Correspondence and Advertising Standards

With the core prohibitions established, let's look at the broader standards that apply to all advertising and correspondence: the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents and the misleading-filings provision of the Uniform Securities Act (USA).

What Does NASAA Prohibit in Advertising?

Under the NASAA Statement of Policy (1983, as amended), it is a dishonest or unethical practice for a broker-dealer to:

• Use any advertising or sales presentation in a fashion that is deceptive or misleading. NASAA's own example is distributing nonfactual data, material, or presentations based on conjecture, or unfounded or unrealistic claims, 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
• Publish or circulate any notice, circular, advertisement, or communication purporting to report a transaction as a purchase or sale unless the broker-dealer believes it was a bona fide transaction
• Quote bid or asked prices unless the broker-dealer believes they represent bona fide bids or offers

Exam Tip: Gotchas

The NASAA deceptive advertising prohibition covers more than just ads. It reaches sales presentations too, and its example names brochures, flyers, and displays carrying nonfactual or unfounded material designed to undermine a prospectus or disclosure document. The test is whether the advertising or presentation is used in a deceptive or misleading fashion.

How Do Adviser Testimonials and Performance Claims Differ?

The NASAA standard currently tested on the Series 63 prohibits client testimonials. Client consent, an unpaid statement, or compensation disclosures do not create an exception. Keep that adviser prohibition separate from FINRA's rules for broker-dealer testimonials.

Separately, the Act makes it unlawful, in soliciting advisory clients, to make an untrue statement of a material fact or omit one needed to keep the statements made from misleading, so an adviser's own performance advertisement must not mislead.

An ending account balance can rise because the client deposited cash or transferred assets even when investments did not gain. Before claiming the adviser produced the increase, separate client cash flows from investment results.

A disclaimer that results vary does not cure a false claim about what caused account growth. Nor does displaying a net figure calculated from the same unsupported balance increase.

What Makes a Filing "Misleading"?

It is unlawful for any person to make or cause to be made, in any document filed with the Administrator or in any proceeding under the Act, any statement that is false or misleading in any material respect at the time and under the circumstances in which it is made.

This applies to all filings:

• Registration applications
• Financial statements
• Sales literature filed with the Administrator
• Any other document submitted to the Administrator

Exam Tip: Gotchas

• The misleading-filings prohibition applies to all documents filed with the Administrator, not just advertising
• The operative test is whether advertising or a sales presentation is used in a deceptive or misleading fashion. Accurate figures can fail it: a truthful chart laid out to make a prospectus's risk discussion look immaterial is one example. NASAA's own named example is nonfactual or unfounded material, in words, pictures, or graphs, designed to supplement, detract from, supersede, or defeat a prospectus or disclosure
• Republishing someone else's quote is no defense: the test is whether the broker-dealer believes the quote is a bona fide bid or offer, not who originated it. Circulating a quote the firm does not believe is bona fide is a dishonest practice

What Should You Check on Exam Day?

• NASAA's deceptive-advertising rule covers sales presentations, brochures, flyers, and displays. The tested adviser standard prohibits client testimonials. Separately, a performance claim must distinguish investment gains from client deposits and withdrawals.
• Quoting a bid or asked price the firm does not believe is bona fide is a dishonest practice, regardless of who originated the quote.
• The USA's misleading-filings prohibition reaches every document filed with the Administrator: registration applications, financial statements, and sales literature, not only advertising.