Securities regulators closely monitor the communications that registered persons distribute to 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 risk: if a message contains untrue or fraudulent information, many investors could be misled at once.
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 specifically, while the USA discusses them more generally.
Correspondence means direct communication with a client or prospective (potential) client. It can be sent to one person (for example, an email or letter) or written for a group of clients (for example, an email to all clients).
Advertising is a general communication intended for a broad audience.
The USA includes broad anti-fraud rules that apply to engaging investors and can 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 practical terms, you can’t lie to, mislead, or manipulate an investor when discussing securities. You also must disclose material facts when they’re needed to keep a statement from being misleading.
Leaving out a material fact in a public communication might be accidental, but it can still be 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 for 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 information about a security that contradicts its prospectus (or any other disclosure document) would be unlawful.
Broker-dealers and agents may not lie to or mislead an investor, but the standards applied to them are generally less stringent than those applied to 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 trades executed by broker-dealers are not the result of an agent’s recommendation, so fiduciary rules often don’t apply.
This affects communications and enforcement in practice:
*Suitability standards relate to pursuing punitive actions against registered persons for making unsuitable recommendations.
Most of the communications 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’s or IAR’s public communication:
Testimonials of any kind
Testimonials are endorsements meant to persuade others to use a product or service. In the advisory context, a testimonial can be interpreted as a performance guarantee or as implying that similar results are likely for other investors.
To avoid these ethical and disclosure 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:
[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
This means advisers generally may not highlight specific recommendations that produced profits. NASAA provides an exception, but it requires full and balanced disclosure:
[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
So, an investment adviser or IAR may disclose recommendations publicly only if:
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 that charts, formulas, and similar tools can support an explanation, but they shouldn’t be presented as a stand-alone solution for deciding what to buy or sell (or when). If they’re used in advertising, their limitations and the difficulties of using them must be prominently disclosed.
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.
If something 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.
False information
This is straightforward: false statements are prohibited in advertisements, correspondence, and any interaction with a client. Although it appears in the investment adviser & IAR section, this principle applies to all registered persons and issuers.
Social media is now a major channel for client engagement and marketing in the financial industry. Investors also share investing stories and information widely through message boards and timelines. Because of this, regulators have issued guidelines and rules that apply to online activity.
In general, the same rules discussed in this chapter apply to social media:
Firms must also supervise business-related social media activity. When representatives post online for business purposes, the firm must have a supervisory system designed to ensure regulatory 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 this review is to confirm that the platform allows the firm and representative 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 treats these communications similarly to advertising.
Interactive communications
Interactive communications are 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, tweeting a link to a Yahoo Finance article). 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 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 sharing a paid review of the firm’s products or services on TikTok.
Whether a firm adopts or becomes entangled 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. A firm does not need to keep records of purely personal posts (for example, family or pet photos). However, a personal account can become a business use of social media depending on what is posted. For example, if a representative posts a TikTok discussing the firm’s products and services, regulators may treat that as business communication.
To help employees understand the boundary between personal and business posts, firms must provide ongoing education (typically through 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.
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