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
- Marketing brochures
- Telemarketing scripts
- Slides or audio/videotapes used in marketing presentations
- Email messages sent to more than one person
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
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.
Personal FinanceHere's what the corporations with some of the biggest advertising budgets in the U.S. spend their money on.
InvestingChanges in television consumption habits have forced advertising to target audiences through new means, namely Internet advertising.
Personal FinanceWe list five outlets where advertisers are spending their money, and how these trends developed.
Stock AnalysisLearn why Facebook is free to users, and understand how the company makes more money by charging advertisers than it would if it charged users.
InvestingAdvertising on a Times Square billboard costs more per impression than similar forms of advertising, but that doesn't mean it's not worth it.
Stock AnalysisAdvertisers are now spending more on online ads than ever before. For investors, that means the time could be right to bet on digital advertising players.
InvestingDigital advertising has outgrown the internet.
Fundamental AnalysisFind out how small- and medium-sized businesses around the world use Twitter to gain new business. Twitter now offers its advertising platform in 200 countries.
Personal FinanceThings are rarely as they appear, especially in the marketing and advertising world.
Stock AnalysisLook at how Facebook's Instant Articles feature works, and how it differs from the new Accelerated Mobile Pages feature from Google and Twitter.
An advertising scheduling strategy in which a business alternates ...
In general, an advertising strategy in which a product is promoted ...
A marketing strategy in which a company shows how its product ...
A regional advertising group based on the American West Coast ...
A form of advertising in which physical marketing materials are ...
A category included in financial accounting to represent expenses ...
Learn about the importance of advertising revenue in the Internet industry. Find out how much Internet firms rely on advertising ... Read Answer >>
The bait and switch is a advertising technique which can be considered illegal, but in most cases is merely looked upon as ... Read Answer >>
I. Fraudulent investment advice.II. Distribution of unregulated advertising materials.III. Misleading filings.IV. Making ... Read Answer >>
A. When the transaction is less than $5,000B. When the IA decides only how many shares to sellC. When the client tells the ... Read Answer >>
When an advertisement says "financing", it means that the seller is going to give you a loan on an item that you purchase. ... Read Answer >>
A company logo change usually constitutes a material disclosable event. Securities law requires that companies disclose all ... Read Answer >>