Principal Approval Requirements

Approval requirements track the same three categories from the first section of this unit. Retail communications get the strictest treatment because they reach the widest and least sophisticated audience.

When Must a Principal Approve a Retail Communication?

An appropriately qualified registered principal must approve each retail communication before the earlier of its use or its filing with FINRA's Advertising Regulation Department.

Exam Tip: Gotchas

• The approval deadline is not simply "before use." A retail communication that gets filed before it's ever used still needs principal approval before that filing, since approval attaches to whichever event, use or filing, happens first.
• Principal approval is a per-piece requirement for retail communications, with four narrow exceptions, not three. Three of them swap approval for correspondence-style supervision: one excepted from the research report or debt research report definition, unless it makes a financial or investment recommendation; one posted on an online interactive forum; and one that makes no financial or investment recommendation and promotes nothing the firm sells.
• The fourth exception works differently and lifts approval entirely. If another member already filed the piece and received a Department letter saying it appears consistent with applicable standards, and this firm has not materially altered it and will not use it inconsistently with that letter, no principal approval is required at all.
• An exception excuses approval before use, not before filing. If the firm files the piece with the Advertising Regulation Department, a qualified principal must still approve it first, whichever exception it otherwise met.

How Are Institutional Communications and Correspondence Supervised?

Institutional communications and correspondence do not require a principal's approval before each piece goes out. Instead, each is governed by the firm's own written supervisory procedures.

• Institutional communications: A firm's written supervisory procedures govern principal review. When those procedures do not require review of every institutional communication before first use, they must instead provide for:
  • Education and training of associated persons on the firm's procedures
  • Documentation of that education and training
  • Surveillance and follow-up to confirm the procedures are actually being followed
• Correspondence: Correspondence is subject to a firm's supervision and review requirements, not item-by-item principal pre-approval.

Exam Tip: Gotchas

• Only retail communications carry a blanket prior-approval requirement. Institutional communications and correspondence are supervised and reviewed under written procedures, which is a different standard than a principal's signature on every piece before use.
• A firm that doesn't review every institutional communication before use isn't automatically out of compliance. It's only out of compliance if its procedures also skip the required training, documentation, and surveillance and follow-up.

What Should You Check on Exam Day?

• Confirm which event, use or filing, comes first in the scenario; principal approval for a retail communication must precede whichever happens earlier.
• Do not apply the retail-communication approval deadline to correspondence or institutional communications; those run on written supervisory procedures instead.
• When a scenario describes a firm skipping per-piece institutional review, check whether the firm's procedures still include training, documentation, and surveillance and follow-up.