Correspondence & advertising

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.

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 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:

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

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 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.

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 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:

• Without a fiduciary duty in most circumstances, broker-dealers and agents can advertise transaction-related services and execute trades without discussing all material facts.
• The state administrator is less likely to enforce suitability standards* on these registered persons.
• If an investor purchases 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 can apply 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 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 restrict or prohibit any of the following from appearing in an investment adviser’s or IAR’s public communication:

• Testimonials and endorsements, unless specific disclosure, oversight, and eligibility conditions are met
• Reference to specific past recommendations
• 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 from a current client or investor about their experience with the adviser; an endorsement is a similar statement from someone who isn’t a client (this now also includes anyone who solicits or refers a client to the adviser). Either can be interpreted as a performance guarantee or as implying that similar results are likely for other investors, which is why NASAA regulates their use closely.

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, but only if the adviser:

• Discloses clearly and prominently whether the person is a client/investor (testimonial) or not (endorsement), whether cash or non-cash compensation was involved, and a brief description of any material conflicts of interest arising from the person’s relationship with the adviser, along with 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 agreed-upon activities and the terms of compensation.
• Avoids ineligible persons - the adviser may not compensate anyone, directly or indirectly, for a testimonial or endorsement if it knows, or in the exercise of reasonable care should know, that the person is subject to a disqualifying event (for example, a securities-related felony) within the preceding ten years.

Two exemptions narrow these requirements:

• A testimonial or endorsement given for no compensation doesn’t need to satisfy 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 to satisfy the identity/compensation disclosure, as long as the affiliation is apparent or is disclosed and documented. Affiliates remain subject to the ineligible-person bar.

Broker-dealers and agents have never been 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. To apply this correctly, you need to know who it covers.

The SEC’s new rule applies only to federal-covered advisers. State-registered advisers instead follow NASAA’s own amended Model Rule 102(a)(4)-1, described above - the two frameworks are similar but not identical.

The SEC rule updates two broad areas:

• The definition of advertising
• When and how 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 include either in a public advertisement, the adviser must ensure the following rules are followed:

• 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 paid in cash (for example, free advisory services in return for an endorsement).
• Supervise endorsement/testimonial activity and have a written agreement with the promoter if the promoter receives more than $1,000 in cash or non-cash compensation.
• Do not use promoters who face statutory disqualifications (for example, a felony conviction in the last 10 years).

The SEC marketing rule also includes general prohibitions:

• 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 ratings 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 designed to produce 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 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: both federal-covered advisers (under the SEC marketing rule) and state-registered advisers (under NASAA’s amended Model Rule 102(a)(4)-1) may include endorsements and testimonials in advertisements if they satisfy their respective rule’s disclosure, oversight, and eligibility requirements. The two rules aren’t identical - for example, only the SEC rule exempts de minimis compensation ($1,000 or less) from the written-agreement requirement; NASAA’s rule has no such carve-out.

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’s amended Model Rule 102(a)(4)-1 superseded the older exception that let an adviser furnish a list of all recommendations made over the preceding year along with prices and a disclaimer legend. In its place, the amended rule sets performance-presentation standards for any advertisement that does include performance results:

• Gross vs. net performance: an adviser can’t show gross performance (performance without factoring in the costs of advice) without also showing net performance at equal prominence, calculated over the same time period and using the same methodology.
• Time periods: portfolio or composite performance (other than for a private fund) must show one-, five-, and ten-year periods, each presented with equal prominence.

Exam tip: treat any performance advertisement in an exam question as already showing the required one-, five-, and ten-year periods. The tested issue is usually the gross/net comparison or another prohibited practice, not a missing time period.

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 communications

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:

• Public posts intended for a mass audience are generally treated like advertising.
• Private messages and chats are typically treated like correspondence.
• False, misleading, or exaggerated statements are prohibited.
• Omitting a material fact is prohibited.
• Actions such as “likes” or endorsements can be treated as testimonials or endorsements, which are subject to the disclosure, oversight, and eligibility conditions discussed above for investment advisers and investment adviser representatives.

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
• Interactive communications

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.