Correspondence and Advertising
With the contractual framework established, the final piece covers how advisers communicate with the public. The SEC's Marketing Rule fundamentally changed advertising rules in 2022, and the exam tests the new framework heavily.
General Communication Standards
All communications by investment advisers and broker-dealers must meet these standards:
- Fair, balanced, and not misleading
- Must have a reasonable basis for any claims or recommendations
- Cannot make false or misleading statements of material fact
- Must disclose material risks alongside potential benefits
These requirements apply to every form of communication: letters, emails, presentations, social media posts, website content, and formal advertisements.
The SEC Marketing Rule (Rule 206(4)-1)
The Marketing Rule replaced the former advertising and solicitation rules, effective November 4, 2022. It modernized how investment advisers can market their services.
What Counts as an "Advertisement"
The rule defines "advertisement" broadly to include:
- Client-facing communications: Any communication that offers or promotes advisory services (with limited exceptions for one-on-one communications)
- Compensated third-party endorsements and testimonials: Any paid promotion by someone outside the firm
What's Now Permitted (With Conditions)
| Type | Definition | Key Conditions |
|---|---|---|
| Testimonials | Statement by a current client about their experience | Must disclose: compensation paid, conflicts, whether promoter is a client |
| Endorsements | Statement by a non-client indicating approval or support | Must disclose: compensation, conflicts; written agreement required |
| Third-party ratings | Rankings or scores from external providers | Must meet specific criteria for objectivity |
| Hypothetical performance | Modeled or backtested returns | Cannot be shown to mass audiences; must include methodology, assumptions, and limitations |
| Related performance | Results from similar portfolios | Must be presented fairly with appropriate context |
What's Still Prohibited
- Untrue statements of material fact
- Unsubstantiated claims: any claim without a reasonable basis
- Cherry-picking favorable time periods for performance data
- Failing to present performance fairly (e.g., showing only the best-performing accounts)
- Showing gross performance without also showing net performance (net must be equally or more prominent)
Testimonial and Endorsement Requirements
When using testimonials or endorsements, the adviser must:
- Disclose whether the promoter is compensated
- Disclose material conflicts of interest
- Disclose whether the promoter is a client
- Enter into a written agreement with promoters (unless the promoter is an affiliate or receives $1,000 or less)
- Oversee the promoter's compliance with the Marketing Rule
- Not use promoters who are disqualified persons (bad actors under Rule 506 of Reg D)
Hypothetical Performance Restrictions
- Cannot be shown to mass or retail audiences (only appropriate for sophisticated recipients)
- Must include the methodology used to create the hypothetical
- Must disclose assumptions and limitations
- Must explain that hypothetical results have inherent limitations and may not reflect actual trading
Exam Tip: Gotchas
- Testimonials and endorsements are now PERMITTED. Before November 2022, they were prohibited. The exam tests the new rule: they are allowed, but with extensive disclosure and compliance requirements.
- "Testimonials are prohibited" is the old rule. If you see that as an answer choice, it no longer applies.
- Hypothetical performance cannot be shown to mass/retail audiences. Only sophisticated, targeted recipients qualify.
- Net performance must appear alongside gross performance. Net must be equally or more prominent; showing gross alone is prohibited.
- Written agreement required with paid promoters. The only exceptions: affiliates or de minimis compensation ($1,000 or less).
Social Media
- All social media activity by advisers and agents is subject to the same regulatory requirements as any other advertisement or correspondence
- Social media posts must be supervised, archived, and compliant with advertising rules
- "Likes," "shares," and endorsements on social media may constitute testimonials subject to disclosure requirements
- Interactive content (forums, live chats) may be treated differently from static posts, depending on the medium
Key principle: The medium does not change the rules. The same standards apply whether you are posting on LinkedIn, sending a newsletter, or running a TV commercial.
Exam Tip: Gotchas
- Social media follows the same advertising rules. There is no separate, lighter standard for social media posts. A LinkedIn post is regulated just like a print advertisement.
Recordkeeping (SEC Rule 204-2)
All marketing materials and communications must be preserved:
| Requirement | Detail |
|---|---|
| Retention period | At least 5 years from the end of the fiscal year of last use |
| Accessible location | First 2 years must be kept in the adviser's principal office |
| What's covered | Advertisements, marketing materials, social media posts, emails, website content, testimonials, endorsements |
| Performance records | Must maintain all calculations and data supporting any performance claims |
Exam Tip: Gotchas
- 5 years total, 2 years in the principal office. Records must be kept for at least 5 years, but only the first 2 years require storage at the adviser's main office.