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Guide to the Internet for Registered Representatives |
Introduction
FINRA has developed this page to make registered representatives (RRs) aware of the compliance requirements and potential liabilities when using the Internet and electronic communications.
This page addresses some general compliance requirements that apply to electronic communications. It also discusses specific considerations relating to the use of email, instant messaging and websites including chat rooms, blogs and bulletin boards. We have based the information on published rules, interpretations and notices. Wherever possible, a link to the actual text of the rule or interpretation is provided.
An RR's compliance responsibilities when communicating via the Internet or other electronic media are the same as in face-to-face discussions or in written communications with the public. In addition, RRs must be aware of internal firm policies and procedures that may restrict or prohibit the use of electronic communications.
Categories of Electronic Communications with the Public
Electronic communications may fall under any one of the following categories of communications. They may be considered as correspondence, public appearances, advertisements, sales literature, reprints and institutional sales material. These methods of communication are covered under FINRA Conduct Rules and also explained on the Advertising Regulation Web page. In general:
- Publicly available Web sites (including banner advertisements, blogs and bulletin boards) are considered advertisements.
- An email or instant message sent to 25 or more prospective retail customers is considered sales literature.
- An email or instant message is considered correspondence if it is sent to i) a single customer (prospective or existing) ii) to an unlimited number of existing retail customers and/or less than 25 prospective retail customers (firm-wide) within a 30 day period.
- Password-protected Web sites are considered sales literature.
- Chat room discussions are considered public appearances.
Rules that Affect Internet Usage
All communications with the public are subject to compliance with FINRA Conduct Rules and related Interpretative Materials. Set forth are highlights of the Conduct Rules that apply to all forms of electronic communications. RRs are urged to view the actual rules below using the links provided.
Standards of Commercial Honor and Principles of Trade (Rule 2110)
Rule 2110 requires RRs to adhere to high standards of commercial honor and just and equitable principles of trade in conducting their business. Guidance regarding compliant ways to transact business and ensure just and equitable principles of trade are addressed in Interpretive Material related to this rule.
Communications with the Public (Rule 2210)
Communications with the public must:
- be based on principles of fair dealing and not omit material information, particularly risk disclosure;
- not make exaggerated, unwarranted, or misleading claims;
- give the investor a sound basis for making an investment decision; and
- not contain predictions or projections of investment results.
Guidelines to Ensure Communications With the Public are Not Misleading (IM- 2210-1)
IM-2210-1 makes it clear that every member is responsible for determining whether any communication with the public is compliant. It also addresses what must be considered in determining whether a communication complies with all applicable standards.
Approval and Recordkeeping (Rule 2210(b))
Advertisements and sales literature, written or electronic, must be approved in writing prior to use. Electronic correspondence, i.e., email and instant messaging to 25 or more existing customers over a 30-day period requires prior approval by a registered principal. Research reports also require approval, by a registered principal before they are posted on a Web site. RRs must know what their firm's policies and procedures are in order to comply with these rules.
Supervision (Rule 3010)
Members must establish, maintain and enforce written procedures for communications and ensure compliance with all applicable securities laws and rules. Therefore, RRs must know their firm's supervisory and review policies and comply with them, even if they are more restrictive than what is allowed under FINRA rules. Notice to Members 99-03 provides a full discussion of how Rule 3010 applies to electronic communications. Failure to follow the firm's supervisory and review procedures and regulations in general may subject an RR to disciplinary action either from the firm or the regulators.
Books and Records (Rule 3110)
Advertisements and sales literature must be maintained as part of the firm's records for three years from the date of last use. Correspondence must also be maintained in compliance with applicable FINRA rules and with SEC Rules 17a-3 and 17a-4. An RR's email or instant messaging to the public relating to the firm's business whether generated from the office, home or elsewhere, is subject to these provisions. RRs should know and comply with their firm's policies in this area.
Recommendations to Customers (Suitability) (Rule 2310)
RRs must have a reasonable basis for believing that each recommendation to a customer is suitable based on the information provided by the customer. To this end, RR's should make reasonable efforts to obtain information concerning a customer's financial status, tax status, investment objectives and other pertinent information considered reasonable in making a recommendation to the customer.
Conflicts of Interest (Rule 2711, IM-2210-1 (6)(C) and Notices to Members 02-39, 04-18 and 07-04)
RRs must avoid any conflicts of interest in transactions with customers. Rule Rule 2711, IM-2210-1 (6)(C) and Notices to Members 02-39, 04-18 and 07-04 cover conflict of interest issues regarding equity research reports and recommendations. Whether or not communicated electronically, conflict of interest and other disclosures required in research reports and recommendations must be made. RRs should note that they may not be able to publish an equity research report without having registered as a research analyst and maintaining related continuing education requirements. Also, FINRA would give close scrutiny to circumstances where an RR personally buys shares of a thinly traded stock and then publicly makes a buy recommendation, or promotes the stock in a chat room or blog or bulletin board.
Day Trading Rules (Rules 2360 and 2361)
Rules 2360 and 2361 apply to member firms, and as such, RRs that promote day trading strategies. Firms are required to furnish a risk disclosure statement to a non-institutional customer prior to opening an account for the customer. In addition, the firm will either have to (1) approve the customer's account for a day trading strategy, or (2) obtain from the customer a written agreement that the customer does not intend to use the account for day-trading purposes. As part of the account approval process, the firm is required to make a threshold determination that day trading is appropriate for the customer. Notice to Members 00-62, provides more information on these day-trading rules.
Other Important Internet Compliance Issues
Use of EMail and Instant Messaging
RRs may mistakenly believe that sending an email or instant message from home exempts it from their firm's supervision or the regulations. In fact, whether sent from the office or home, email and instant messages that concern investments or a FINRA member firm's business fall under FINRA jurisdiction.
Group email and instant messages must be approved prior to use
In general, the same email or instant message sent to 25 or more prospective or existing customers must be approved prior to use by the appropriate registered principal of the firm. Depending on their content, group messages may also require filing with FINRA's Advertising Regulation Department. Firms have flexibility to adopt their own procedures for how emails or instant messages sent to fewer than 25 individuals are handled. RRs should familiarize themselves with their firms' procedures and ensure they comply fully. RRs should contact their compliance departments for details in this area.
Firms must retain business-related email and instant messages
In addition to approval, firms must be able to retain and produce business related emails in accordance with specific regulations. RRs should familiarize themselves with their firms' requirements for email use and retention. For example, some firms may require that all emails and instant messages be sent using firm equipment or software.
Electronic Chat Rooms, Blogs and Bulletin Boards
The fact that an individual is registered subjects him/her to a higher standard than members of the general public. Given the fast-paced environment of chat rooms, blogs and bulletin boards, casual or off-handed statements have the potential of crossing the line between being a reasonable opinion and an exaggerated or unwarranted claim. Because of the difficulties of supervision and the potential liabilities from participating in these forums, many firms limit or prohibit participation altogether.
Chat room participation by RRs is considered a public appearance. Therefore, RRs must follow the same requirements for participating in a chat room that they would if they were speaking in person before a group of investors. There are no filing requirements, but RRs are accountable under FINRA Conduct Rules and the federal securities laws for what they say regarding securities or services. Also, member firms are responsible for supervising the business-related activities of RRs including chat room participation. Remember, these rules apply regardless of whether an RR is in the office at home or a public computer.
In general, blogs and bulletin boards are considered advertisements and as such, all the content standards apply. Depending on the subject matter, firms may need to file these postings with FINRA.
RRs who are considering hosting a bulletin board, blog or chat room should contact their compliance department to determine whether such activities are permitted and what procedures may apply. Member firms must supervise the operation of any securities-related blog, bulletin board or chat room hosted by an RR or by the firm itself to ensure compliance with FINRA Conduct Rules and the federal securities laws. For example, a member firm may limit when commenters can post new messages to times when such messages can be monitored. A member firm may also require commenters to register and agree to abide by the terms of the Web site, including limitations on content.
Web Sites
Points to remember:
Member firm name required - Web sites must clearly and prominently include the name of the member firm (or a legal fictional name) by which the firm is commonly recognized or name required by any state or jurisdiction so that investors know the firm with which they are doing business.
Current Information should be used - RRs who communicate electronically must use current information. Outdated information runs a high risk of being inaccurate and misleading to investors.
Disclose risk factors - Both the content of the risk disclosure and its location are important. Risk disclosure should clearly and accurately describe the risks involved. Disclosures should be included in the appropriate locations within the Web site. Because visitors may jump from one Web page to another, or come to the site from different entry points, investors should see the disclosures regardless of their entry point into the site.
Speed & Reliability Claims - Communications that refer to the speed and reliability of a firm's electronic trading systems must not exaggerate the firm's capabilities. Notice to Members 99-11 provides guidance about disclosures that firms provide to customers to educate them about the effects of market volatility and volume.
Linking to other Web Sites
Linking to other sites raises concerns because these sites may contain misleading or incorrect information. An RR's Web site should not have a link to a site that he/she knows or has reason to know contains false or misleading information about products or services. RRs should exercise the same care in choosing links as they would in referring customers to any outside source of information.
Procuring Material From Third Party Web Sites
Sales communications sold at a third party site may not be compliant with the Rules, since such material may include misleading or dated information or be subject to filing with FINRA. Therefore, RRs should exercise extreme caution when procuring sales communications from a third party Web site.
References to FINRA Membership and Linking to FINRA Web Sites
A member or a person associated with the member firm who refers to its membership in FINRA on an Internet Web site must provide a hyperlink to FINRA's home page www.finra.org. The hyperlink must be located in close proximity to the reference to FINRA membership that is reasonably designed to draw the public's attention to the FINRA membership information. If more than one reference to FINRA membership is made on the Web site, the hyperlink may be placed in close proximity to any FINRA reference that is reasonably designed to draw the public's attention to the FINRA membership information.
There is no independent obligation requiring a member to mention its FINRA membership. Thus, the hyperlink is required only if a member or associated person of the member firm chooses to mention its membership on its Web site.
Please note that the use of FINRA 's logo on a firm's or RR's website is prohibited.
State Registration Requirements
Each state has separate registration requirements for individuals doing business in that state. Use of electronic communications may be deemed a solicitation of business. Generally, the solicitation of business in a state triggers the requirement for registration. RRs are advised to rely on their individual firms for guidance regarding state registration issues.
Pertinent FINRA Website Information:
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