Retail Communication

A draft brochure for the Kelmscott High Income Fund devotes two full pages in large type to the fund attractive yield and its record of monthly distributions, and mentions in small print on the final page that the portfolio holds below investment grade bonds. Under FINRA Rule 2210 content standards, the piece is:

1. A.acceptable, because every statement in it is factually accurate.A communication may be misleading despite being literally true, through emphasis and omission.
2. B.deficient, because risk disclosure must be given prominence comparable to the benefits presented.Correct. Fair and balanced means balanced in presentation, not merely complete.
3. C.deficient only if the fund yield figure is not current to the most recent calendar quarter.Currency of performance data is a separate requirement and does not cure the imbalance.
4. D.acceptable, because the risks are disclosed somewhere in the piece.Mere inclusion does not satisfy a standard aimed at how the reader will actually understand the piece.

Why: Communications must be fair and balanced and must provide a sound basis for evaluating the facts. A piece that presents benefits prominently while burying the corresponding risks in small type at the back does not meet that standard, even though every statement in it may be literally true. The remedy is to give the credit and interest rate risks of a high yield strategy prominence comparable to the yield claims, not merely to include them somewhere.

A representative at Ironvale Capital asks to print the credential "Certified Senior Retirement Strategist" on his business cards and in retail communications aimed at retirees. He obtained the credential from a private organization after a two-hour online course, with no examination, no experience requirement and no continuing education. What must the firm do?

1. A.Permit it, because the designation was in fact awarded to him and the statement is therefore literally true.Wrong. A literally true statement still violates the content standards if the overall impression misleads.
2. B.Permit it as long as the communication discloses the fee he paid to obtain the credential.Wrong. Disclosing the cost does not cure the misleading implication of expertise.
3. C.Permit it in institutional communications only, since institutional investors can evaluate credentials for themselves.Wrong. The problem is the substance of the credential, and the proposed use here is retail in any event.
4. D.Prohibit it, because a designation implying expertise the representative does not possess, awarded without meaningful standards, makes the communication misleading.Correct. Firms must vet designations, and this one conveys qualifications the representative has not earned.

Why: FINRA's content standards prohibit communications that are false, exaggerated, unwarranted, promissory or misleading. A professional designation that suggests specialized expertise in advising older investors, but that rests on a two-hour course with no testing, experience or continuing education, conveys a level of qualification the representative does not possess. Firms are expected to vet designations before permitting their use, considering whether a recognized body awards them, whether meaningful standards and examinations exist, and whether the credential can be verified.

Marchmont Securities finalises a new brochure describing the Marchmont Core Bond Fund, a registered investment company, and begins distributing it to retail investors on 3 March. With respect to FINRA's Advertising Regulation Department, the firm must:

1. A.Obtain FINRA's written approval of the brochure before distributing it on 3 March.Routine fund retail communications are filed after first use; FINRA does not pre-approve them for an established member.
2. B.File the brochure only if a customer complains about its contents.Filing is not complaint-driven; it is required within a set period after first use.
3. C.File the brochure within one year of first use, when it renews its annual advertising submission.There is no annual advertising submission of this kind, and the filing window is far shorter.
4. D.File the brochure with FINRA within 10 business days of first use, separately from the principal approval required before first use.Correct. Fund retail communications are filed within 10 business days of first use, and principal approval must precede that use.

Why: A retail communication concerning a registered investment company must be filed with FINRA's Advertising Regulation Department within 10 business days of first use. The obligation is a post-use filing for an established member, which is why the firm may distribute the brochure before filing, and it sits alongside, not instead of, the separate requirement that a registered principal approve the piece before it is first used.

A representative wants to mail prospects a fund family's glossy sales brochure describing the Wexbury funds' strategy, management team and past results. The brochure is not structured as an advertisement containing only the information the SEC permits to be omitted from a prospectus. Before or with that brochure, the representative must deliver:

1. A.A copy of the fund's Statement of Additional Information.The Statement of Additional Information is furnished on request; it is not the required accompaniment to sales literature.
2. B.The fund's current prospectus, which must precede or accompany the sales literature.Correct. Fund sales literature must be preceded or accompanied by a prospectus unless it fits the narrow advertising exception.
3. C.The fund's most recent annual report, which contains the audited financial statements.The annual report is a separate shareholder document and does not satisfy the prospectus requirement.
4. D.Nothing, provided the prospectus is delivered with the confirmation if the prospect later invests.Delivery with the confirmation does not cure sales literature that should have been accompanied by a prospectus.

Why: Fund sales literature must be preceded or accompanied by a prospectus. The limited exception is the advertisement that confines itself to the information the SEC permits, sometimes called an omitting prospectus, which may stand alone provided it carries the required performance data and legends. Because this brochure does not fit that exception, the prospectus must go with it or before it.