Series 65

Client Communication and Compensation - Advertising

What Comprises the Definition of Advertising?
The Investment Advisers Act of 1940 defines advertising as any letter, notice, circular or other written communication addressed to more than one person, as well as any notice in a publication or by radio or TV that contains:

  • Graphs, charts, formulas or other devices used to determine how to choose a security or when to buy or sell a security
  • Information that offers analysis, reports or publications concerning securities or when to buy or sell a security
  • Any other investment advisory service that relates to securities
The following media have also been identified by the SEC as forms of advertising:
  • Form letters and other mass mailings
  • Press releases
  • Newsletters
  • Marketing brochures
  • Telemarketing scripts
  • Slides or audio/videotapes used in marketing presentations
  • Email messages sent to more than one person
Advertising Standards
IA advertising is not permitted to:
  • Refer (directly or indirectly) to testimonials about the adviser

  • Refer to past specific recommendations that were profitable. However, an IA may advertise a list of ALL recommendations made within the immediate past year (or longer), as long as all pertinent information is included (date of recommendations, market price at time of buy, sell, and current), along with a disclaimer on the first page stating: "It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list."

  • Advertise that any report, analysis or other service is free of charge if that is not completely true. There must be no obligation or condition of any kind.

  • Represent that a graph, chart, formula or other device can (by itself) be used to determine which securities to buy or sell without disclosing the limitations in doing so
Performance Advertising
The SEC has clarified in a guidance statement (the Clover Capital letter) that advertising of actual performance data will be prohibited if the advertising:
  • Includes results that don't reflect the impact of brokerage commissions, advisory fees and other client-paid expenses.
  • Fails to disclose the effect that market or economic conditions had on the results.
  • Fails to disclose whether or not the results shown reflect reinvestment of dividends and capital gains.
  • Makes claims about the future potential for profit without also mentioning the possibility of loss.
  • Fails to disclose (if applicable) that performance results related only to a select group of the IA's clients.
  • Compares results to an index without disclosing all material facts relevant to the comparison.
  • Fails to disclose any material conditions, objectives or investment strategies used to obtain the results.
Exam Tips and Tricks
Expect more than one question involving performance advertising. In particular, one type of answer that appears to be correct is "IAs cannot use performance advertising that promotes results received by only a small group of the portfolios under management." But the requirements listed above only state that it is prohibited when the fact that a small group was used is NOT disclosed. So, the answer above is actually incorrect.






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