Client Communication

The whole unit on one sheet: disclosure timing, the registration-is-not-approval rule, the loss-guarantee ban, contract requirements, and the modern advertising framework the exam loves.

The One-Liners That Win Points

• Advisers owe a fiduciary disclosure duty; broker-dealers follow a narrower antifraud standard (no untrue statements/misleading omissions tied to a transaction).
• Omitting a material fact carries the same legal weight as a false statement: silence can be fraud.
• Form ADV Part 2A is the brochure, a plain-English narrative (18 core items, plus Item 19 for state-registered advisers); Part 1 is the fill-in-the-blank form filed with regulators.
• Registration does not equal endorsement. It is a procedural filing, not a finding of competence, approval, or a judgment on the merits of any security. Applies at the state, SEC, and self-regulatory-organization (SRO) level.
• Stating your registration status is fine ("I am registered as an investment adviser representative (IAR) in this state"); using RIA/IAR as a credential-style tag, or implying approval/endorsement, is a violation.
• Guaranteeing a client against loss, or promising a specific return, is always prohibited, with no exception for client sophistication or wealth; calling a security "risk-free" is treated as the same violation.
• Sharing in a customer's account profits or losses is permitted with written authorization from both the customer and the BD; sharing WITHOUT that authorization (or an outright no-loss guarantee) is what's prohibited. A performance-based fee on gains is a separate, adviser-side topic (allowed only for qualified clients).
• Advisory contracts must be in writing and cannot be assigned without the client's (or other party's) consent; the rule doesn't specifically require that consent be written.
• Testimonials and endorsements are now permitted under the SEC Marketing Rule, with extensive disclosure and compliance conditions.
• Registration abbreviations (RIA, IAR) can be stated accurately but not used like a credential; earned credentials like Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) can be used either way.

Numbers to Lock In

Top Gotchas

• Initial brochure delivery is 48 hours before signing, OR at signing with a 5-business-day free look, not a single unconditional "always before" rule. Two SEPARATE deadlines also apply after that: 90 days to file the annual amendment with regulators, 120 days for the annual client delivery.
• Sharing in a customer's account (profits or losses) is permitted with written authorization from both the customer and the BD. What's prohibited is sharing without that authorization, or an outright no-loss guarantee. A qualified client's performance fee is a separate, adviser-side topic.
• Hedge clauses that disclaim liability for negligence are suspect: advisers cannot contract away their fiduciary duty.
• Net performance must appear alongside gross, equally or more prominently; showing gross alone is prohibited.
• Hypothetical performance has no flat retail/mass-audience ban. The real test: policies reasonably designed for audience relevance, plus disclosed methodology, risks, and limitations.
• "Testimonials are prohibited" is the old rule. If you see it as an answer choice, it no longer applies.
• Accurately stating "I am registered as an IAR" is always lawful; using "RIA"/"IAR" as a credential-style tag is not. "Series 66 certified" is inaccurate (it is a license, so say "licensed").

Disclosures

• Advisers owe full and fair disclosure of all material facts as a fiduciary duty; broker-dealers follow the USA's narrower antifraud standard (no untrue statements or misleading omissions tied to a transaction).
• Advisers disclose fees and compensation, conflicts of interest, disciplinary history, investment risks, and financial condition that could impair the adviser's ability to meet obligations.
• Form ADV Part 2A is the primary disclosure document (18 core items, plus Item 19 for state-registered advisers). Initial delivery: 48 hours before contracting, or at signing with a 5-business-day free look. Annual delivery (within 120 days): a full updated brochure with a summary of changes, OR just the summary with an offer to provide the brochure; skipped entirely if nothing material changed.

Unlawful Representations Concerning Registration

• It is unlawful to represent that registration means a finding of competence, endorsement, approval of qualifications, or approval of the merits of any security.
• Registration is a procedural step (exams, fees, forms); the regulator has not evaluated skill, judgment, or advice quality.
• Common trap: "approved," "endorsed," "qualified by," or "determined" paired with a regulator's name: those imply endorsement and cross the line.

Performance Guarantees

• Guaranteeing a client against loss is unlawful for advisers, adviser representatives, broker-dealers, and agents alike, with no exceptions.
• Promising a specific rate of return, promising to "make the client whole," or calling a security "risk-free" all count as guarantees.
• Sharing in a customer's account profits or losses is permitted with written authorization from both the customer and the broker-dealer; sharing without that authorization is the prohibited act.
• Overly broad hedge clauses may mislead clients about their legal rights and are viewed as potentially fraudulent.

Client Contracts

• These terms must be provided in writing (not necessarily as one single formal document): description of services, term, fee schedule/formula, the prepaid-fee refund amount, discretionary-authority disclosure, the no-performance-compensation term, a no-assignment-without-consent clause, and (for partnerships) the membership-change notification duty. Brochure delivery and specific renewal terms are separate obligations, not required contract clauses.
• Assignment requires the client's (or other party's) consent, not necessarily written consent, and INCLUDES (but isn't limited to) a change in who controls the adviser's management/policies or can vote more than 50% of its voting securities (not a flat 25%), plus a direct/indirect transfer or hypothecation of the contract itself.
• A change in an advisory partnership's membership is an assignment, unless the partners leaving or joining are only a minority of members holding only a minority interest; a majority change requires consent.
• Performance-based fees are generally prohibited, permitted only for qualified clients ($1.4M+ AUM, $2.7M+ net worth, a qualified purchaser, or certain adviser insiders/employees), and the fee may share in gains only; the symmetrical fulcrum fee (rising for outperformance, falling for underperformance against a benchmark) applies to a registered investment company OR any other client with more than $1 million under contract. A separate exception lets a business development company charge up to 20% of net realized gains.

Correspondence and Advertising

• All communications must be fair, balanced, and not misleading, with a reasonable basis, disclosing material risks alongside benefits; the standard is the same for letters, emails, social media, and formal ads.
• The SEC Marketing Rule permits testimonials (current-client statements) and endorsements (non-client statements) with disclosure of compensation, conflicts, and client status; a written agreement is required with paid promoters unless they are an affiliate or receive $1,000 or less.
• A promoter can't be compensated if they're an "ineligible person" under the Marketing Rule's own disqualification test (specified SEC actions/events in the past 10 years); Reg D private-placement "bad actor" coverage is only a narrow exemption from checking that test for that offering, not the definition of ineligibility.
• Performance ads (other than private funds) need 1-, 5-, and 10-year periods shown with equal prominence; related performance must include all related portfolios (narrow exception); extracted performance needs the total portfolio's results offered too; cherry-picking time periods and showing gross performance without equally prominent net are prohibited.
• Social media follows the same advertising rules: no lighter standard, and "likes," shares, and endorsements may be testimonials.
• Registration abbreviations (RIA, IAR, agent) can be stated accurately but not used like a designation; earned credentials (CFA, CFP) can be used either way; marketing materials are retained at least 5 years, with the first 2 years in an "appropriate office."

One-Breath Recap

Advisers owe full and fair disclosure of every material fact as a fiduciary duty; broker-dealers instead follow the antifraud standard, and an omission is as fraudulent as a lie either way. Registration is a filing, never an endorsement, approval, or finding of competence, so stating your status is fine but implying a regulator vouched for you (or using the abbreviation like a credential) is a violation.

You can never guarantee against loss, though sharing in a customer's account profits or losses is fine with written authorization from both the customer and the BD. Qualified clients may be charged a performance fee on gains, and advisory contracts must be written with no assignment absent the client's or other party's consent.

Advertising is fair, balanced, and not misleading, testimonials and endorsements are now allowed with heavy disclosure and written promoter agreements, performance ads need 1-/5-/10-year periods shown fairly, and marketing records live for at least five years with the first two in an appropriate office.

Need more than the recap? Read the full Client Communication unit.