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.
ProfessionalsAdvertising and Solicitation
InvestingThe Internet and digital media are changing the way companies advertise and market themselves. More targeted, varied and faster advertising is possible.
InvestingUnderstand what programmatic advertising is as well as the technology that drives it. Learn about the top four ways programmatic advertising is changing media.
ProfessionalsFINRA/NASAA Series 26 Section 6 - Standards Applicable to Public Communications, Advertisements and Sales Literature. In this section use of recommendations and communications of variable products ...
InvestingChanges in television consumption habits have forced advertising to target audiences through new means, namely Internet advertising.
InvestingThe rapidly expanding digital advertising industry is leading a shift towards content and demanding forced innovation.
ProfessionalsFINRA/NASAA Series 66 - Solicitation. In this section rules for solicitation and sample question.
ProfessionalsFINRA/NASAA Series 65 - Solicitation. This section otlines the rules under which solicitation is permitted.
Personal FinanceOver the past 10 years, advertising strategies have evolved as a result of technological development as the internet has provided new channels for advertisers to reach a larger audience.
ProfessionalsFINRA/NASAA Series 66 - Other Prohibited Behaviors. This section describes other prohibited behaviour such as misrepresentations, third-party research, improper facts, misleading statements and ...
The portion of the total marketing budget that is allocated to ...
An advertising scheduling strategy in which a business alternates ...
A regional advertising group based on the U.S. East Coast that ...
A measure of a market's sensitivity to increases or decreases ...
In general, an advertising strategy in which a product is promoted ...
A form of advertising in which physical marketing materials are ...
Understanding the role advertising plays in the marketing mix will help business owners define their promotional strategies ... Read Answer >>
Learn about the importance of advertising revenue in the Internet industry. Find out how much Internet firms rely on advertising ... Read Answer >>
The correct answer is a). Consider the intended target audience when deciding if a communication constitutes advertising. ... 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 >>
I. Fraudulent investment advice.II. Distribution of unregulated advertising materials.III. Misleading filings.IV. Making ... 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 >>