Communications with Prospects and Customers - Investment Company Act of 1940, and FINRA Conduct Rule 2110 and 2120


Investment Company Act of 1940

Rule 34-b - Sales Literature Deemed to be Misleading
Under the Investment Company Act of 1940, Rule 34-b defines misleading sales literature. Any advertisement, pamphlet, circular, form letter, or other sales literature addressed to or intended for distribution to prospective investors that is required to be filed with the Commission as sales literature, and which contains misleading information, or which has omitted a fact necessary in order to make the statements made therein not materially misleading falls under this rule. Several provisions require that the literature be in compliance with Rule 482 described above, including:

  • Sales literature that includes performance data must include the information required under Rule 482.

  • Sales literature for a money market fund must include the information required under Rule 482.

  • Sales literature for mutual funds (other than money market funds) must include the total return information required under Rule 482.


NASD (now known as FINRA) Conduct Rule 2110

Standards of Commercial
Honor
Under FINRA General Standards of Business Conduct, a member, in the conduct of his business, must observe high standards of commercial honor and just and equitable principles of trade. Under Rule 2110, the following conduct is prohibited:

  • Front-running - This is the unethical practice of a member trading a security based on information that his or her clients have not yet received.

  • Trading ahead of research reports - A member may not purposefully establish, create or change the firm's inventory position in any security in anticipation of the issuance of a research report regarding that security by the member firm.

  • Trading ahead of customer market orders - A member must make every effort to fully and promptly execute a customer market order. If any member accepts an order without immediately executing it, the member is prohibited from trading that security on the same side of the market for its own account unless it immediately thereafter executes the customer market order up to the size and at the same or a better price than that at which it traded for its own account.


NASD (now known as FINRA) Conduct Rule 2120

Use of Manipulative or Fraudulent Devices
Members are also forbidden from using any manipulative, deceptive or other fraudulent devices in any dealings with the public under FINRA Rule 2120, which is cross referenced with SEC Rule 10b-5. This rule defines such behavior as:

The use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

  • To employ any device, scheme, or artifice to defraud

  • To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading

  • To engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.

FINRA Conduct Rule 2210
Related Articles
  1. Term

    Understanding Market Price and Its Changes

    An asset’s or service’s market price is the current price at which it can be bought and sold.
  2. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  3. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  4. Mutual Funds & ETFs

    5 Low Fee Lord Abbett Mutual Funds

    Learn about five low expense ratio Lord Abbett mutual funds and the key characteristics about each mutual fund's top holdings, returns and total assets.
  5. Economics

    The History of Stock Exchanges

    Stock exchanges began with countries who sailed east in the 1600s, braving pirates and bad weather to find goods they could trade back home.
  6. Investing

    Credit Suisse Losses: Indicating Bigger Trouble?

    The banking sector's dependence on the energy sector is just one of many factors that have experts worried about the banking industry's performance.
  7. Stock Analysis

    The Top 4 Large Cap Restaurant Stocks for 2016 (SBUX, MCD)

    Learn about the top four large-cap restaurant stocks for 2016 and economic factors that could impact the industry over the next year.
  8. Personal Finance

    Zika Virus: Latest Advice on Staying Safe

    Zika has hit the U.S. Here’s the most recent update on what’s known about the virus, how it spreads, who’s at highest risk and how to avoid it.
  9. Economics

    How Warren Buffett Made Berkshire A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  10. Mutual Funds & ETFs

    Top 10 Most Traded Leveraged ETFs (UVXY, SDS)

    Discover how leveraged ETFs work and why they are popular among traders. Learn about the 10 most traded leveraged ETF in the marketplace today.
RELATED TERMS
  1. Environmental Economics

    An area of economics that studies the economic impact of environmental ...
  2. Fair Trade Price

    A minimum price paid for certain agricultural products imported ...
  3. FANG Stocks (FB, AMZN)

    FANGs stands for the high-performing tech stocks Facebook, Amazon, ...
  4. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  5. Great Society

    Born in the turbulent sixties, the Great Society was President ...
  6. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  4. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  5. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
  6. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center