Module 5: Communication with Customers and Prospects

• Topic 01

  Disclosure Requirements

  130 questions
• Topic 02

  Advertising and Sales Literature

  130 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What is an 'unwarranted claim' in the context of advertising?

   • A
     An unwarranted claim is limited to claims about registration status or regulatory endorsement.
   • B
     An unwarranted claim is a claim made without the prior approval of the state administrator.
   • C
     An unwarranted claim is any statement about investment performance, regardless of how well-supported.
   • D
     An unwarranted claim is an assertion in advertising that is not supported by objective evidence or a reasonable basis — for example, claiming to be 'the best investment firm in the state' without supporting data.
     Correct answer
   Explanation

   Unwarranted claims include puffery that implies substantive superiority without any factual support, unsupported performance claims, and other assertions that mislead investors about the nature of the investment or the firm. Advertising must have a reasonable factual basis; claims without supporting evidence violate the fair-and-balanced standard.

2. Can a firm's website be considered a form of continuous advertising?

   • A
     Yes, but only the homepage needs to comply; individual pages of a website are not regulated.
   • B
     No — websites are exempt from advertising standards because they are interactive rather than one-way communications.
   • C
     Yes — a firm's website is a continuous communication with the public and must comply with advertising content standards on an ongoing basis.
     Correct answer
   • D
     No — a website is a static information tool and is not considered advertising under securities law.
   Explanation

   A broker-dealer's or investment adviser's public-facing website constitutes continuous advertising directed at the investing public. All pages that include investment-related content must comply with the fair-and-balanced standard. Websites must be periodically reviewed and updated to ensure continued compliance, particularly if market conditions change and projected returns become outdated.

3. Must an advertisement disclose if the person providing a testimonial was compensated?

   • A
     No — compensation disclosure is only required when the testimonial is from a celebrity.
   • B
     No — compensation is private information and need not be disclosed.
   • C
     Yes — compensation for a testimonial is a material fact that must be disclosed so investors can assess the testimonial's objectivity.
     Correct answer
   • D
     Yes, but only if the compensation exceeds $500.
   Explanation

   Compensation creates a potential conflict of interest that is material to an investor's evaluation of a testimonial. Whether the person received any form of compensation — cash, free services, or other benefits — must be disclosed. Failing to disclose compensation when it was received renders the testimonial misleading.