. Rule 2212 permits rankings created and published by an independent Ranking Entity, or rankings created by a fund or its affiliate but based on a Ranking Entity's performance measurements.
• Be approved in advance by the SEC's Division of Investment Management: Misconception: the SEC does not pre-approve advertising. FINRA's Advertising Regulation Department reviews member communications, and even then filing is generally post-use for fund pieces.
• Cover a period of at least 20 years: Misconception: this invents a length requirement. The rule sets minimum periods of one year and requires disclosure of the period, not a 20-year history.

Verified against: FINRA Rule 2212

Answer: Written approval by a registered principal of the seminar materials before use

Under FINRA Rule 2210(b)(1), an appropriately registered principal must approve each retail communication before the earlier of its use or its filing with FINRA. Seminar slides, handouts, and scripts distributed to a public audience of more than 25 retail investors are retail communications. The representative's unscripted remarks at the seminar are a public appearance, which is subject to the content standards of Rule 2210(d)(1) but not to the approval requirement.

The Trap: Believing seminar materials escape principal approval because the event is spoken rather than printed.

• A signed acknowledgment from each attendee that no offer was made: Misconception: this invents a document. Nothing in Rule 2210 requires attendee acknowledgments.
• SEC clearance of the presentation before it is delivered: Misconception: the SEC does not clear member firm sales presentations. Review is a firm principal function, with FINRA filing where the rule requires it.
• Attendance limited to 25 people so the materials remain correspondence: Misconception: nothing requires a cap on attendance. Materials that reach 25 or fewer retail investors within 30 calendar days are correspondence, reviewed under the firm's supervisory procedures instead of pre-approved, but materials for a 60-person seminar are retail communications and need principal approval.

Verified against: FINRA Rule 2210(b)(1), 2210(d)(1) and 2210(f)

Answer: Disclose that the securities products are not FDIC insured, are not bank deposits or obligations, and may lose value

FINRA Rule 3160 governs networking arrangements between members and financial institutions. The member must set its services physically apart from the institution's retail deposit-taking activity where practical, identify its services clearly, and disclose orally and in writing that the securities products are not insured by the FDIC, are not deposits or other obligations of the financial institution and are not guaranteed by it, and are subject to investment risk including possible loss of principal.

The Trap: Assuming customers on bank premises understand the products are uninsured, when the rule requires the disclosure to be made explicitly and in writing.

• Register the bank itself as a FINRA member firm before any securities are sold on its premises: Misconception: the networking arrangement exists precisely so the bank does not have to be a member. The broker-dealer is the member and is responsible for the securities activity.
• Guarantee the securities products against loss because they are sold on bank premises: Misconception: this is the exact confusion the disclosure exists to prevent. Securities sold on bank premises are not guaranteed by anyone.
• Prohibit unregistered bank employees from making any customer referrals: Misconception: referrals are permitted. Unregistered bank employees may refer customers and may receive a nominal one-time cash fee of a fixed dollar amount that is not contingent on whether the referral results in a transaction.

Verified against: FINRA Rule 3160

Answer: Within 10 business days of first use, like other retail communications promoting a specific fund

FINRA Rule 2213 permits bond mutual fund volatility ratings in retail communications only under strict conditions, including that the rating is based exclusively on objective, quantifiable factors, is produced by an independent entity, is current to the most recently completed calendar quarter, and is accompanied by prescribed disclosures. The rating may not be identified or described as a 'risk' rating. Since January 9, 2017 there is no special filing rule for these pieces: an established firm files a retail communication promoting a specific bond fund within 10 business days of first use under Rule 2210(c)(3)(A).

The Trap: Remembering the pre-2017 pre-use filing rule for volatility ratings, which no longer appears on the Rule 2210(c)(2) list.

• Only if a customer complains to the firm about the accuracy of the volatility rating: Misconception: filing obligations are not complaint-driven. They attach to the category of communication.
• At least 10 business days prior to first use, with use withheld until any FINRA comments are addressed: Misconception: this was the rule before FINRA's amendments to Rules 2210 and 2213 took effect on January 9, 2017. The Rule 2210(c)(2) pre-use list now covers only certain fund rankings or comparisons and security futures.
• Never, because a rating is third-party content the firm does not adopt: Misconception: a member that distributes third-party content in its own retail communication adopts it and is responsible for it.

Verified against: FINRA Rule 2213 and Rule 2210(c)(3)(A)