Correspondence and Advertising Standards

With the core prohibitions established, let's look at the broader standards that apply to all advertising and correspondence: FINRA specifics, NASAA dishonest practices, and the USA's misleading filings provision.

FINRA Rule 2210 - Advertising Specifics

Retail communications encompass traditional advertising:

  • Newspaper ads, magazine ads, billboards
  • Radio/TV commercials
  • Websites, mass emails, mass mailings
  • Any material distributed to more than 25 retail investors in 30 days

Required Elements in Retail Communications

  • The name of the member firm (or clearly identify the relationship)
  • If making a recommendation, disclosure of material conflicts of interest (financial interest in the security, market-making activity)
  • For testimonials:
    • Disclosure that the person was compensated (if applicable)
    • That the testimonial may not be representative of all clients
    • That past performance does not guarantee future results

NASAA Dishonest Practices - Deceptive 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.

USA Section 404 - Misleading Filings

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 under Section 403
  • Any other document submitted to the Administrator

Exam Tip: Gotchas

  • Section 404 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
  • Quoting prices that are not bona fide is a dishonest practice, even if the broker-dealer did not originate the quote
  • Testimonials in retail communications require multiple disclosures (compensation, non-representative, past performance disclaimer)