Correspondence & advertising

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Securities regulators are perpetually concerned with the communications

registered persons distribute to investors (especially retail investors). In today’s digital age, it’s
fairly easy to engage a significant number of people with a social media post or an online
advertisement. What if an untrue or fraudulent piece of information is shared in those
messages? The Uniform Securities Act (USA) has clear guidelines related to these
communications, plus the North American Securities Administrators Association (NASAA) has
created numerous orders and rules to further enforce those guidelines.
In general, public communications are broken down into two categories: correspondence and
advertising. While federal securities laws define them very specifically, the USA tends to refer to
them in generalities. Correspondence is direct communications with a client or prospective
(potential) client. This type of communication can be meant for one person (e.g. an email or
letter) or written for a group of clients (e.g. an email to all clients). Advertising is a general
communication intended for a broad audience.
The USA has some general rules related to engaging investors, all of which could be applied to
public communications:
It is unlawful for any person, in connection with the offer, sale or purchase of any security,
directly or indirectly:
 To employ any device, scheme, or artifice to defraud, or
 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 are made, not misleading, or
 To engage in any act, practice, or course of business which operates or would operate as
a fraud or deceit upon any person
In a nutshell, don’t lie to or manipulate any investor when discussing securities! Additionally, it’s
important to offer all material facts when necessary.
Definitions
Material fact
Any fact relating to a security or investment product that could entice a securities transaction
For example:
 Not a material fact: Disney is a corporation (virtually all publicly traded companies are
corporations)
  Material fact: Disney has been paying a regular cash dividend to investors for decades,
but they suspended dividend payments indefinitely in early 2020 due to the COVID-19
pandemic
Omitting a material fact in a public communication may be unintentional, but would still be
unlawful and potentially subject to civil liabilities and penalties. If it was willful (on purpose), the
financial professional may additionally be subject to criminal penalties. Non-material facts are
not required to be disclosed.
NASAA rules relating to correspondence and advertising are further broken down into rules for:
 Broker-dealers and agents
 Investment advisers and investment adviser representatives (IARs)
 Social media communications
Broker-dealer & agent communications rules
NASAA rules state the following regarding communications with the public:
[It’s unethical and unlawful to use] any advertising or sales presentation in such a fashion as to
be deceptive or misleading. An example of such practice would be a distribution of any
nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims
or assertions in any brochure, flyer, or display by words, pictures, graphs or otherwise designed
to supplement, detract from, supersede or defeat the purpose or effect of any prospectus* or
disclosure
*A prospectus is an issuer-created document that discloses material information related to an
investment and its inherent risks. For example, here’s AirBnB’s prospectus for their initial public
offering in December 2020. Discussing information related to a security that contradicts its
prospectus (or any other disclosure form) would be unlawful.
Broker-dealers and agents may not lie or mislead an investor in any way, but the standards
imposed on these persons are not as stringent as with investment advisers and IARs. The reason
relates to fiduciary duties.
Definitions
Fiduciary duty
The requirement for a person (typically a professional) to hold another person’s interest above
its own in all matters
Broker-dealers and agents are not held to a fiduciary standard when
executing unsolicited transactions. A trade is considered unsolicited if the action was an
investor’s decision without influence from a financial professional. The majority of trades
executed by broker-dealers are not due to the result of recommendations from agents, and are
therefore not subject to fiduciary rules. What exactly does this mean? Broker-dealers and
agents don’t have to be as careful with their communications as investment advisers and IARs.
With a lack of fiduciary duty in most circumstances, broker-dealers and agents can advertise
their transaction-related services and execute trades without discussing all material facts.
Additionally, the state administrator is less likely to enforce suitability standards* on these
registered persons. If an investor purchases a security on an unsolicited basis that’s too
aggressive for them, broker-dealers and agents are typically not held liable. However, fiduciary
duties come into play if a recommendation is made.
*Suitability standards relate to pursuing punitive actions against registered persons for making
unsuitable recommendations.
Investment adviser and IAR communications rules
Virtually all of the same communications rules applied to broker-dealers and agents also apply
to investment advisers and IARs. A number of additional regulations are applied as well.
Because advisers always have a fiduciary duty to their clients, they are held to higher
standards. NASAA rules prohibit any of the following from appearing in an investment adviser or
IAR’s public communication:
 Testimonials of any kind
 Reference to specific past recommendations
 Overstatement of the importance of charts and formulas
 An offer of free services that aren’t actually free
 False information
Testimonials of any kind
You’ve seen them before. A celebrity endorses a product or service of a business in hopes of
getting you to buy it. While they may seem harmless, testimonials for advisers could be
interpreted as a performance guarantee of sorts. If a wealthy superstar had a good experience
with their investment adviser, will that necessarily translate to other investors? Maybe, maybe
not.
To avoid the ethical dilemmas related to testimonials, NASAA rules forbid investment advisers
and IARs from using endorsements of any kind. However, there’s no rule against broker-dealers
or agents using them. Remember, they’re not subject to the same standards because of their
business model (transaction execution vs. making recommendations).
Sidenote
New SEC Marketing Rules
In 2020, the SEC finalized a new rule that changes the way investment advisers regulated by
the Investment Advisers Act of 1940 can market their services. Before we get into the specifics,
it’s important to understand when and where this new rule applies. The SEC’s new rule only
relates to federal-covered advisers, as NASAA has not publicly stated if blue sky laws will
change. Therefore, you should assume state-registered advisers are still prohibited from utilizing
endorsements or testimonials.
The new SEC rule updates two general rules - the definition of advertising and the ability for
investment advisers to publish endorsements and/or testimonials. First, let’s explore the SEC’s
new definition of advertising:
Any direct or indirect communication an investment adviser makes to more than one person
that:
 Offers the investment adviser’s investment advisory services with regard to securities to
prospective clients, current clients, or private fund investors
 Includes any endorsement or testimonial for which an adviser provides cash and non-
cash compensation directly or indirectly
The big change here is the inclusion of an endorsement or testimonial as an allowed form of
public communication. To include either in a public advertisement, the adviser must ensure the
following rules are followed:
 Disclosure: Advertisements must clearly and prominently disclose whether the person
giving the testimonial or endorsement (the “promoter”) is a client and whether the
 promoter is compensated. Additional disclosures are required regarding compensation
and conflicts of interest.
 Oversight and Written Agreement: An adviser that uses testimonials or endorsements in
an advertisement must oversee compliance with the marketing rule. An adviser also
must enter into a written agreement with promoters, except where the promoter is an
affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or
less, or the equivalent value in non-cash compensation, during the preceding twelve
months).
 Disqualification: The rule prohibits certain “bad actors” from acting as promoters,
subject to exceptions where other disqualification provisions apply.
In summary, federal-covered advisers must follow three general rules when publishing
endorsements or testimonials. First, they must disclose any form of compensation (cash and
non-cash) in these advertisements. Non-cash compensation is anything of value not directly
denominated in cash (e.g. free advisory services in return for an endorsement). Second, the
adviser must properly supervise activities related to endorsements and/or testimonials, plus
must have a written agreement with the promoter if they receive more than $1,000 in cash or
non-cash compensation. Third, those facing statutory disqualifications (e.g. a felony conviction
in the last 10 years) are prohibited from being promoters in these advertisements.
There are a few other important topics in the new SEC marketing rule. A number of general
prohibitions have been identified:
 Making an untrue statement of a material fact, or omitting a material fact necessary to
make the statement made, in light of the circumstances under which it was made, not
misleading
 Making a material statement of fact that the adviser does not have a reasonable basis
for believing it will be able to substantiate upon demand by the [SEC]
 Including information that would reasonably be likely to cause an untrue or misleading
implication or inference to be drawn concerning a material fact relating to the adviser
 Discussing any potential benefits without providing fair and balanced treatment of any
associated material risks or limitations
 Referencing specific investment advice provided by the adviser that is not presented in a
fair and balanced manner
 Including or excluding performance results, or presenting performance time periods, in a
manner that is not fair and balanced
 Including information that is otherwise materially misleading
Additionally, the rule covers some specifics on the usage of third-party rating systems
(e.g. Trustpilot):
The rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides
disclosures and satisfies certain criteria* pertaining to the preparation of the rating.
*Generally speaking the “certain criteria” requires the adviser to have a reasonable basis to
believe the third-party rating system is fair and not set up to receive a specific result.
Additionally, the adviser must disclose the identity of the third-party ratings service/agency and
any compensation paid to the third party.
Last, the new SEC marketing rule prohibits a number of remarks related to performance in
advertisements. Those prohibitions are:
  Posting gross performance*, unless the advertisement also presents net performance
 Any performance results, unless they are provided for specific time periods in most
circumstances
 Any statement that the [SEC] has approved or reviewed any calculation or presentation
of performance results
 Highlighting accounts or assets with superb performance that are not consistent with
the general returns of products and/or services offered
 Hypothetical performance (which does not include performance generated by
interactive analysis tools), unless the adviser adopts and implements policies and
procedures reasonably designed to ensure that the performance is relevant to the likely
financial situation and investment objectives of the intended audience and the adviser
provides certain information underlying the hypothetical performance
 Predecessor performance**, unless there is an appropriate similarity with regard to the
personnel and accounts at the predecessor adviser and the personnel and accounts at
the advertising adviser
*Gross performance is overall performance without factoring in the costs of investment advice.
**Predecessor performance relates to the performance of another form of the company. For
example, assume ABC Advisers Company is bought out by XYZ Strategies. XYZ Strategies could
not publish the performance of accounts previously managed by ABC Advisers unless XYZ
offered relatively similar products and/or services.
Bottom line - SEC (federal-covered) advisers can now include endorsements and testimonials in
advertisements as long as a number of protocols are followed and disclosures are made. Until
NASAA officially comments on the new rule, we’ll assume state laws will remain the same,
effectively prohibiting state-registered advisers from publishing endorsements or testimonials.
Reference to specific past recommendations
Let’s take a look at the specific language in the NASAA rule relating to this prohibition:
[It’s prohibited to refer] to past specific recommendations of the investment adviser or IAR that
were or would have been profitable to any person
In other words, advisers may not make reference to any specific recommendation that resulted
in a client profiting. However, they do provide some exceptions:
[Advisers] may furnish or offer to furnish a list of all recommendations made by the investment
adviser or investment adviser representative within the immediately preceding period of not
less than one year if the advertisement or list also includes both of the following:
 The name of each security recommended, the date and nature of each
recommendation, the market price at that time, the price at which the recommendation
was to be acted upon, and the most recently available market price of each such security
 A legend on the first page in prominent print or type that states that the reader should
not assume that recommendations made in the future will be profitable or will equal the
performance of the securities in the list
Investment advisers and IARs may disclose their recommendations publicly if they disclose all
recommendations over a specific time period of at least a year. For example, an adviser may
post all recommendations they made in 2019 given it’s been at least one full year since those
recommendations have been made. The adviser cannot be selective with what they disclose
either; if they want to publish their recommendations, they must disclose the good and the bad
ones.
Additionally, information related to the recommended securities must be provided. And last, it’s
always important to balance public statements with reality. While some of the
recommendations made by the adviser may have been profitable in the past, that’s no
indication of future performance. This type of language should be displayed in any
communication referencing past recommendations in order to balance out the risks and
rewards of investing.
Overstatement of the importance of charts and formulas
Again, let’s look at the specific language in the NASAA rule relating to this topic:
[It’s prohibited to represent] that any graph, chart, formula, or other device being offered can in
and of itself be used to determine which securities to buy or sell, or when to buy or sell them;
or which represents, directly or indirectly, that any graph, chart, formula, or other device being
offered will assist any person in making that person’s own decisions as to which securities to
buy or sell, or when to buy or sell them, without prominently disclosing in such advertisement
the limitations thereof and the difficulties with respect to its use.
In plain English, advisers shouldn’t put too much emphasis on the importance of a chart,
formula (e.g. calculating the historical return of an investment), or anything similar. Charts
display historical performance, and we already know the past doesn’t necessarily dictate the
future. Formulas, especially complex ones, can sometimes provide false indicators of success.
Bottom line - while they can be used as a part of a larger conversation, investment advisers and
IARs should never make a recommendation solely based on charts, formulas, or anything
similar.
An offer of free services that aren’t actually free
According to the same NASAA rules:
[It’s prohibited to represent] that any report, analysis, or other service will be furnished for free
or without charge, unless such report, analysis, or other service actually is or will be furnished
entirely free and without any direct or indirect condition or obligation.
Obviously, false advertising is prohibited across all businesses, both in and out of the finance
industry. However, investment advisers and IARs must go a step further. If a product or service is
being marketed as “free,” it must truly be free. For example, it would be prohibited for an
investment adviser to offer a free financial plan if an investor moved their investment accounts
under the adviser’s control. If the “free” product requires another action, then it cannot be
marketed as free.
False information
This one is pretty simple. Don’t lie in advertisements, correspondence, or any interaction with a
client! Although this is part of the investment adviser & IAR section, this rule applies to all
registered persons and issuers.
Social media communications
As our world evolves further into the digital age, social media becomes more prevalent. The
financial industry is no exception. Now, more than ever, financial firms are engaging their clients
and marketing their services online. Virtually all financial representatives have a digital footprint
on social media. Investors are hungry for information and share investing stories on message
boards and their timelines. Accordingly, securities regulators have created a number of relevant
guidelines and rules.
Good news - generally all of the regulations we discussed in this chapter apply to social media
communications. Publicly available communications meant for mass audiences are generally
treated like advertising, while private chats are typically considered a form of correspondence.
Financial professionals are prohibited from making false, misleading, or exaggerated
statements. Omissions of material fact are strictly forbidden. Whether the communication is on
paper, a billboard, or on Twitter, the same general rules apply.
Firms must have a robust supervisory system in place when representatives create business-
related social media posts. Many brokers, advisers, and representatives engage potential and
current clients through internet platforms. Just like all other forms of communication, firms
must ensure regulatory compliance through proper supervision.
Prior to a representative utilizing a social media platform, it must be properly vetted and
reviewed by a registered principal (supervisor). The primary purpose of the review is to ensure
relevant rules and guidelines are capable of being followed on the platform. You can assume
most of the major platforms - Twitter, Facebook, Instagram, TikTok, and YouTube - are already
reviewed by most firms. If a representative wants to try out a new platform, they must gain
principal approval prior to utilizing it.
Social media posts are broken down into two general categories:
 Static content
 Interactive communications
Static content
This type of social media content is defined as:
Typically posted for the longer term and lacks the immediacy of a real time conversation
Examples of static content include blogs and social media profiles. NASAA treats these
communications similarly to advertising.
Interactive communications
This type of social media content is defined as:
Typically real-time and involve a dialog with third parties
Examples of interactive communications include posts on interactive forums (e.g. Reddit), use of
chat rooms, Tweets, Facebook posts, comments on other social media posts, and direct
messages (DMs). NASAA treats these communications similarly to correspondence.
Sometimes financial firms and their representatives repost third-party content and link to third-
party websites. For example, a brokerage firm tweeting a link to an article on market activity on
Yahoo Finance. Accordingly, securities regulators maintain policies for these types of social
media posts. If a firm adopts or entangles itself with third-party content, the communication is
treated as if it were the firm’s own creation.
Adoption occurs when a firm endorses or approves third-party content
An example of adoption would include a firm retweeting a financial blog with commentary (e.g.
“Check out this interesting piece on the current state of the market”)
Entanglement occurs when the firm involves itself with the preparation of the third-party post
An example of entanglement would include a firm sharing a paid review of its products or
services on TikTok.
Whether a firm adopts or entangles itself with third-party content, the shared material must be
vetted, reviewed, and treated essentially as if it were created by the firm.
A registered person’s personal social media is not regulated by the same set of rules. Don’t
worry - there’s no need to have your firm keep a record of the cute Instagram posts of your kids
or pets. However, it’s quite possible a post could be considered a business use of social media.
For example, if a representative created a TikTok discussing the products and services of their
firm. To ensure employees of securities businesses understand the “line in the sand” between
personal and business posts, their employing firm must provide ongoing education (typically in
the form of training modules or videos). If the state administrator were to consider a registered
representative’s personal social media crossing into “business territory,” they and their firm
could both face punitive actions.
Key points
Correspondence
 Direct communications with clients
 Examples:
o Letter to an individual client
o Group email to clients
Advertising
 General communication intended for a broad audience
 Examples:
o Billboard ads
o Ads on social media
Material fact
 Any fact relating to a security or investment product that could entice a securities
transaction
 Must be disclosed in all communications
Broker-dealer and agent communication guidelines
 Cannot be deceptive or misleading
 Can have testimonials
 May not include false information
Investment advisers and IAR communication guidelines
 Cannot be deceptive or misleading
 Cannot have testimonials
 May reference past recommendations only if:
o Disclosure is non-selective
o Must cover a period of at least 1 year
o Must include language stating no indicator of future success
 Cannot overstate the importance of charts or formulas
 May not advertise free services unless 100% free
 May not include false information
Social media communications
 Generally subject to the same rules as general communications
 Rules don’t apply to personal social media posts
 Firms must create robust supervisory systems to ensure compliance
Static content
 Longer term and fixed content, not an interactive communication
 Must be pre-approved by a principal
 May be required to file with FINRA
Interactive communications
 Real-time dialog with third parties
 No principal pre-approval or FINRA filing is required
 Subject to periodic review
Third-party posts and websites
 Must be vetted and reviewed by the firm
 Subject to typical recordkeeping requirements
 Applies to adopted and entangled third-party content
Adopted third-party content
 Endorsed or approved third-party content
 Firm not involved in the creation of the content
Entangled third-party content
 Third-party content created with or funded by a firm