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
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
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