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

• Disclosure is "before or at the time of" the transaction or relationship, never after.
• 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; 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"); implying approval, endorsement, or qualification by a regulator is a violation.
• Guaranteeing a client against loss is always prohibited, with no exception for client sophistication or wealth; calling a security "risk-free" is treated as the same violation.
• Sharing in client losses is a prohibited guarantee; sharing in gains is a performance-based fee (allowed only for qualified clients with a fulcrum structure).
• Advisory contracts must be in writing and cannot be assigned without the client's prior written consent.
• Testimonials and endorsements are now permitted under the SEC Marketing Rule, with extensive disclosure and compliance conditions.
• Registration abbreviations (RIA, IAR) are not designations; earned credentials like Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) are.

Numbers to Lock In

Top Gotchas

• Two brochure deadlines, not one: 90 days to file the annual amendment with regulators, 120 days to deliver the updated brochure to existing clients. For a December 31 year-end, that is March 31 and April 30; the exam uses March 31 as the decoy on client-delivery questions.
• Sharing in losses versus sharing in gains are constantly confused: losses = prohibited guarantee; gains = performance fee for qualified clients only.
• 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 cannot be shown to mass or retail audiences, only sophisticated, targeted recipients, and must include methodology, assumptions, and limitations.
• "Testimonials are prohibited" is the old rule. If you see it as an answer choice, it no longer applies.
• "RIA" or "IAR" on a business card is always prohibited, no matter how accurate; "Series 66 certified" is inaccurate (it is a license, so say "licensed").

Disclosures

• Advisers and broker-dealers owe full and fair disclosure of all material facts; material means anything a reasonable investor would consider important.
• 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, delivered before or at the time of entering the agreement; the annual update includes a summary of material changes or an offer to provide the updated brochure.

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.
• Watch for "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," sharing in losses, or calling a security "risk-free" all count as guarantees.
• Overly broad hedge clauses may mislead clients about their legal rights and are viewed as potentially fraudulent.

Client Contracts

• Every advisory contract must be in writing and include: description of services, fee schedule and compensation method, discretionary-authority disclosure, the brochure-delivery obligation, term/termination/renewal provisions, and a no-assignment-without-consent clause.
• Assignment requires prior written consent and includes any direct or indirect transfer, or transfer of a controlling block of voting securities (more than 25% is presumed control).
• 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 ($1.4 million or more assets under management with the adviser, or more than $2.7 million net worth excluding primary residence), and must use a symmetrical fulcrum fee that rises for outperformance and falls for underperformance against a benchmark.

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.
• Disqualified persons (bad actors) may not act as promoters; 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) are not designations, but earned credentials (CFA, CFP) are permitted; marketing materials are retained at least 5 years, with the first 2 years in the principal office.

One-Breath Recap

Full and fair disclosure of every material fact happens before or at the time of the relationship (never after), and an omission is as fraudulent as a lie. 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 is a violation. You can never guarantee against loss or share in client losses, though a symmetrical fulcrum fee lets qualified clients pay on gains, and advisory contracts must be written with no assignment absent the client's consent. Advertising is fair, balanced, and not misleading, testimonials and endorsements are now allowed with heavy disclosure and written promoter agreements, and marketing records live for at least five years with the first two in the principal office.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Client Communication unit for the complete lesson.