Correspondence and Advertising
Uniform Securities Act (USA) Section 403 grants the Administrator authority to require the filing of advertising and sales literature. USA Section 405 prohibits false or misleading statements in any communication. The Securities and Exchange Commission (SEC) Marketing Rule (Rule 206(4)-1), effective November 2022, is the primary federal rule governing adviser advertising. SEC Rule 204-2 requires advisers to keep records of advertisements and communications.
Definition of "Advertisement" for Investment Advisers (IAs)
Under the SEC Marketing Rule (Rule 206(4)-1), an advertisement is any direct or indirect communication that offers advisory services to prospective or current clients.
What counts as an advertisement:
- Emails, text messages, social media posts
- Websites, podcasts, videos, blogs
- Brochures, radio/TV, presentations
What is excluded:
- One-on-one communications are not considered advertisements under the first prong of the definition
Think of it this way: If it goes to more than one person and talks about the adviser's services or results, it's an advertisement. Even a single social media post visible to the public qualifies because it reaches more than one person.
Exam Tip: Gotchas
- One-on-one communications are generally excluded from the advertisement definition; they are considered correspondence, not advertising.
- Social media posts are advertisements. A post on LinkedIn about your firm's performance is subject to advertising rules.
- Emails to multiple recipients = advertisement. A mass email about your services triggers all the advertising rules.
Seven General Prohibitions (Marketing Rule)
All advertisements by investment advisers must NOT:
- Include any untrue statement of a material fact
- Include any omission of a material fact necessary to make the statement not misleading
- Include information reasonably likely to cause an untrue or misleading implication or inference about a material fact
- Discuss potential benefits without providing fair and balanced treatment of associated material risks or limitations
- Reference specific investment advice that is not presented in a fair and balanced manner
- Include or exclude performance results or present performance time periods in a manner that is not fair and balanced
- Be otherwise materially misleading
Testimonials and Endorsements (Now Permitted with Conditions)
The SEC Marketing Rule now permits testimonials and endorsements for SEC-registered IAs, subject to these requirements:
| Requirement | Detail |
|---|---|
| Disclosure | Must clearly disclose whether the person is a client and whether they are compensated |
| Written agreement | Required with any compensated promoter receiving more than $1,000 in a 12-month period |
| Oversight | Adviser must oversee promoter compliance with the marketing rule |
| Disqualification | "Bad actors" (persons with certain disciplinary histories) may not serve as compensated promoters |
| Conflicts | Material conflicts of interest must be disclosed |
Critical Exam Distinction: SEC vs. State
| IA Type | Testimonial Rule |
|---|---|
| SEC-registered IA | Testimonials permitted under the Marketing Rule (with disclosures) |
| State-registered IA | Testimonials still prohibited in most states |
Exam Tip: Gotchas
- SEC-registered = testimonials allowed (with disclosures). This is the new rule.
- State-registered = testimonials still banned (most states). This is the most frequently tested distinction in this topic.
Third-Party Ratings
Third-party ratings are permitted only from a neutral, independent source with full disclosures:
- The methodology used
- The time period on which the rating was based
- Any compensation paid for the rating
- The adviser must reasonably believe the rating complies with the rule
Performance Advertising
- Net performance must be shown alongside gross performance with equal prominence
- Must include returns for 1-, 5-, and 10-year periods (or since inception if shorter)
- Hypothetical performance is permitted only if the adviser adopts policies designed to ensure it is relevant and not misleading, and is delivered to the intended audience
- Predecessor performance may be shown if the adviser has substantially similar personnel and investment process
State Advertising Rules
For state-registered advisers, additional prohibitions apply:
| Prohibition | Description |
|---|---|
| Testimonials | Prohibited for state-registered advisers (stricter than SEC Marketing Rule) |
| Past recommendations | Cannot reference past specific profitable recommendations unless providing a complete list for at least the prior 1 year with required legend |
| Graphs/formulas | Cannot represent that a graph, chart, or formula can alone determine trading decisions without disclosing limitations |
| Free services | Cannot represent that a service is "free" unless it truly is free with no conditions |
| Administrator approval | Cannot state the Administrator has approved any advertisement |
| Untrue statements | Cannot contain any untrue statement of material fact or be otherwise misleading |
Exam Tip: Gotchas
- The SEC Marketing Rule NOW allows testimonials with proper disclosures. However, many state rules still prohibit testimonials entirely for state-registered advisers. The exam tests this distinction: federal covered advisers follow SEC rules; state-registered advisers may face stricter state prohibitions.
Social Media
- Social media posts that offer advisory services to more than one person are advertisements subject to the Marketing Rule
- Advisers must have written policies and procedures for social media use
- Third-party posts shared or adopted by the adviser become the adviser's own communication
- Record-keeping: All social media communications related to the advisory business must be retained per SEC Rule 204-2
Email and Digital Messaging
- Business-related emails and digital messages are records that must be retained
- Mass emails offering advisory services are advertisements under the Marketing Rule
- Individual email responses to client questions are generally not advertisements (one-on-one communications)
- Advisers must archive and supervise electronic communications
Website and Internet Communications
- An adviser's website is an advertisement under the Marketing Rule
- Must comply with all seven general prohibitions
- Performance information on websites must follow performance advertising rules
- Websites accessible to the general public are treated as communications with retail clients
- Content must be kept current and accurate
Administrator's Authority Over Communications
The state Administrator (USA Section 403) has broad authority over adviser communications:
- May require filing of advertising materials before or after use
- May require specific disclosures in advertisements
- May require that certain types of communications be pre-approved
- May issue stop orders against misleading advertising
- The Administrator's authority extends to all persons registered or required to be registered in the state