Advertising and Sales Literature

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.

Performance Information

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

• FINRA Rule 2210: Communications with the Public
• SEC Guidance on Advertising: Advertising by Investment Advisers
• FINRA Regulatory Notices: Communication with the Public—Use of Rankings

SIE Exam Practice Questions: Advertising and Sales Literature

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.