Investment Company Communications

These three rules are SEC rules, not FINRA rules, but they govern how broker-dealers can advertise registered funds. A Series 24 principal must understand the federal overlay because a fund communication that satisfies the FINRA communications framework can still violate any of these federal rules. The exam tests these together.

The Three Federal Rules at a Glance

Think of it this way: The prospectus-advertising rule governs how performance is presented in fund advertising. The sales-literature anti-fraud rule governs the content factors that make any fund sales literature misleading. The supplemental sales-literature rule attaches federal anti-fraud liability to fund sales literature by treating it as a filed document. Three different layers, all applying simultaneously.

The Prospectus-Advertising Rule

A qualifying investment-company prospectus advertisement is treated as a deemed prospectus under the Securities Act of 1933. This is a meaningful legal change: ordinary advertising communications would be governed only by the Securities Act anti-fraud provisions and the issuer's prospectus requirement. By being a deemed prospectus, a qualifying ad lets a fund advertise investment performance and other material information outside the four corners of the statutory prospectus.

Required Disclosures in Every Prospectus-Advertising-Rule Ad

A qualifying ad must contain:

• A statement advising investors to consider the fund's investment objectives, risks, charges, and expenses carefully before investing
• A statement that the prospectus (and summary prospectus, if available) contains this and other information
• Identification of a source from which an investor may obtain a prospectus
• A statement that the prospectus "should be read carefully before investing"

These disclosures are commonly compressed into a standard footer that appears on every fund ad. Without them, the communication is not a valid prospectus-advertising-rule ad and reverts to the more restrictive default rule that only the prospectus itself can advertise the fund.

Standardized Performance Presentation

The prospectus-advertising rule also imposes a strict standardized performance requirement when the ad displays returns:

• Average annual total returns for 1, 5, and 10 years (or life-of-fund if shorter)
• As of the most recent calendar quarter
• Current to the most recent month-end (with toll-free number or website disclosure)
• Money market funds: must include the standardized risk statement matching the prospectus
• The ad may show non-standardized returns, but standardized returns for the same period must accompany them with at least equal prominence

Exam Tip: Gotchas

• An omitting-prospectus advertisement needs the prescribed advisory and prospectus pointer. Missing information makes the chosen advertising route unavailable as drafted. Correct the piece or establish another legally available basis before use.
• Standardized returns are 1, 5, and 10 years (or life-of-fund), as of the most recent calendar quarter. The exam will sometimes describe an ad showing only 1- and 3-year returns and ask whether the rule is satisfied. It is not (5- and 10-year missing).
• A prospectus-advertising-rule ad must still be filed with FINRA, even though it is also filed with the SEC. The "separately filed with the SEC" exclusion covers registration statements and prospectuses, but it specifically does not reach an investment-company advertisement published as a prospectus.

The Sales-Literature Anti-Fraud Rule

The investment-company sales-literature anti-fraud rule under the Securities Act establishes that sales literature for an investment company is deemed misleading if it includes any untrue statement of a material fact or omits a material fact necessary to make statements not misleading.

The rule lists factors to consider when determining whether sales literature is misleading:

• The overall context in which statements appear, including the relative emphasis on different points
• Whether relevant qualifications are presented in close proximity to the statements they qualify
• Statements about possible benefits without equal prominence given to the risks of those benefits
• Treatment of past performance as predictive of future performance, particularly without appropriate disclaimers

The rule applies to all sales literature, not only registered ad filings. A direct-mail piece, a video script, or a website page can all be sales literature for these purposes.

Exam Tip: Gotchas

• The sales-literature anti-fraud rule governs all sales literature, not only ads filed under the prospectus-advertising rule. A piece can satisfy the standardized-performance requirement and still violate the sales-literature anti-fraud rule if it touts benefits without proportional risk disclosure or treats past performance as predictive.
• The "overall context" factor lets the SEC find a piece misleading even if every individual statement is technically true. A flashy chart of cherry-picked five-year returns can be misleading by selection even if no number is wrong.

The Supplemental Sales-Literature Rule

The supplemental investment-company sales-literature rule specifies information needed to prevent misleading omissions in covered sales literature. It includes applicable performance, money-market, and fee-and-expense disclosures. Its coverage and exceptions depend on the type of literature and information presented.

Including the prescribed information does not relieve the fund, underwriter, or dealer of other federal antifraud obligations. The rule is not a device that turns every sales message into a filed document.

Why This Matters for Series 24

The supplemental sales-literature rule creates a federal anti-fraud charging route for misleading fund sales literature. The same conduct can be charged under:

• The FINRA communications framework (content standards), reachable through FINRA enforcement
• The Securities Act sales-literature anti-fraud rule (misleading sales literature), reachable through SEC enforcement
• The Investment Company Act anti-fraud provision via the supplemental sales-literature rule (filed-document anti-fraud), reachable through SEC enforcement
• The Securities Act broad anti-fraud provision, reachable through SEC enforcement

A fund sponsor or distributing broker-dealer that produces misleading sales literature faces multiple charging routes simultaneously.

Exam Tip: Gotchas

• Required disclosures do not create an antifraud safe harbor. Review the whole presentation for misleading statements and omissions even when the prescribed performance figures and warnings are present.

The Securities Act Prospectus Requirement and Anti-Fraud Backbone

Two underlying Securities Act provisions form the federal anti-fraud backdrop:

• The prospectus requirement governs what can be sent in connection with an offer. A qualifying investment-company prospectus advertisement is a deemed prospectus; this is why the prospectus-advertising rule exists at all (it modifies what can be in a prospectus-style communication)
• The broad anti-fraud provision prohibits fraud, misrepresentation, deceit, or omission in the offer or sale of any security via interstate commerce. It is the broad anti-fraud authority that overlays all sales communications, including paid promotional content (see the payments-to-influence-publications prohibition)

Exam Tip: Gotchas

• The Securities Act broad anti-fraud provision is the backstop for any offer or sale communication. A misleading fund sales piece can be charged under the FINRA communications framework, the sales-literature anti-fraud rule, the supplemental sales-literature rule, and the Securities Act broad anti-fraud provision all simultaneously. The exam tests this as: "Which charging route is available?" The answer is often "all of them."

SIPA: Advertising and the SIPC Logo

The Securities Investor Protection Act of 1970 (SIPA) imposes a separate but related advertising-restriction rule:

• A broker-dealer that is not a SIPC member may not advertise its services in a manner that suggests it provides protection comparable to SIPC
• Non-SIPC broker-dealers are barred from displaying the SIPC logo or referencing SIPC membership in any sales material
• The SIPC name and logo are restricted symbols; misuse can result in SIPC and SEC enforcement

This rule rarely affects established firms (almost all broker-dealers are SIPC members), but the exam tests it because specialty entities (purely municipal dealers, certain government-securities-only firms, unregistered foreign affiliates) can be non-SIPC and must scrub their marketing accordingly.

Exam Tip: Gotchas

• A non-SIPC broker-dealer cannot advertise "investor protection" or display the SIPC logo. The exam tests this as a "negative" rule: the firm not in SIPC, not the firm in SIPC. If the fact pattern says the firm is SIPC-registered, no SIPA advertising issue arises.

What Should You Check on Exam Day?

• Can you identify an incomplete omitting-prospectus advertisement and explain why the chosen route is unavailable until its conditions are met?
• Can you state the standardized performance periods required when a fund ad shows returns: 1, 5, and 10 years, as of the most recent calendar quarter?
• Can you name the four charging routes for misleading fund sales literature: FINRA communications framework, sales-literature anti-fraud rule, supplemental sales-literature rule, and broad anti-fraud provision?
• Do you know why a non-SIPC broker-dealer cannot advertise investor protection or display the SIPC logo?