Tales From the Front: Communicate, But Don't Mislead
n a recent customer arbitration, evidence revealed that the rep had prepared a series of reports for an account showing substantial unrealized losses and relatively insubstantial realized gains. The rep mailed the reports to the customer. His notes on the reports boasted of the realized gains, yet minimized the importance of the unrealized losses. He emphasized that the unrealized losses were "unrealized; no loss until you sell!", and predicted that the positions "will recover."
Normally, branch management would intercept this kind of misleading correspondence to a customer. However, the manager failed to do so in this arbitration. As a result, the reports with the notations ended up as a primary exhibit in the customer arbitration.
It is important for reps to have a basic understanding of what they can, and cannot, communicate to their customers. Reps should familiarize themselves with both NASD Rule 2210 and NYSE Rule 472. In sum, these rules require that reps communicate, in a fair and balanced fashion, true statements that do not omit important facts. Straightforward enough. Now let's examine the rules particularly as they would apply to the arbitration scenario described above - opinions and predictions.
There are a host of rules that govern the giving of opinions. As a general proposition, Rule 472 cautions that opinions must have a reasonable basis, and Rule 2210 instructs reps not to make any false, exaggerated, unwarranted or misleading statement.
But the rules swell from there. For example, the NASD advises that reps consider the context in which they give opinions:
"A statement made in one context may be misleading even though such a statement could be appropriate in another context. An essential test in this regard is the balanced treatment of risks and potential benefits. [A rep's] communications should be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield inherent to investments."
Likewise, the NASD cautions reps to consider their audience: "Different levels of explanation or detail may be necessary depending on the audience to which a communication is directed." Related to that point, the NASD reminds reps that "a complex or overly technical explanation may be more confusing than too little information."
Another interesting caution relates to footnotes. The NASD has a particular rule for footnotes and legends, allowing information to be placed there only if doing so will not "inhibit the customer's understanding of the communication." The NYSE weighs in with an additional, interesting caution. Reps must date their communications, and any significant information or data that is "not reasonably current (usually more than 6 months old - depending upon the industry and the circumstances)" must be noted.
Now, let's examine the rules regarding predictions. First, the NYSE allows for "projections and forecasts" of future events which are clearly labeled as forecasts. That said, the NYSE also states that, "Any projection or prediction must contain the bases or assumptions upon which they are made and must indicate that the bases or assumptions of the materials upon which such projections or predictions are made are available upon request."
However, reps should realize that the NASD is even stricter. Rule 2210 states:
"Communications with the public may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast. A hypothetical illustration of mathematical principles is permitted, provided that it does not predict or project the performance of an investment or investment strategy."
These are just some of the many communication rules with which reps must comply!
As one can see, reps should be glad to have competent branch and compliance assistance to navigate though the often confusing rules regarding communications with customers.
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
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