Saturday, February 7, 2009

Market letter rule change

Oh great--another rule change by FINRA. As if test takers didn't already struggle enough with the definitions of sales literature, correspondence, etc., FINRA has just relaxed the rule covering "market letters."

Let's start with the big picture: what is the significance of these definitions of "sales literature," "correspondence," "advertising," etc.? The big picture is that FINRA and the SEC hold firms responsible for all outgoing communications. If the communication is considered "advertising" or "sales literature," a compliance principal has to review and pre-approve the material, also keeping copies for the firm's files. If the communication is considered "correspondence," pre-approval is not required. The firm simply needs an effective monitoring and internal education program in place to make sure registered rep's don't send out emails, faxes, and letters with ridiculous claims like "You, too, can triple your money this quarter without subjecting your investment to loss of principal."

Okay, so "sales literature" requires pre-approval. What is considered to be "sales literature"? As we can see at, sales literature includes "Any written or electronic communication, other than an advertisement, independently prepared reprint, institutional sales material and correspondence, that is generally distributed or made generally available to customers or the public, including circulars, research reports, performance reports or summaries, form letters, telemarketing scripts, seminar texts, reprints (that are not independently prepared reprints) or excerpts of any other advertisement, sales literature or published article, and press releases concerning a member's products or services."
Ouch—FINRA rules are painful this early on a Saturday morning. Notice that the regulators aren't so worried about protecting the institutional investors, which include pension funds, mutual funds and insurance companies--they're big boys and girls, so the firm doesn't have to pre-approve sales literature going only to institutional investors. But, if the sales literature is sent to retail investors, it needs to be pre-approved. A "market letter" is considered sales literature. Basically, it's a marketing piece disguised as some friendly, thoughtful analysis from the firm's president, chief economist, "chief equity strategist," etc. Today, I would picture a market letter coming to me with headlines such as "After the fallout and the bailout--now what?" or "Is the housing market finally finding the bottom?" and then some sage-sounding advice from someone clearly smarter than the average retail investor. Up until now, such market letters had to be pre-approved under NASD rules, and under NYSE rules, to be pre-approved by a supervisory analyst or other “qualified person” at the firm. Not anymore. Sort of. Remember, we're dealing with securities regulators here, and they insist on keeping things as clear as mud. But, we can follow them as long as we remain patient. What the rule change involves is this: a market letter can now be considered correspondence, as long as it does not go to 25 or more existing retail customers in a 30-day period and does not make any financial or investment recommendation "or otherwise promote the firm's product or service."
Well, first I can see a loophole about a mile wide--if I were the market letter guy at the firm, I would just take out anything that looks like a direct promotion of the firm's product or service. But I would make sure you see the name of the firm in the text of each "story" at least every 15 words or so. I mean, that's all these so-called "market letters" were ever for--put the name of the firm in front of the client on a regular basis and give the client a reason to want to call and buy or sell some securities--what is this, rocket science? Anyway, if the market letter inserts a little display ad with "Call today for a free IRA check-up with your financial representative today," and goes to 25 or more existing retail customers in a 30-day period, it will have to be pre-approved.

And this really stinks for test-takers, because when you're defining "correspondence," the number 25 is used in a slightly different way. For market letters, discussed above, the rule uses "25 or more existing retail customers in a 30-day period." But the definition of "correspondence" includes a form letter that is sent to fewer than 25 prospects in a 30-day period." Why? Well, a form letter that introduces you as a go-getting new registered representative working for Broker-Dealer XYZ would be sent to drum up business, and you'd probably like to mail it to thousands of prospects just so maybe 5 of them won't hang up on you when you follow up later. This form letter has to be pre-approved. But if you sent it to 24 prospects, it would be considered "correspondence," and would also probably be useless at drumming up new business. However, if you send faxes/emails/letters to existing clients, the number is no longer relevant. The number "25" is for "prospects," and if the letter goes to 25 "prospects" in a 30-day period, it becomes sales literature subject to pre-approval. Letters/faxes/emails to existing clients are considered correspondence, period. On the other hand, for this new rule that allows firms to call market letters "correspondence," the number "25" is for existing customers . . . if the market letter makes investment recommendations and goes to 25 existing customers it once again becomes "sales literature," subject to pre-approval. But, if it doesn't meet that definition it can be treated as "correspondence," which requires a monitoring and training/education program at the firm, not pre-approval. Why the difference? Basically it’s a simple as this: form letters are used to drum up new business with prospects. Market letters generally go to existing clients.

Why the rule change? According to the regulatory notice "FINRA has been concerned that the pre-use approval requirements in some circumstances may have inhibited the flow of information to traders and other investors who base their investment decisions on timely market analysis." As far as I can tell, there is no apology to Series 7 candidates, who now have to spend another 10 minutes or more studying the mind-boggling differences among sales literature, correspondence, advertising, etc.


    i pasted the 63 a long time ago and studying for the 24, but still, it talks about correspondence in there too, i'm glad i looked at your email today! THANKS AND WHERE IS YOUR 24 PASS THE TEST!!!

  2. Robert,

    Is this new infornation likely to be on the test so soon if they just made the change?

  3. Good point--no, I don't usually anticipate something showing up so soon. But, I like people to be on the look-out for a possible new twist to a question, since eventually it will make its way into the test bank. I think the test would have to make it obvious that there is a new defintion . . . a market letter sent to this many existing clients over a 30-day period. Up to now, only the phrase "market letter" would have likely been used, since all "market letters" were treated as sales literature.