I have always found it enlightening – and a bit scary – to talk to my clients about FINRA Rule 2210, the advertising (or “communications with the public”) rule, to see what they know about it. It’s a long, dense rule, so I’m not talking about knowledge of its more esoteric components; I’m talking about something way more basic, namely, what communications does it apply to. All too often, my clients are surprised to learn that by the very definitions in the rule itself, 2210 is NOT restricted to communications relating to securities. Just a week or so ago, in an AWC, FINRA made this abundantly clear.

Let’s back up and review some basics. According to 2210(a), there are three types of communications: correspondence, retail communications and institutional communications. All are defined. Notably, none of the definitions makes any mention of the need to pertain to a security. “Correspondence” is “any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.” “Retail communications” are simply correspondence sent to more than 25 retail investors in a 30-day period. And “institutional communications” “means any written (including electronic) communication that is distributed or made available only to institutional investors.” Lest you think that FINRA tried to sneak in a requirement that securities be involved through its definitions of the terms “retail investor” and “institutional investor,” you would be wrong. A retail investor is simply “any person other than an institutional investor, regardless of whether the person has an account with a member.” That definition has nothing to do with securities. The same is true of how FINRA defines an institutional investor.

Similarly, in 2210(d), the portion of the rule that governs the content of communications with the public, there is also no requirement that the communications be about securities. In short, the content standards merely require that communications

• “must be fair and balanced”
• may not “omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading
• cannot be “false, exaggerated, unwarranted, promissory or misleading”
• cannot contain “any untrue statement of a material fact or is otherwise false or misleading.”[1]

Because of this, I have always told my registered rep clients that, strictly speaking, the advertising rule applies if they were to place an ad in the newspaper to sell their car. I am not saying that FINRA would bring a case if it concluded that the ad was not “fair and balanced,” but it remains that it could.[2]

Which brings us to the AWC. In July 2017, Michael Pellegrino mailed an ad “promoting [a] short-term, high yield contract to approximately 80 retail investors.” Notably, the ad itself “stated that the product was not a security.” Even more notable, the AWC never finds that it was, in fact, a security. But, that’s because of what I have just been saying: it doesn’t matter, it’s still a violation if it doesn’t meet the content standards.

But here’s the real lesson of this settlement: there are communications that don’t involve securities that FINRA could care less about, and there are communications that don’t involve securities that FINRA will care a great deal about. Mr. Pellegrino’s mailing fell squarely into the latter category because while the product he was pushing may or may not have been a security as a matter of law, it sure as heck looked like one as a matter of fact. That’s why FINRA takes pains in the AWC to point out the characteristics of the product and the mailing, to make it clear that whatever Mr. Pellegrino was selling, it walked and quacked like a security:

• The mailing referenced Mr. Pellegrino’s BD, and noted that it was a member of FINRA.
• In order to invest in the contract, investors had to sign a “Memorandum of Indebtedness” (MOI), whereby they agreed to provide funds for distribution at the issuer’s discretion.
• Investors also had to sign a Statement of Understanding relating to the MOIs that referenced Mr. Pellegrino’s BD.
• The issuer pooled investor monies and lent it as a “Merchant Cash Advance” to small businesses unable to borrow money through traditional avenues.
• The investors entered into the MOIs with the expectation of investment returns based on a percentage of the merchants’ future revenues.

While this is not quite a full-blown Howey analysis, i.e., the test that a court historically would apply to a product to determine whether it is a security or not, it certainly borrows enough from the Howey test that it’s obvious that FINRA cared that, at a minimum, Mr. Pellegrino’s mailing sure resembled a security. And that, in my view, is why FINRA brought the case.

So I wouldn’t worry too much about the ad you’re about to place on Craig’s List to sell your old couch, or the email you sent to everyone in your contact list sharing your opinion of Lupin, that new Netflix show, or the flyer you created to support your nomination for Condo Board. Despite the fact that they are all theoretically subject to the content standards of the advertising rule, FINRA will not be troubled if, say, you under-disclosed the size and source of the stain on the couch cushion. On the other hand, if you communicate in writing with people about something that involves an investment, you may not take much comfort from the fact that you could plausibly argue it is not a security.

[1] I should note that the word “security” does appear in the rule. In 2210(d)(1)(A), it says that “[a]ll member communications must . . . provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.” But, as you can see, this by no means restricts the rule ONLY to securities.

[2] I learned this lesson, like, two decades ago as a lawyer with NASD’s Department of Enforcement. I brought an advertising case involving a viatical settlement, which, at the time, was or wasn’t a security, depending on who you asked. That is, the SEC said it was, but the DC Circuit Court of Appeals held to the contrary. Acknowledging that split in authority, the NAC, in affirming the finding by the hearing panel that the respondent did, in fact, violate the rule, essentially said it didn’t care one way or the other because the rule covered the ad either way: “we find that the advertisement at issue is subject to the requirements of Conduct Rule 2210, which addresses, among other things, standards applicable to all member communications with the public."