Investment Company and Mutual Fund Communications

The SEC's investment company advertising framework is built from several interlocking rules. Each rule carves out a specific path that lets a fund advertise without violating Section 5 of the Securities Act (which prohibits selling unregistered securities). The Series 6 exam tests which rule does what.

Why do Securities Act Sections 5 and 12 matter for fund advertising?

Before diving into the advertising rules, understand the two sections they exist to satisfy:

• SA Section 5: Prohibits offers or sales of securities unless registered (or exempt). Advertisements for registered funds could technically violate Section 5 unless a rule carves out an exception.
• SA Section 12: Creates civil liability for misleading communications:
  • Section 12(a)(1): Strict liability for violating Section 5 (registration / prospectus delivery)
  • Section 12(a)(2): Liability for material misstatements or omissions in a prospectus or oral communication

Rules 482, 135a, 135b, and 498 each describe a compliant path that keeps fund advertising out of Section 5 trouble.

What does SEC Rule 156 prohibit in investment company sales literature?

Rule 156 is the antifraud rule specific to investment company sales literature. It applies on top of Rules 482 and 34b-1.

Sales literature is materially misleading if it:

• Contains an untrue statement of a material fact, OR
• Omits a material fact necessary to make a statement not misleading

Four specific areas the SEC flags as common problem zones:

What does SEC Rule 482 require for investment company advertising?

Rule 482 permits investment company advertisements to be deemed a prospectus under Section 10(b), so they can contain information beyond what the statutory prospectus includes (performance data, for example).

Standardized performance requirements when performance data is included:

• Must show SEC-standardized total return:
  • 1-year average annual total return
  • 1-year and 5-year (if fund has existed at least 5 years)
  • 1-year, 5-year, and 10-year (if fund has existed at least 10 years, or life-of-fund if shorter)
• Returns must be current to the most recent calendar quarter ended prior to submission
• All three standardized periods must be presented with equal prominence

Required disclosures in a Rule 482 ad:

• Disclosure advising investors to consider the fund's objectives, risks, charges, and expenses before investing
• Statement that the prospectus and summary prospectus contain this information and that investors should read them carefully
• A standardized legend:
  • Past performance does not guarantee future results
  • Current performance may be lower or higher
  • Investment return and principal value fluctuate
  • Shares may be worth more or less than cost when redeemed
• Maximum sales load and any other non-recurring fees
• Fee and expense presentations consistent with the prospectus fee table

Exam Tip: Gotchas

Rule 482 standardized total return requires 1-year / 5-year / 10-year average annual total returns (or life-of-fund if shorter). A fund cannot show only a 3-year return or YTD-only performance without also including the standardized periods. This is one of the most heavily tested facts in the Rule 482 area.

What does SEC Rule 498 allow funds to deliver?

Rule 498 lets funds satisfy prospectus delivery obligations by using a summary prospectus (a short, plain-English document) instead of the full statutory prospectus, provided:

• The summary prospectus is sent or given to investors covering 9 key items:
  1. Investment objectives
  2. Fees and expenses
  3. Principal investment strategies
  4. Principal risks
  5. Past performance
  6. Management (investment adviser and portfolio manager)
  7. Purchase and sale of fund shares
  8. Tax information
  9. Financial intermediary compensation
• The full statutory prospectus, Statement of Additional Information (SAI), and most recent shareholder reports are posted online at a publicly accessible website and made available free of charge
• The full statutory prospectus is sent to the investor upon request (generally treated as within 3 business days)

When is investment company sales literature deemed misleading under Rule 34b-1?

Rule 34b-1 (issued under the Investment Company Act of 1940, the ICA) is a companion rule to Rule 482. It addresses fund sales literature (as opposed to advertising) that accompanies or follows a statutory prospectus.

Such sales literature is deemed materially misleading if it contains performance data without:

• The uniformly computed (standardized) performance data required by Rule 482, AND
• The required Rule 482 legend (past performance does not guarantee future results, etc.)

Compliance with Rule 34b-1 does NOT relieve the fund, underwriter, or dealer from liability under the antifraud provisions.

What does Securities Act Rule 135a permit for generic fund advertising?

Rule 135a permits generic investment company advertisements that do NOT name a specific fund. Because no specific security is offered, a Rule 135a ad is NOT a prospectus.

Allowed content:

• Investment company securities in general (e.g., how mutual funds work)
• Types of investment companies (open-end, closed-end, unit investment trusts (UITs)) and their characteristics
• Services offered in connection with investment companies
• Name and address of the sponsor (broker-dealer, underwriter, or adviser)

If the ad solicits inquiries and promises to send prospectuses in response, the ad must state:

• The number of investment companies covered
• Whether the sponsor is the principal underwriter or adviser

How does Rule 135b treat FINRA-filed fund communications?

Rule 135b provides that FINRA-filed communications that comply with Rule 2210's filing requirements (and relate to registered investment company securities) are NOT deemed a "prospectus" or "offer" under Securities Act Sections 2(a)(10) and 5(c).

This lets member firms use ads about specific funds without triggering Section 5 violations during the registration period.

Which investment company advertising rules produce a prospectus?

This is the exam's favorite question in this area.

Exam Tip: Gotchas

A Rule 482 advertisement IS treated as a prospectus (an "omitting prospectus" under Section 10(b)). A Rule 135a generic ad is NOT a prospectus because it does not name a specific fund. The exam tests which one qualifies as a prospectus for Section 5 compliance.