Quick Answer
Every communication, correspondence, retail, or institutional, must be based on fair dealing and good faith, be fair and balanced, and give a sound basis for evaluating what's being discussed. Material omissions and false, exaggerated, unwarranted, promissory, or misleading statements are prohibited, and audience-appropriate detail with balanced risk-and-benefit treatment is required throughout.
These content standards apply regardless of which of the three categories a piece falls into. A firm's approval process and filing obligations change by category, covered later in this unit, but the underlying substance rules never relax just because a communication happens to skip a filing requirement.
What Must Every Communication Do?
- Be based on principles of fair dealing and good faith.
- Be fair and balanced.
- Provide a sound basis for evaluating the security, type of security, industry, or service being discussed.
- Avoid omitting a material fact or qualification where the omission would make the communication misleading.
- Avoid any false, exaggerated, unwarranted, promissory, or misleading statement or claim.
- Give balanced treatment of risks and potential benefits, with details and explanations appropriate to the audience receiving the communication.
- Keep statements clear and not misleading in the context where they are made, and consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return, and yield.
- Put information in a legend or footnote only where that placement would not get in the way of an investor understanding the communication.
Think of it this way: A communication aimed at a risk-averse retail investor needs more explanation of downside risk than the same product pitched to an institutional investor's trading desk. The content standard is the same, but what counts as "appropriate detail" moves with the audience.
Can a Communication Predict or Project Performance?
Generally, no. A communication may not predict or project performance, imply that past performance will recur, or make an exaggerated or unwarranted claim, opinion, or forecast.
Three narrow carve-outs exist:
- A hypothetical illustration of mathematical principles, as long as it does not itself predict or project the performance of an investment or a strategy.
- A compliant investment-analysis tool, or a written report the tool produces, that meets the applicable content requirements for that kind of tool. The carve-out covers the report as well as the tool itself.
- A properly supported price target in a research report on debt or equity securities, when the target has a reasonable basis and is accompanied by the required valuation and risk disclosures.
Exam Tip: Gotchas
- The performance-prediction ban is not absolute. A stem describing a hypothetical illustration, an investment-analysis tool, or a supported research-report price target is describing one of the three carve-outs, not a violation.
- "Exaggerated or unwarranted" catches more than outright false statements. A literally accurate claim can still be misleading, and still violate the standard, if the surrounding context leaves out the material fact needed to keep it fair and balanced.
What Should You Check on Exam Day?
- Apply the fair-dealing, balance, and no-material-omission standards to every category, not just retail communications.
- Distinguish a forbidden performance prediction from one of the three carve-outs: hypothetical math illustration, compliant analysis tool, or supported research price target.
- Match the level of explanation in a scenario to its audience; a risk-averse retail investor needs more risk disclosure than an institutional desk.