4.3.2 Advertising and Sales Literature
In the securities industry, effective communication with the public is paramount, not only for building trust and credibility but also for ensuring compliance with regulatory standards. As you prepare for the Securities Industry Essentials (SIE) Exam, understanding the nuances of advertising and sales literature is crucial. This section delves into the definitions, content standards, prohibited practices, and regulatory requirements associated with advertising and sales literature, providing you with a comprehensive understanding necessary for both the exam and your future career.
Definitions
Advertising
Advertising in the securities industry refers to materials intended for mass market distribution through public media channels. These include:
- Newspapers and Magazines: Print media where firms can place advertisements to reach a broad audience.
- Radio and Television: Broadcast media that allow for audio and visual advertisements.
- Billboards: Outdoor advertising that targets a wide audience.
- Internet Banners: Digital advertisements placed on websites to attract online users.
Advertising is designed to reach a large and diverse audience, making accuracy and compliance with regulatory standards essential.
Sales Literature
Sales literature, on the other hand, is more targeted and includes written or electronic communications directed at a specific audience. Examples include:
- Brochures and Pamphlets: Informative documents provided to potential clients.
- Research Reports: Detailed analyses of securities or market trends.
- Form Letters and Market Letters: Standardized communications sent to multiple recipients.
- Seminar Materials: Content distributed during educational or promotional events.
Sales literature is typically distributed to more than 25 retail investors and must adhere to strict regulatory guidelines to ensure that the information is accurate and not misleading.
Content Standards
Accuracy and Truthfulness
The cornerstone of advertising and sales literature is the requirement for accuracy and truthfulness. Communications must:
- Present Information Fairly and Accurately: All statements should be clear and factual.
- Avoid False, Exaggerated, or Misleading Statements: Any information that could mislead investors is strictly prohibited.
For example, if a firm advertises a mutual fund’s past performance, it must ensure that the data is accurate and not presented in a way that suggests future performance is guaranteed.
Balanced Discussions of Risks and Benefits
Communications must provide a balanced presentation of both the risks and benefits associated with an investment or strategy. This means:
- Equal Prominence of Risks and Benefits: Benefits cannot be emphasized without an equally prominent discussion of the associated risks.
- Clear Risk Disclosure: Investors should be made aware of potential downsides to ensure informed decision-making.
For instance, if an advertisement highlights the potential returns of a high-yield bond fund, it must also disclose the risks, such as interest rate risk and credit risk.
When including performance information, firms must adhere to specific standards:
- Past Performance Must Not Imply Future Results: Communications should not suggest that past performance guarantees future outcomes.
- Required Disclosures: Must include relevant details such as time periods, applicable fees, and conditions that affected performance.
For example, if a firm advertises a fund’s past 10-year return, it must disclose any fees that would impact an investor’s actual return.
Testimonials
Testimonials can be a powerful tool in advertising, but they must comply with regulatory standards:
- Disclosure of Compensation: If the testimonial giver is compensated, this must be disclosed.
- Conflict of Interest: Any potential conflicts of interest should be clearly stated.
For instance, if a client provides a testimonial about their positive experience with a brokerage firm, the firm must disclose if the client received any compensation for their statement.
Use of “Free”
The term “free” can only be used in advertising if there are no conditions or obligations attached. Misleading use of “free” can lead to regulatory penalties.
Prohibited Practices
Predictions and Projections
Firms are prohibited from making predictions or projections about investment performance. This includes:
- No Guaranteed Results: Communications must not imply guaranteed returns.
- Hypothetical Illustrations: Must be reasonable and accompanied by clear explanations.
For example, a firm cannot advertise that an investment will yield a specific return in the future.
Use of Professional Designations
Professional designations must be accurately represented:
- Accurate Representation of Qualifications: Firms must not exaggerate or mislead about an individual’s qualifications or expertise.
For instance, using a designation that implies a higher level of expertise than the individual possesses is prohibited.
Approval and Filing Requirements
Prior Principal Approval
Before using advertising and sales literature classified as retail communication, firms must obtain prior principal approval. This ensures that all communications comply with regulatory standards.
Filing with FINRA
Firms must file certain communications with FINRA:
- Pre-Use Filing: Required for new member firms or communications involving specific investment products, such as mutual funds with performance rankings.
- Post-Use Filing: Generally required within 10 business days of first use.
Recordkeeping
Firms must maintain copies of advertisements and sales literature, along with approval records, for at least three years. This ensures that firms can demonstrate compliance with regulatory requirements if audited.
Third-Party Materials
Firms are responsible for the content of materials produced by third parties if they distribute these materials. This means that even if a firm did not create the content, it must ensure that the information is accurate and compliant with regulatory standards.
Advertising and Sales Literature and the SIE Exam
As you prepare for the SIE Exam, focus on understanding the definitions and differences between advertising and sales literature. Recognize the content standards, prohibitions, and required disclosures. Familiarize yourself with approval, filing, and recordkeeping requirements to ensure a comprehensive understanding of this critical area.
Glossary
- Advertising: Mass market communications through public media channels.
- Sales Literature: Targeted communications to specific audiences distributed to more than 25 retail investors.
- Testimonials: Statements from clients or others about the firm’s products or services.
References
SIE Exam Practice Questions: Advertising and Sales Literature
### What is the primary purpose of advertising in the securities industry?
- [ ] To guarantee investment returns
- [ ] To provide detailed analysis of securities
- [x] To reach a broad audience with general information
- [ ] To offer personalized investment advice
> **Explanation:** Advertising aims to reach a broad audience with general information about products and services, not to guarantee returns or provide personalized advice.
### Which of the following is considered sales literature?
- [ ] A newspaper advertisement
- [ ] A television commercial
- [x] A research report sent to 30 retail investors
- [ ] An internet banner ad
> **Explanation:** Sales literature includes communications like research reports directed at specific audiences, such as more than 25 retail investors.
### What must be included when using performance data in advertising?
- [ ] Predictions of future performance
- [x] Disclosures of applicable fees and conditions
- [ ] Guarantees of similar future results
- [ ] Only positive performance metrics
> **Explanation:** Performance data must include disclosures of applicable fees and conditions that affected past performance, without implying future guarantees.
### What is prohibited in securities advertising?
- [ ] Balanced discussions of risks and benefits
- [ ] Use of testimonials with disclosures
- [x] Predictions of guaranteed investment returns
- [ ] Accurate representation of professional designations
> **Explanation:** Predictions of guaranteed investment returns are prohibited, as they can mislead investors about the certainty of future results.
### When can the term "free" be used in advertising?
- [ ] When there are minor conditions attached
- [ ] When it is part of a promotional offer
- [ ] When the service is only free for a trial period
- [x] When there are no conditions or obligations attached
> **Explanation:** The term "free" can only be used if there are no conditions or obligations, ensuring transparency and honesty in advertising.
### What is required before using retail communication?
- [x] Prior principal approval
- [ ] Filing with the SEC
- [ ] Approval from all investors
- [ ] No specific requirements
> **Explanation:** Prior principal approval is required to ensure that retail communications comply with regulatory standards before use.
### For how long must firms maintain records of advertisements?
- [ ] One year
- [ ] Two years
- [x] Three years
- [ ] Five years
> **Explanation:** Firms must maintain records of advertisements and sales literature for at least three years to comply with regulatory requirements.
### What must be disclosed when using testimonials in advertising?
- [ ] The exact words of the testimonial
- [ ] The number of testimonials received
- [x] Whether the testimonial giver is compensated
- [ ] The age of the testimonial giver
> **Explanation:** If the testimonial giver is compensated, this must be disclosed to inform potential conflicts of interest.
### What is a key characteristic of sales literature?
- [ ] It is distributed to a mass audience
- [x] It is targeted to a specific audience
- [ ] It does not require regulatory approval
- [ ] It can include predictions of future performance
> **Explanation:** Sales literature is targeted to a specific audience, typically more than 25 retail investors, and must adhere to regulatory standards.
### How should hypothetical illustrations be presented in advertising?
- [ ] As guaranteed outcomes
- [ ] Without any disclaimers
- [x] With clear explanations and reasonable assumptions
- [ ] As the primary focus of the advertisement
> **Explanation:** Hypothetical illustrations must be presented with clear explanations and reasonable assumptions to avoid misleading investors.
By mastering the principles of advertising and sales literature, you will be well-prepared to navigate the regulatory landscape of the securities industry and excel in the SIE Exam.