Securities regulators like the state administrator closely monitor the communications registered persons send to investors (especially retail investors). In a digital environment, a single social media post or online ad can reach a large audience quickly. If those messages include untrue or fraudulent information, the harm can spread just as quickly.
The Uniform Securities Act (USA) sets clear standards for these communications. The North American Securities Administrators Association (NASAA) has also issued numerous orders and rules that reinforce and expand on those standards.
In general, public communications fall into two categories: correspondence and advertising. Federal securities laws define these terms very precisely, while the USA discusses them more generally.
Correspondence is direct communication with a client or prospective (potential) client. It can be sent to:
Advertising is a general communication intended for a broad audience.
The USA includes broad anti-fraud rules that apply to investor communications:
It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:
- To employ any device, scheme, or artifice to defraud, or
- To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or
- To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person
Put simply: don’t lie to, mislead, or manipulate investors when discussing securities. Just as important, you must include material facts when they’re needed to keep a statement from being misleading.
Leaving out a material fact may be unintentional, but it’s still unlawful and may lead to civil liabilities and penalties. If the omission is willful (intentional), the financial professional may also face criminal penalties. Non-material facts don’t have to be disclosed.
NASAA rules on correspondence and advertising are further divided into rules for:
NASAA rules state the following regarding communications with the public:
[It’s unethical and unlawful to use] any advertising or sales presentation in such a fashion as to be deceptive or misleading. An example of such practice would be a distribution of any nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in any brochure, flyer, or display by words, pictures, graphs or otherwise designed to supplement, detract from, supersede or defeat the purpose or effect of any prospectus* or disclosure
A prospectus is an issuer-created document that discloses material information about an investment and its inherent risks. For example, here’s AirBnB’s prospectus for its initial public offering in December 2020. Discussing a security in a way that contradicts its prospectus (or any other required disclosure document) would be unlawful.
Broker-dealers and agents may not lie to or mislead investors, but they generally aren’t held to the same communication standards as investment advisers and IARs. The key difference is fiduciary duty.
Broker-dealers and agents are not held to a fiduciary standard when executing unsolicited transactions. A trade is unsolicited when the investor makes the decision without influence from a financial professional. Many broker-dealer transactions are not based on an agent’s recommendation, so fiduciary rules often don’t apply.
In practice, this means broker-dealers and agents can advertise transaction-related services and execute unsolicited trades without discussing every material fact. The state administrator is also less likely to enforce suitability standards* against these registered persons in unsolicited situations. If an investor buys a security on an unsolicited basis and it turns out to be too aggressive, broker-dealers and agents are typically not held liable.
Fiduciary duties do apply when a recommendation is made.
*Suitability standards relate to pursuing punitive actions against registered persons for making unsuitable recommendations.
Most of the communication rules that apply to broker-dealers and agents also apply to investment advisers and IARs. Advisers and IARs are subject to additional restrictions because they have a fiduciary duty to clients.
NASAA rules prohibit any of the following from appearing in an investment adviser or IAR’s public communication:
Testimonials of any kind
Testimonials are endorsements meant to influence an audience (for example, a celebrity promoting a product). In the advisory context, a testimonial can sound like a performance guarantee. Even if one client had a great experience, that doesn’t mean other investors will have the same results.
To avoid these issues, NASAA rules prohibit investment advisers and IARs from using endorsements or testimonials. Broker-dealers and agents are not subject to this NASAA prohibition.
Reference to specific past recommendations
Here is the NASAA rule language behind this prohibition:
[It’s prohibited to refer] to past specific recommendations of the investment adviser or IAR that were or would have been profitable to any person
In other words, advisers may not highlight specific recommendations that made clients money.
NASAA does allow a limited exception:
[Advisers] may furnish or offer to furnish a list of all recommendations made by the investment adviser or investment adviser representative within the immediately preceding period of not less than one year if the advertisement or list also includes both of the following:
- The name of each security recommended, the date and nature of each recommendation, the market price at that time, the price at which the recommendation was to be acted upon, and the most recently available market price of each such security
- A legend on the first page in prominent print or type that states that the reader should not assume that recommendations made in the future will be profitable or will equal the performance of the securities in the list
Investment advisers and IARs may disclose recommendations publicly if they:
For example, an adviser could publish all recommendations made in 2024 once at least one full year has passed. The adviser can’t cherry-pick only the winners.
Overstatement of the importance of charts and formulas
NASAA’s rule language is:
[It’s prohibited to represent] that any graph, chart, formula, or other device being offered can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them; or which represents, directly or indirectly, that any graph, chart, formula, or other device being offered will assist any person in making that person’s own decisions as to which securities to buy or sell, or when to buy or sell them, without prominently disclosing in such advertisement the limitations thereof and the difficulties with respect to its use.
The idea is straightforward: charts and formulas can support analysis, but they don’t guarantee correct decisions. Charts show historical performance, and past performance doesn’t necessarily predict future results. Complex formulas can also create a false sense of certainty.
So advisers and IARs shouldn’t present a chart, formula, or similar tool as if it can reliably tell someone what to buy, sell, or when to trade - especially without clearly disclosing limitations.
An offer of free services that aren’t actually free
NASAA states:
[It’s prohibited to represent] that any report, analysis, or other service will be furnished for free or without charge, unless such report, analysis, or other service actually is or will be furnished entirely free and without any direct or indirect condition or obligation.
False advertising is prohibited in any industry. For advisers and IARs, the “free” claim must be literal: no direct or indirect conditions.
For example, it would be prohibited to advertise a “free” financial plan if the investor must move assets under the adviser’s management to receive it. If the “free” service requires another action, it can’t be marketed as free.
False information
This rule is simple: don’t lie in advertisements, correspondence, or any interaction with a client. Although it appears in the adviser/IAR section, it applies to all registered persons and issuers.
Social media is now a major channel for client engagement and marketing in the financial industry. Investors share information widely through posts, comments, and message boards, so regulators have issued guidance to address these risks.
The key point is that the same general standards apply on social media as they do elsewhere. Public posts aimed at mass audiences are generally treated like advertising, while private messages and chats are typically treated like correspondence. False, misleading, or exaggerated statements are prohibited, and omitting material facts is strictly forbidden. Actions such as “likes” or endorsements on social media are treated as testimonials, which are prohibited for investment advisers and investment adviser representatives.
Firms must also supervise business-related social media activity. When representatives use internet platforms to engage current or prospective clients, the firm must ensure compliance through proper oversight.
Before a representative uses a social media platform for business, the platform must be vetted and reviewed by a registered principal (supervisor). The purpose of this review is to confirm that the platform allows the representative and firm to follow applicable rules and guidelines. Most major platforms (Twitter, Facebook, Instagram, TikTok, and YouTube) have already been reviewed by many firms. If a representative wants to use a new platform, principal approval is required before using it.
Social media posts are broken down into two general categories:
Static content
Static content is defined as:
Typically posted for the longer term and lacks the immediacy of a real-time conversation
Examples include blogs and social media profiles. NASAA generally treats static content like advertising.
Interactive communications
Interactive communications are defined as:
Typically real-time and involve a dialog with third parties
Examples include posts on interactive forums (e.g., Reddit), chat rooms, Tweets, Facebook posts, comments on other social media posts, and direct messages (DMs). NASAA generally treats these communications like correspondence.
Firms and representatives sometimes repost third-party content or link to third-party websites (for example, tweeting a Yahoo Finance article about market activity). Regulators address this by focusing on whether the firm has effectively made the third-party content its own.
If a firm adopts or becomes entangled with third-party content, the communication is treated as if the firm created it.
Adoption occurs when a firm endorses or approves third-party content
An example of adoption is retweeting a financial blog and adding commentary such as: “Check out this interesting piece on the current state of the market.”
Entanglement occurs when the firm involves itself with the preparation of the third-party post
An example of entanglement is sharing a paid review of the firm’s products or services on TikTok.
Whether a firm adopts or entangles itself with third-party content, the shared material must be vetted, reviewed, and treated essentially as if it were created by the firm.
A registered person’s personal social media is not regulated under the same set of rules. Firms don’t need to keep records of purely personal posts (like photos of kids or pets). However, a personal account can still become a business communication depending on what’s posted.
For example, if a representative posts a TikTok discussing the firm’s products and services, regulators may view that as business use. To help employees understand the boundary between personal and business posts, firms must provide ongoing education (often through training modules or videos). If the state administrator determines that a registered person’s personal social media crossed into business communications, both the individual and the firm could face punitive actions.
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