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 dishonest-practices rules and the USA's misleading-filings provision.

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
• Distribute nonfactual data, material, or presentations based on conjecture, unfounded or unrealistic claims in any brochure, flyer, or display
• Use words, pictures, graphs, or other means 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 includes sales presentations, brochures, flyers, displays, and any communication that undermines a prospectus or disclosure document. If it could mislead an investor, it is prohibited.

How Should an Adviser Check a Client Testimonial?

Under NASAA's adviser marketing model rule, a testimonial is conditionally permitted, but the adviser must have a reasonable basis to substantiate its material factual claims. A client's sincere opinion does not establish that the adviser caused an increase in account value.

For example, an ending account balance can rise because the client deposited cash or transferred assets, even if the investments did not gain. Before publishing a testimonial that credits the adviser for the increase, the firm needs records that separate client cash flows from investment results or another sound basis for the claimed attribution.

Applicable testimonial conditions also include clear disclosures of client status, any compensation, and material conflicts. Oversight and a written agreement may be required for a compensated promoter. If the advertisement presents gross performance, separate gross-and-net presentation requirements apply. None of those safeguards cures an unsupported factual claim.

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
• NASAA prohibits using graphics or charts that undermine the purpose of a prospectus; even a truthful chart can be deceptive if it distracts from required disclosures
• 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, not just formal ads. A testimonial attributing account growth to an adviser needs factual support separate 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.