Professional Correspondence That Pushes The Envelope

By Monneke Jones AAA

Many inexperienced registered representatives unintentionally violate the rules governing correspondence in order to add value to client communications by cross-selling a variety of products and services. This makes having a solid understanding of correspondence and sales literature critical for a registered principal. In this article, we'll provide some pointers on how to distinguish between the two and lay out some examples on what proper correspondence should look like.

Communications with the Public
The National Association of Securities Dealers (NASD) established Rules 2210 and 2211 to provide a clear distinction between correspondence and sales literature. To see these rules, check out the NASD's site for Rules 2210 and 2211.) In general, the rules explain what types of information may be included in client correspondence versus sales literature, including limitations on the distribution of such information. When necessary, these rules provide registered principals with a methodology for assessing whether the content of intended correspondence crosses the line to sales literature.

What is correspondence?
The NASD definition of correspondence consists of any written letter or email message distributed by a member to one or more of its existing retail customers, and fewer than 25 prospective retail customers, within any 30-calendar-day period.

One common myth about correspondence is that because it is directed at current clients, the content may be more sales-oriented. However, registered principals must remember that correspondence is still subject to the supervision and review requirements of NASD Rule 3010(d) and that correspondence requires a registered principal's review when its distribution exceeds the 25/30 limitations (25 customers within any 30-calendar-day period) and/or when the content makes any financial or investment recommendation or otherwise promotes a product or service of the member.

What is sales literature?
The definition of sales literature is broad, which may explain why some registered representatives mistakenly include some elements of sales literature in client correspondence. The NASD defines sales literature as: "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, market letters, 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" (NASD Rule 2210).

When Correspondence Becomes Sales Literature
The financial services industry is notorious for maximizing every opportunity to promote its lineup of products and services to clients. Cross selling usually involves misdirecting inexperienced registered representatives to discuss other "opportunities" with their clients at all points of contact, which (unfortunately) includes correspondence.

If you want to get a better idea of how the misdirection occurs, take a look at the following pieces of mock correspondence:

ABC Investments
123 Anywhere Street
Anytown, USA 71264
Ellen Smith
256 Clearwater Street

Fairfax, Virginia23599

Dear Mrs. Smith:
The purpose of this letter is to confirm your exchange from ABC Blue Chip Fund to ABC Large Cap Growth Fund. According to the IRS, this exchange constitutes the sale of securities. We urge you to speak with your tax and legal advisor about how this exchange may impact your situation.
The most recent version of the ABC Large Cap Growth Fund prospectus is also enclosed for your review. If you have any questions about this transaction, or any other issues related to ABC Investments, please contact our Client Service line at 877-555-2300, Monday through Friday, between the hours of 8:00-5:00 pm CST.
Thank you, Mrs. Smith, for being a part of the ABC Investments family.
Sincerely,
Bob Wilson
President, ABC Investments

ABC Investments
Member SIPC

Figure 1: This communication illustrates the proper way to create correspondence.
ABC Investments
123 Anywhere Street
Anytown, USA 71264
Ellen Smith

256 Clearwater Street

Fairfax, Virginia23599

Dear Mrs. Smith:
The purpose of this letter is to confirm your exchange from ABC Blue Chip Fund to ABC Large Cap Growth Fund. According to the IRS, this exchange constitutes the sale of securities. However, ABC Investments would like to make you aware that we have several tax-advantaged products that may decrease the impact of taxation during fund exchanges within the ABC Investments Family of Funds. We urge you to speak with your tax and legal advisor about how this exchange may impact your situation.
The most recent version of the ABC Large Cap Growth Fund prospectus is also enclosed for your review. If you have any questions about this transaction, or any other issues related to ABC Investments - including which tax-advantaged products may be suitable to meet your investment goals and objectives - please contact our Client Service line at 877-555-2300, Monday through Friday, between the hours of 8:00-5:00 pm CST.
Thank you, Mrs. Smith, for being a part of the ABC Investments family.

Sincerely,
Bob Wilson
President, ABC Investments

ABC Investments Member SIPC

Figure 2: This communication illustrates the most common way registered representatives violate the rules of correspondence and cross the line to sales literature. The italicized portions emphasize the boundaries that are crossed.

The Role of Registered Principals
As a registered principal, you must understand the mindset and training needs of the registered representatives you supervise. In many cases, the critical point of detection - the point at which a registered principal has to determine whether a particular piece of communication crosses the line from correspondence to sales literature - is assessing the author's intent and the communication's purpose. Also ask yourself whether the communication was initiated by the client or resulted from a recent inquiry or transaction.

If, for example, a client makes a trade or exchange, it is usually as a result of a trigger event, such as rolling over retirement plan assets, increasing investment amounts or diversifying allocations. Because it is common knowledge among registered representatives that trigger events provide a very distinct window of opportunity for promotions, it is more likely that communications resulting from a client transaction would be viewed as a proverbial window of opportunity rather than a standard transaction that warranted a form letter response.

Conclusion
Should registered representatives be charged with closing this window? No. The growth of the financial services industry depends on registered representatives' ability to increase the value of their service and advice to clients, primarily through the proven practice of cross selling. So, instead of closing the window of opportunity, perhaps registered principals should be charged with:

  1. Convincing registered representatives that the "value" of correspondence is the service, not the cross-sell
  2. That the most compelling platform to promote the firm is through sales literature, not correspondence.

For additional information regarding correspondence and sales literature, please read the following NASD Notices to Members:

For more career-related articles, see the Financial Careers archive.

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