Content Standards and Prohibitions

Now that you can classify a communication, the next question is: what can (and cannot) the content say? The FINRA communications rule imposes baseline standards that apply to all communications, plus extra disclosures for retail communications. These standards apply regardless of whether the piece is a retail communication, correspondence, or institutional communication.

What content standards apply to all broker-dealer communications under the FINRA communications rule?

Every broker-dealer communication must:

• Be based on principles of fair dealing and good faith
• Be fair and balanced and provide a sound basis for evaluating the facts
• Clearly identify the member firm by name, in retail communications and correspondence. This is not required of every communication, and "blind" recruiting advertisements are excepted
• NOT omit any material fact or qualification if the omission would make the communication misleading
• NOT contain any false, exaggerated, unwarranted, promissory, or misleading statements or claims
• NOT predict or project performance or imply past performance will recur. Only three things are allowed: a hypothetical illustration of mathematical principles that does not predict performance, an investment analysis tool or its report, and a price target in a research report with a reasonable basis. Standardized fund performance is not one of them, because past performance is historical, not a projection, so it never needed an exception
• NOT make any exaggerated or unwarranted claim, opinion, or forecast

What additional disclosures do retail communications require?

Retail communications must go further. In addition to the general standards above, they must:

• Reflect any material limitation or qualification on the claims being made
• Clearly distinguish hypothetical or back-tested performance from actual performance
• For testimonials, prominently disclose three things: that the testimonial may not be representative of other customers' experience, that it is no guarantee of future performance or success, and, if more than $100 in value was paid for it, that it is a paid testimonial. A testimonial on a technical aspect of investing also requires the speaker to have the knowledge and experience to form a valid opinion

Exam Tip: Gotchas

A retail communication that shows hypothetical or back-tested returns must clearly label them as such. Presenting modeled returns alongside actual returns without a clear distinction is a violation of the FINRA communications rule.

What tax language is prohibited in broker-dealer communications?

The exam repeatedly tests the tax-treatment language a rep may use. The two key distinctions:

• Tax-free: Interest or earnings are never taxed (e.g., qualified municipal bond interest at the federal level). Use only when the product is genuinely tax-free.
• Tax-deferred: Taxes are delayed until withdrawal, not eliminated (e.g., variable annuity earnings, traditional IRA earnings). Use when taxes are merely postponed.

Requirements:

• Cannot call a product "tax-free" if it is only tax-deferred
• Must identify federal vs state tax treatment (e.g., municipal bond interest is federally tax-exempt but may be state-taxable for out-of-state investors)

Exam Tip: Gotchas

Tax-deferred is NOT tax-free. A variable annuity communication that describes the product as "tax-free" violates the FINRA communications rule and its variable-contract communications counterpart, plus the antifraud and material-misstatement provisions of the Securities Act. A Series 6 rep who signs off on "tax-free" language for a variable annuity is creating civil liability for the firm.

How must a comparison between investments be presented?

Any comparison in a retail communication between investments or services must disclose all material differences between them. The rule names the ones that matter:

• investment objectives
• costs and expenses
• liquidity
• safety
• guarantees or insurance
• fluctuation of principal or return
• tax features

Exam Tip: Gotchas

A fund-versus-bank-CD comparison is the classic item. The certificate of deposit (CD) is insured and the fund is not, so guarantees or insurance and fluctuation of principal must both appear. Showing only the yield difference fails the rule, even if every number quoted is accurate.

What must a recommendation in a retail communication disclose?

When a retail communication recommends a security, the firm must disclose, if applicable, that it:

• makes a market in the security, or will buy from and sell to customers on a principal basis
• or an involved associated person has a financial interest in that issuer's securities, and the nature of that interest, unless it is nominal
• was manager or co-manager of a public offering of that issuer's securities within the past 12 months

A communication that shows past recommendations must also meet conditions on how it presents them.

Exam Tip: Gotchas

None of this applies to a communication recommending only funds or variable insurance products. Since those are the only products a Series 6 rep recommends, the practical answer is that the firm needs a reasonable basis and nothing on this list. Watch for a choice demanding a market-making or co-manager disclosure on a mutual fund piece.

Where must a firm reference BrokerCheck?

A member firm's website must carry a readily apparent reference and hyperlink to BrokerCheck on:

• the initial webpage the firm intends retail investors to view, and
• any other webpage carrying a professional profile of a registered person who conducts business with retail investors

The requirement does not reach a firm's directory or list of registered persons that carries only names and contact details, or a third party's website.

What content is prohibited in broker-dealer communications?

A quick checklist of prohibited content in any broker-dealer communication:

• Exaggerated claims about performance, management skill, or product features
• Unwarranted forecasts of future returns
• Promissory language ("guaranteed to beat the market")
• Past performance guarantees that imply future results will be the same
• Misleading comparisons to indexes or other investment vehicles without context
• Equal-prominence failures (e.g., boldfacing benefits but burying risks in footnotes)

Exam Tip: Gotchas

Municipal bond interest is federally tax-exempt, but it may be state-taxable when the investor is out-of-state. A communication that says "tax-free" without calling out the state-tax exposure can mislead out-of-state investors.

What Should You Check on Exam Day?

• Can you state that a communication may never predict or project future performance, except for a hypothetical math illustration, an investment analysis tool, or a research report's price target?
• Do you know that a retail communication showing hypothetical or back-tested performance must clearly label it as such, distinct from actual performance?
• Can you explain why a product cannot be called "tax-free" when it is only tax-deferred, and that municipal bond interest needs a federal-versus-state tax note?
• Do you know that a comparison between investments must disclose all material differences, including guarantees or insurance and fluctuation of principal, not just yield?
• Can you state that the market-making, financial-interest, and manager/co-manager recommendation disclosures do not apply to a communication recommending only funds or variable insurance products?