Sales Practices and Conduct Standards
Sales practices and conduct standards
Sales-practice questions test whether a recommendation and its communication were fair, suitable, and properly approved. Core duties include know your customer (FINRA Rule 2090), suitability (FINRA Rule 2111), fair dealing (NYSE Rule 435), and truthful, balanced communications (NYSE Rule 472 and FINRA Rule 2210). Firms must approve retail communications and correspondence through qualified principals, retain them, and ensure that performance claims, projections, hypothetical results, and testimonials are not misleading. The antifraud provisions, including Section 10(b) and Rule 10b-5 and Section 17(a), apply regardless of internal approval.
Watch for conduct issues: excessive trading and churning, unauthorized transactions, misuse of discretion, unsuitable concentration, inappropriate mutual fund share classes and missed breakpoints, unsuitable variable annuity exchanges, and improper handling of IPO allocations. Discretion requires written authorization and acceptance by the firm; holding mail or using a power of attorney raises separate control concerns.
Traps
Candidates stumble on the difference between correspondence-generally written material sent to 25 or fewer retail investors within 30 days-and retail communications requiring principal pre-approval. Another trap is believing principal approval cures a misleading statement; approval is necessary but not sufficient. Hypothetical performance must be clearly labeled and cannot imply certainty.
Rule of thumb
Before written sales material goes to the public, ask: Is it fair and balanced, approved by a principal, and can the firm produce a retained copy?
Worked example: A representative drafts a one-page flyer showing a 22% average annual return. The firm must treat it as a retail communication, obtain principal approval, ensure the performance is calculated and presented with required disclosures and time periods, and retain it-not simply email it to clients.