Chapter 5 — Communications with Customers & Prospects

Advertising authority

Administrator may require filing of advertisements or sales literature

Ad filing scope

Applies to BDs and IAs unless security or transaction is exempt

Non-exempt ads

Ads for non-exempt securities in non-exempt transactions may be required

Ad filing methods

Ads may be pre-approved, filed before use, concurrently, after use, or not at all

Mass mailings

Each letter is considered an offer into the state

Mass mailing jurisdiction

Admin has jurisdiction over mass mailings

Mailed confirmations

Mailing a trade confirmation does NOT create jurisdiction

IA advertisement definition

Any written communication to more than one person is an advertisement

IA ad requirements

IA ads are subject to content, filing, and recordkeeping rules

Testimonials

BDs and federal covered IAs may use testimonials

State IA testimonials

Rules for testimonials vary for state-registered IAs

Websites as advertising

IA websites are considered advertisements

Website recordkeeping

Old and new versions of websites must be retained

Website registration

Advertising alone does not trigger registration

Website follow-up

Follow-up advice or offers trigger registration or exemption

30-second bank ad

Banks may run ads up to 30 seconds without FDIC disclosures

FDIC disclosure rule

Longer ads must disclose securities are not FDIC insured

Verbal orders

Agents may accept verbal orders

Voicemail orders

Orders may NOT be accepted via voicemail

IA marketing rule

Gross performance may not be shown unless net performance is also shown

Net performance

Net returns must be equally prominent as gross returns

Static social media

Static content is advertising and subject to approval

Static content traits

Remains posted and visible to all users

Interactive social media

Allows comments, likes, or participation

Interactive monitoring

Interactive content must be monitored for compliance

Likes as testimonials

State regulators may treat “likes” as testimonials

Testimonial distinction

Likes are testimonials, not solicitations

Social media approval

Posting fees or performance requires prior approval

Retail communication

Social media posts are retail communications

Form ADV structure

Form ADV has Parts 1, 2, and 3

ADV Part 1

Regulatory information for administrators

ADV Part 2A

Brochure describing services, fees, and conflicts

ADV Part 2B

Brochure supplement on IAR background and discipline

ADV Part 3

Form CRS summarizing client relationship

BD Form CRS

BDs and agents must provide Form CRS at account opening

IA brochure

Narrative disclosure written in plain English

Investor brochure

IA disclosure document for clients and prospects

SSNs

IA brochures do NOT include client SSNs

IA custody

IAs with custody must file an audited balance sheet

Advisory fee standard

Advisory fees must be reasonable and not excessive

Fee changes

Changes in fees are NOT material events

Annual amendment

Fee changes filed in annual update within 90 days of EOFY

Access persons

Supervised persons with access to nonpublic info

Access person roles

Typically includes directors, officers, and partners

Margin initial deposit

Margin purchases require 50% initial deposit

Margin leverage

Returns are magnified 2x on gains and losses

Debit balance

Market changes do NOT affect debit balance

Account equity

Equity rises or falls with market movement

Maintenance call formula

(Original price × 50%) ÷ 0.75

Maintenance example

$60 stock triggers call at $40

Call option outlook

Buying calls is bullish

Put option outlook

Buying puts is bearish

Protective put

Used to hedge a long stock position

Covered call

Writing calls generates income on long stock

Straddle

Buying or selling call and put on same stock

Long straddle

Bet on volatility

Short straddle

Bet on stability

Collar

Buy put and write call to protect gains

Option intrinsic value

Difference between strike price and market value

Intrinsic value floor

Intrinsic value cannot be negative

Call intrinsic value

Market price minus strike price

Put intrinsic value

Strike price minus market price

At-the-money

No intrinsic value when strike equals market price