Recommendations Concerning Advertising and Promotion of Commission Discounts

FINRA rules require that member's communications with the public be accurate, fair and not misleading. An investor considering the series of a broker-dealer, including a "discount" broker, should be informed of all factors material to his use of such broker-dealer's services. There are many variables in the charges and services offered by broker-dealers and it isn't reasonable to expect that every variation be included in media advertising, given the expense of such advertising. Relevant factors not included in advertisements should be communicated to persons responding, however. Certain items should be included in the advertisement itself, when the advertisement would be misleading in the absence of their disclosure.

 

Generally, any communication with the public concerning "discount" brokerage should reflect recognition of the following factors:

 

  • Stocks are not the only types of securities available. Commission rates may vary markedly for other types of products (e.g., options, bonds).
  • Certain types of securities offered by prospectus cannot normally be sold at prices reflecting discounts from the commission or sales charge stated in the prospectus (e.g, mutual funds and certain other registered offerings).
  • Generalized, unqualified statements concerning a commission or discount rate will be inherently inaccurate and misleading if there are any undisclosed factors with would cause that rate to be unavailable (e.g., minimum commissions, volume requirements, separate service charges, etc.).

 

Importance of Full Disclosure

 

The public will have a much better understanding of a member's services, and future disputes will be minimized, if certain disclosure are made, preferably in writing. The most common method of disclosing these items is through use of a brochure or mailer. Examples of important basic disclosures include:

  1. The basic commission rate schedule of the member, including variations in the rates applicable to larger transactions or to transactions in options, bond, or other products.
  2. Any applicable minimum commission, minimum transaction size, registration fee or initial deposit requirement.
  3. Any special service charges applicable to limit orders, safekeeping of securities, transfer of issue of certificates, odd lot transactions, research, or other services.
  4. If applicable, the services not offered by the firm which might be expected by an investor. The most common services eliminated by discount brokers are personalized recommendations and research.
  5. If mutual funds or fixed-price products are specifically mentioned in advertising or sales literature, the fact that discounts on such products are not available. If such products are not offered by the member, consideration should be given to so stating.
  6. If the member ever acts as principal, as a market-maker or otherwise, the policies of the member in this regard and the relevance to such transactions, or lack thereof, of the member's agency commission rates.
  7. Any other factor which might be necessary to an understanding of the member's rates or services. Where a member's rates may be difficult to determine due to the combined impact of minimum commissions, separate registration or service charges, etc., use of specific examples should be considered.

 

Discount Advertising

 

While, as noted, including all of the above disclosures in every advertisement or public communication may be neither necessary nor practical, advertisements which omit such items should include an offer to furnish further information. Also, the content of a particular advertisement may dictate specific disclosures in order to make it accurate and not misleading, and there are certain unwarranted implications which can be contained in advertisements which are not carefully prepared. For example, advertisements and promotional material should disclose:

  • any time limitations or material conditions applicable to a rate or discount advertised, especially the conditions under which an advertised maximum savings would be achieved. For example, if a minimum transaction amount is required, or the savings applies only to OTC trades, such sold be disclosed.
  • what an advertised discount is based upon, e.g., the member's normal commission rates, formerly existing fixed rates, recent survey of competitors, etc. If the discount is based upon a survey of competitors, the date and nature of such survey should be disclosed, and consideration should be given to disclosing the details of the survey, or at least offering such details.
  • any factor which would alter an advertised discount which is stated or implied to be a minimum or across-the-board discount. A minimum commission, volume requirement, special service charge, etc. would fall into this category. Even where the context of a particular advertisement doesn't require it, disclosure of a minimum commission charge will reduce both misunderstandings and inquiries from unqualified respondents.

 

Implications to be avoided in discount advertising include:

  • that a single discount or rate is applicable to all transactions in all types of securities.
  • that all products and services typically offered by broker-dealers are available when such is not the case.
  • that a particular service offered (or exchange membership) is that of the advertising member when it is provided by a correspondent or clearing firm.
  • that a survey of competitors' commission rates is current when such is not the case. (It may be misleading to base an advertised discount on a survey which isn't current.)

 

Adherence to principles of full disclosure to clients will reduce troublesome and potentially costly misunderstandings about rates or services. The Association stands ready to assist member in applying its standards with respect to advertising and sales literature (primarily NASD Conduct Rule 2210). Inquiries should be directed to:

 

FINRA Advertising/Investment Companies
Regulation Department
(240) 386-4500