Correspondence & advertising

Securities regulators closely monitor the communications that registered persons share with investors, especially retail investors. In today’s digital environment, a single social media post or online ad can reach a large audience quickly. That reach creates a clear risk: if a message includes untrue or fraudulent information, many investors could be misled at once.

The Uniform Securities Act (USA) sets broad 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 specifically, while the USA discusses them more generally.

Correspondence is direct communication with a client or prospective (potential) client. It can be:

• One-to-one (for example, an email or letter), or
• One-to-many within a client group (for example, an email sent to all clients)

Advertising is a general communication intended for a broad audience.

The USA includes general anti-fraud rules that apply whenever someone engages investors, and these principles also apply to public 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

In other words, you can’t lie to, mislead, or manipulate an investor when discussing securities. You also must disclose material facts when they’re necessary to keep a communication from being misleading.

Definitions

Material fact

Any fact relating to a security or investment product that could entice a securities transaction

For example:

• Not a material fact: Disney is a corporation (virtually all publicly traded companies are corporations)
• Material fact: Disney has been paying a regular cash dividend to investors for decades, but they suspended dividend payments indefinitely in early 2020 due to the COVID-19 pandemic

Leaving out a material fact in a public communication might be accidental, 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:

• Broker-dealers and agents
• Investment advisers and investment adviser representatives (IARs)
• Social media communications

Broker-dealer & agent communications rules

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 information that contradicts a prospectus (or any other disclosure document) would be unlawful.

Broker-dealers and agents may not lie to or mislead an investor. However, the standards applied to them are generally less stringent than those applied to investment advisers and IARs. The key difference is fiduciary duty.

Definitions

Fiduciary duty

The requirement for a person (typically a professional) to hold another person’s interest above its own in all matters

Broker-dealers and agents are not held to a fiduciary standard when executing unsolicited transactions. A transaction is unsolicited when the investor makes the decision without influence from a financial professional. Many broker-dealer transactions are not the result of an agent’s recommendation, so fiduciary rules often don’t apply.

Practically, this means broker-dealers and agents generally don’t have to be as cautious in their communications as investment advisers and IARs.

Because fiduciary duty is absent in many broker-dealer situations, broker-dealers and agents can advertise transaction-related services and execute trades without discussing all material facts. In addition, the state administrator is less likely to enforce suitability standards* against these registered persons. If an investor makes an unsolicited purchase that turns out to be too aggressive, broker-dealers and agents typically aren’t held liable. Fiduciary duties do apply, however, when a recommendation is made.

*Suitability standards relate to pursuing punitive actions against registered persons for making unsuitable recommendations.

Investment adviser and IAR communications rules

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 always owe a fiduciary duty to their clients.

NASAA rules restrict or prohibit the following in an investment adviser’s or IAR’s public communication:

• Testimonials or endorsements that don’t meet the required disclosure, documentation, and oversight conditions
• Reference to specific past recommendations (subject to narrow exceptions)
• Overstatement of the importance of charts and formulas
• An offer of free services that aren’t actually free
• False information

Testimonials and endorsements
A testimonial is a statement by a current client or investor about their experience with the adviser. An endorsement is a similar statement by someone who isn’t a client, and it also includes a statement that solicits or refers a client to the adviser.

Under NASAA’s amended Model Rule 102(a)(4)-1 (adopted May 4, 2026), state-registered investment advisers and IARs may use testimonials and endorsements in public communications, but only if the adviser:

• Clearly and prominently discloses whether the person is a client or investor (testimonial) or not (endorsement), whether cash or non-cash compensation was provided, and a brief description of material conflicts of interest arising from the relationship
• Discloses the material terms of any compensation arrangement
• Has a reasonable basis for believing the testimonial or endorsement complies with the rule, and has a written agreement with the person describing the scope of the arrangement and its compensation terms
• Does not compensate, directly or indirectly, anyone it knows - or should know - is an “ineligible person” (someone subject to a disqualifying event, such as a securities-related felony, within the preceding 10 years)

Two exceptions narrow these requirements:

• A testimonial or endorsement given for no compensation doesn’t need the compensation-terms disclosure or the reasonable-basis/written-agreement requirement.
• One from the adviser’s own partners, officers, directors, or employees, or from an affiliate, doesn’t need the identity/compensation disclosure, as long as the affiliation is obvious or is disclosed and documented. The ineligible-person bar still applies to these people.

Broker-dealers and agents were never subject to a NASAA prohibition on testimonials or endorsements.

Sidenote

New SEC Marketing Rules

In 2020, the SEC finalized a new rule that changes how investment advisers regulated by the Investment Advisers Act of 1940 can market their services. Before getting into the details, it helps to be clear about when this rule applies.

The SEC’s new rule applies only to federal-covered advisers. State-registered advisers and IARs follow a separate framework - NASAA’s amended Model Rule 102(a)(4)-1, covered above - so don’t conflate the two sets of requirements.

The SEC rule updates two broad areas:

• The definition of advertising
• When investment advisers may publish endorsements and/or testimonials

Here is the SEC’s updated definition of advertising:

Any direct or indirect communication an investment adviser makes to more than one person that:

• Offers the investment adviser’s investment advisory services with regard to securities to prospective clients, current clients, or private fund investors
• Includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly

A major change is that endorsements and testimonials can be included in advertisements, but only if specific conditions are met. To use an endorsement or testimonial, the adviser must ensure the following:

• Disclosure: Advertisements must clearly and prominently disclose whether the person giving the testimonial or endorsement (the “promoter”) is a client and whether the promoter is compensated. Additional disclosures are required regarding compensation and conflicts of interest.
• Oversight and Written Agreement: An adviser that uses testimonials or endorsements in an advertisement must oversee compliance with the marketing rule. An adviser also must enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
• Disqualification: The rule prohibits certain “bad actors” from acting as promoters, subject to exceptions where other disqualification provisions apply.

In summary, federal-covered advisers must follow three general rules when publishing endorsements or testimonials:

• Disclose compensation (cash and non-cash). Non-cash compensation is anything of value not directly denominated in cash (for example, free advisory services in return for an endorsement).
• Supervise endorsement/testimonial activity and use a written agreement when the promoter receives more than $1,000 in cash or non-cash compensation.
• Do not use promoters who are subject to statutory disqualifications (for example, a felony conviction in the last 10 years).

The SEC marketing rule also lists general prohibitions, including:

• Making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading
• Making a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the [SEC]
• Including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser
• Discussing any potential benefits without providing fair and balanced treatment of any associated material risks or limitations
• Referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner
• Including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced
• Including information that is otherwise materially misleading

The rule also addresses third-party rating systems (for example, Trustpilot):

The rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides disclosures and satisfies certain criteria* pertaining to the preparation of the rating.

*Generally speaking, the “certain criteria” requires the adviser to have a reasonable basis to believe the third-party rating system is fair and not set up to receive a specific result. The adviser must also disclose the identity of the third-party ratings service/agency and any compensation paid to the third party.

Finally, the SEC marketing rule prohibits certain performance-related statements in advertisements:

• Posting gross performance*, unless the advertisement also presents net performance
• Any performance results, unless they are provided for specific time periods in most circumstances
• Any statement that the [SEC] has approved or reviewed any calculation or presentation of performance results
• Highlighting accounts or assets with superb performance that are not consistent with the general returns of products and/or services offered
• Hypothetical performance (which does not include performance generated by interactive analysis tools), unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance
• Predecessor performance **, unless there is an appropriate similarity with regard to the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser

*Gross performance is overall performance without factoring in the costs of investment advice.

**Predecessor performance relates to the performance of another form of the company. For example, assume ABC Advisers Company is bought out by XYZ Strategies. XYZ Strategies could not publish the performance of accounts previously managed by ABC Advisers unless XYZ offered relatively similar products and/or services.

Bottom line: federal-covered advisers follow the SEC marketing rule’s protocols and disclosures described above; state-registered advisers and IARs follow NASAA’s amended Model Rule 102(a)(4)-1 instead. The two frameworks share the same broad goals - disclosure, oversight, and barring bad actors - but differ in some details, such as the SEC rule’s de minimis compensation carve-out ($1,000 or less), which has no NASAA counterpart.

Reference to specific past recommendations
NASAA’s rule states:

[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

So, advisers still may not highlight specific recommendations that produced profits. The older exception that let an adviser publish a list of all recommendations made over the preceding year - complete with prices and a disclaimer legend - is superseded under the amended Model Rule 102(a)(4)-1. In its place, the amended rule sets performance-presentation requirements for any advertisement showing investment results:

• Gross performance (performance before subtracting the cost of advice) may not be shown without net performance displayed with equal prominence, covering the same time period and calculated with the same methodology.
• Portfolio or composite performance (other than for a private fund) must show one-, five-, and ten-year periods, each with equal prominence.

On the exam, treat any advertisement that shows performance as already displaying the required one-, five-, and ten-year periods - don’t select “it omits the ten-year period” as a second correct answer.

Overstatement of the importance of charts and formulas
NASAA’s rule states:

[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 that advisers shouldn’t present charts, formulas, or similar tools as if they can reliably tell someone what to buy, sell, or when to trade. Charts show historical performance, and past performance doesn’t necessarily predict future results. Formulas - especially complex ones - can also create a false sense of certainty. These tools can support a broader discussion, but they shouldn’t be portrayed as stand-alone decision-makers.

An offer of free services that aren’t actually free
NASAA’s rule 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.

If a service is advertised as “free,” it must truly be free - without conditions. For example, an adviser can’t advertise a “free financial plan” if the investor must move assets under the adviser’s management to receive it. If the “free” item requires another action, it can’t be marketed as free.

False information
This rule is straightforward: don’t include false information in advertisements, correspondence, or any client interaction. Although it appears in the investment adviser and IAR section, it applies to all registered persons and issuers.

Social media communications

Social media is now a major channel for client engagement and marketing in the financial industry. Investors share information widely through posts, comments, message boards, and direct messages. Because of that, securities regulators have issued guidelines that apply to social media activity.

In general, the same rules discussed in this chapter apply to social media:

• Public posts intended for a mass audience are generally treated like advertising.
• Private messages and chats are typically treated like correspondence.

Financial professionals may not make false, misleading, or exaggerated statements, and they may not omit material facts. The medium doesn’t change the standard - whether it’s paper, a billboard, or Twitter, the same anti-fraud principles apply. Actions such as “likes” or endorsements on social media are treated as endorsements or testimonials, so the same disclosure, agreement, and ineligible-person conditions covered above apply to them.

Firms must maintain a strong supervisory system for business-related social media activity. Representatives often use internet platforms to communicate with current and prospective clients, and firms are responsible for supervising those communications to ensure compliance.

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 the review is to confirm that the platform allows the 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
• Interactive communications

Static content
This type of social media 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 treats these communications similarly to advertising.

Interactive communications
This type of social media content is defined as:

Typically real-time and involve a dialog with third parties

Examples include posts on interactive forums (for example, Reddit), chat rooms, Tweets, Facebook posts, comments on other social media posts, and direct messages (DMs). NASAA treats these communications similarly to correspondence.

Firms and representatives sometimes repost third-party content or link to third-party websites - for example, a brokerage firm tweeting a link to 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 a firm retweeting a financial blog with commentary (for example, “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 a firm sharing a paid review of its 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 (for example, photos of children or pets). However, a personal account can become a business use of social media - for example, if a representative posts TikToks discussing the firm’s products and services.

To clarify the boundary between personal and business activity, firms must provide ongoing education (typically training modules or videos). If the state administrator determines that a registered representative’s personal social media has crossed into business use, both the representative and the firm may face punitive actions.