Unit 6 - Communication with Clients and Prospects

Guarantee Against Loss

"Guaranteeing a client that a specific result will be achieved (gain or no loss) with advice which will be rendered" as one of the prohibitions.

Typical Broker-Dealer Fees

-issuance of a stock certificate -transferring an account -wiring funds -margin account interest -account maintenance fees -safekeeping of funds/securities -late settlement fee -postage and handling TEST TOPIC ALERT Not included in the fee disclosure documents are: commissions, • markups and markdowns, and • advisory fees. Those disclosures are made in other documents, not the fee disclosure schedule.

Delivery Requirements for SEC-Registered Advisers

A firm brochure must be delivered to each client. It must be delivered even if the advisory agreement with the client is oral (under federal law, contracts may be oral or in writing; under state law, they must be in writing). The firm brochure must be given to each client before or at the time an advisory agreement is entered into with that client. Thereafter, each year, within 120 days of the end of the fiscal year, a free, updated brochure must be delivered to each client that either includes a summary of material changes or is accompanied by a summary of material changes, or alternatively, it would be permitted to deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. TAKE NOTE If there are no material changes, then nothing—not the brochure nor the brochure supplement, nor the summary—must be sent. Although, as we will see shortly, the brochure must be updated promptly when something becomes materially inaccurate, the only time that an interim amendment must be delivered to clients is when there is a disciplinary action. This interim amendment can be in the form of a document describing the material facts relating to the amended disciplinary event

Wrap Fee Program

A wrap fee program is a program under which a client is charged a specified fee, or fees, not based directly on transactions in a client's account, for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and for execution of client transactions. Any registered investment adviser compensated under a wrap fee program for sponsoring, organizing, or administering the program, or for selecting, or providing advice to clients regarding the selection of, other investment advisers in the program, does not use the normal brochure or Part 2A of the ADV. Instead, that adviser furnishes clients and prospective clients Part 2A, Appendix 1. If the entire advisory business is sponsoring wrap fee programs, the firm does not need to prepare a firm brochure separate from the wrap fee program brochure(s). In other words, if all the IA does is sponsor wrap fee programs, it must prepare and deliver a completed Part 2A, Appendix 1, but not a Part 2A. Some of the required disclosures required under Appendix 1 include: • a statement on the cover page of the wrap fee program brochure must state the following (or other clear and concise language conveying the same information) and identify the document as a wrap fee program brochure: This wrap fee program brochure provides information about the qualifications and business practices of [firm name]. If you have any questions about the contents of this brochure, please contact us at [telephone number and/or email address]. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Additional information about [firm name] also is available on the SEC's website at www.adviserinfo.sec.gov. • the amount of the wrap fee charged for the program; • whether the fees are negotiable; • the services provided under the program, including the types of portfolio management services; • a statement that the program may cost the client more or less than purchasing these services separately; • a description of the nature of any fees that the client may pay in addition to the wrap fee; • if the person recommending the wrap fee program to the client receives compensation as a result of the client's participation in the program, disclose this fact - explain, if applicable, that the amount of this compensation may be more than what the person would receive if the client participated in the firm's other programs or paid separately for investment advice, brokerage, and other services, • describe how portfolio managers are selected and reviewed, the basis for recommending or selecting portfolio managers for particular clients, and the criteria for replacing or recommending the replacement of portfolio managers for the program and for particular clients; and • disclose whether any of the firm's related persons act as a portfolio manager for a wrap fee program described in the wrap fee program brochure. TEST TOPIC ALERT It is generally agreed that "buy and hold" clients are not suitable for a wrap fee account because they don't do enough trading to benefit from the fact that commissions are included in the program fee.

Investment Advisor Brochure Rule

ADV Part 2 is a disclosure document that, under state and federal securities laws, is required to be given to clients. Part 2 consists of: 1. Part 2A 2. Part 2A Appendix 1 of Form ADV: Wrap Fee Program Brochure 3. Part 2B of Form ADV: Brochure Supplement • Narrative Format. Part 2 of Form ADV consists of a series of items that contain disclosure requirements for the firm's brochure and any required supplements. The items require narrative responses. If an item does not apply to their business, they must indicate that item is not applicable. There are 18 items on the ADV Part 2 (with a 19th one for state-registered advisers only). Remember, this is for clients to use to understand what the IA does so the information disclosed relates to the way the IA operates the business. Some of the items include - a description of the types of advisory services provided, - fees and compensation, - methods of analysis, investment strategies, and risk of loss, - disciplinary information, - how you select or recommend broker-dealers for client transactions, - custody practices, and - investment discretion. TAKE NOTE Only in the case of state-registered investment advisers is it required to file the brochure supplements. If you think about it, it makes sense because virtually all of the supervised persons described in the supplements are investment adviser representatives and they are always registered on a state level only, not with the SEC. The cover page of the brochure must state the name, business address, contact information, website address (if there is one), and the date of the brochure. Furthermore, the cover page of the brochure must state the following (or other clear and concise language conveying the same information) and identify the document as a brochure: This brochure provides information about the qualifications and business practices of [firm name]. If you have any questions about the contents of this brochure, please contact us at [telephone number and/or email address]. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Additional information about [firm name] also is available on the SEC's website at www.adviserinfo.sec.gov.

Disclosure of Capacity by Investment Advisers

Although recognizing the potential for these abuses, the regulators did not prohibit advisers entirely from engaging in all principal and agency transactions with clients. Rather, they chose to address these particular conflicts of interest by imposing the following disclosure and client consent requirements. • The client receives full written disclosure as to the capacity in which the adviser proposes to act. • Client consent is obtained. Consent, which can be oral or written, may be obtained before or after the execution of the trade, but both of these must be done prior to completion of the transaction. This is unlike a broker-dealer who, when acting as a principal in a trade with a customer or as the customer's agent, need only indicate that capacity on the trade confirmation; consent is not required. TAKE NOTE Completion of the transaction is considered to be the day the trade settles. Under current industry practice, that is the second business day after the trade is made. It is important to remember that: • an adviser may obtain client consent to a principal or agency transaction after execution, but must prior to settlement of the transaction; and • an adviser is not "acting as broker" within the meaning of the acts if the adviser receives no compensation (other than its advisory fee) for effecting a particular agency transaction between advisory clients. It is primarily the incentive to earn additional compensation that creates the adviser's conflict of interest when effecting an agency transaction between advisory clients. TEST TOPIC ALERT What happens if the investment adviser is also registered as a broker-dealer? The requirements just described do not apply to any transaction with a customer of a broker-dealer if such broker-dealer is not acting as an investment adviser in relation to such transaction. In other words, the transaction is not as a result of a recommendation from the adviser. TAKE NOTE What is really going on here? As stated previously, the function of an investment adviser is to be compensated for giving investment advice, not trading securities. Buying and selling securities is the job of a broker-dealer. This discussion deals with the odd case where an investment adviser wears two hats, as it were, and, in addition to giving advice, also trades the security.

Brochure supplement disclosing individual advisory personnel

As has been mentioned earlier, Part 2B is a brochure supplement that must contain certain information about "advisory personnel on whom clients rely for investment advice." The brochure supplement is also a narrative format in plain English and includes six required disclosure categories: • Cover page identifying the supervised person (or persons) covered by the supplement as well as the advisory firm • Educational background and business experience, including disclosing if the supervised person has no high school education, no formal education after high school, or no business background • Disciplinary information about material events within the past 10 years, although the SEC says that even if more than 10 years have passed since the date of the event, you must disclose the event if it is so serious that it remains currently material to a client's or prospective client's evaluation • Other business activities, including disclosing if the supervised person receives commissions, bonuses, or other compensation based on the sale of securities or other investment products, including as a broker-dealer or registered representative (agent), and including distribution or service (trail) fees from the sale of mutual funds • Additional compensation beyond that paid by the client (such as a sales award or other prize) • Supervision, including providing the name, title, and telephone number of the individual responsible for supervising the supervised person's advisory activities on behalf of the firm The investment adviser must prepare a brochure supplement covering the following supervised persons: • Any supervised person who formulates investment advice for a client and has direct client contact • Any supervised person who has discretionary authority over a client's assets, even if the supervised person has no direct client contact

Supervisory Actions to Be Taken by the Broker-Dealer or Investment Adviser

Before allowing associated persons to use social media for business purposes, a firm's policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content, between business and non-business communications, and whether the communication is a retail communication requiring pre-approval. A firm should consider requiring training in the use of social media before permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations. Any such training will reinforce personnel understanding of the firm's policies and procedures as applied to this continuously evolving technology and, in turn, limit the firm's compliance risks.

Fee arrangement

Example

Disclosure of Conflict of Interest

Examples: • offering a proprietary product, such as a house fund (a mutual fund where the underwriter or adviser is affiliated with the broker-dealer); • offering a limited partnership offering (DPP) where the sponsor is an affiliate of the broker-dealer; • program sponsors, such as investment companies or insurance companies, providing incentives or rewards to agents for selling the sponsors' products; • a securities professional having a financial interest in any security being recommended; • a broker-dealer going public and placing shares of its own stock into discretionary accounts; and • a broker-dealer publishing a favorable research report after underwriting the issuer's stock offering. * Shortly before releasing this edition, the SEC proposed Regulation Best Interest. If enacted, this rule will require a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations and is more stringent than the current suitability requirements. When and if this regulation becomes relevant to the exam, we will post the information to the Content Updates and it will be reflected in the online questions.

Summary

Form ADV facts: Part 1B is only filed by state-registered advisers; only state-registered advisers file Part 2 with their regulators—federal covered advisers must keep theirs on hand for inspection; Part 2A is the brochure which must be delivered to clients of all IAs within 120 days of the end of the fiscal year. A brochure supplement may be delivered instead showing the material changes. If there are no material changes, there is no need to send a brochure. The Part 1A annual amendment must be sent to the SEC or Administrator within 90 days after the end of the fiscal year. Many students get confused over the 90-day and 120-day requirements. This example should help:

Correcting Errors

If justified, a broker-dealer, but not an associated person of the firm, may correct a bona fide error. An associated person of a broker-dealer cannot do this because of the concern that any such payment may conceal individual misconduct.

Agency cross transaction

In an agency cross transaction, the adviser (or IAR acting on behalf of the firm) acts as agent for both its advisory client and the party on the other side of the trade. Both state and federal law will permit an adviser to engage in these transactions provided the advisory client executes a written consent prospectively (in advance) authorizing the investment adviser to effect agency cross transactions for such clients and the adviser discloses the following: These requirements do not relieve advisers of their duties to obtain best execution and best price for any transaction. In addition to the prior written consent, at or before the completion of each agency cross transaction, the client must be sent a written trade confirmation that includes: • The adviser will be receiving commissions from both sides of the trade. • There is a potential conflict of interest because of the division of loyalties to both sides. • On at least an annual basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions. • In a conspicuous manner, indicates that this arrangement may be terminated at any time. • No transaction is effected in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser. • a statement of the nature of the transaction; • the date, and if requested, the time of the transaction; and • the source and amount of any remuneration to be received by the IA (or IAR) in connection with the transaction. TAKE NOTE In the case of agency cross transactions, permission to engage in them must be obtained in writing before, (the law says, prospectively), the first transaction. In essence, the client is giving blanket authority to engage in this activity. In the case of acting as a principal or agent, as described previously, no blanket authorization is permitted and client consent (can be oral or written) must be obtained before completion of the transaction. 1. Fiduciary Investment Group (FIG), an investment adviser registered in 6 states, from time to time acts as a principal in trades recommended to advisory clients. Under the provisions of the Uniform Securities Act, A. FIG is engaging in an unlawful practice. B. FIG must receive consent of the clients and disclose its capacity no later than execution of the trade. C. FIG must receive consent of the clients and disclose its capacity no later than completion of the trade. D. FIG does not need consent because the trade was recommended to existing advisory clients. C

Summary of Notice and Consent

Investment advisers organized as a partnership must notify clients when there is a change involving a minority of the partners (e.g., five equal partners, one dies, one retires notification within a reasonable period). • Investment advisers organized as corporations do not have to notify clients of changes to shareholders. • Investment advisers may only assign client contracts with client permission. Assignment occurs when there is a change to a majority of the partners (in our previous example, if one more of the partners left, that would be 3 out of 5—a majority). In the case of a corporation, if a majority of the stock is pledged as collateral for a loan, then that is considered an assignment.

Misrepresenting a security's registration

It is prohibited to imply that registration of a security means that the Administrator (or any regulatory body) has approved of the issue. In fact, on the front page (or inside cover) of every prospectus is a statement called the disclaimer, which states that the security has not been approved or disapproved, and any representation to the contrary is a criminal offense

Misrepresenting a securities professionals registration

Once you are registered, what can you say about that? Can you say the Administrator has approved of you or your registration? Not at all! Representing that your registration implies any kind of approval of you or your qualifications is a prohibited practice. What you can state is that you are a registered agent of ABC Broker-Dealer, or you are a registered investment adviser representative of the XYZ Investment Adviser.

Highlighting

Somewhat related, and also prohibited, is highlighting or making any other marks on a prospectus to draw attention to key points

Investment Adviser Advertising

The SEC has defined the term advertisement to include any notice, circular, website, letter, or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, that offers: • any analysis, report, or publication concerning securities; • any graph, chart, formula, or other device to be used in making any determination concerning securities; or • any other investment advisory service with regard to securities In keeping with the changing times, an investment adviser's website is considered advertising. An investment adviser should not publish, circulate, or distribute any advertisement that is inconsistent with federal rules governing the use of advertisements. Included in the prohibition are advertisements: • containing untrue statements of material fact; • that refer directly or indirectly to any testimonial of any kind; • that represent that a chart, formula, or other device being offered can, by itself, be used to determine which securities are to be bought or sold; • that contain a statement that any analysis, report, or service will be furnished for free when that is not the case; • that refer to past specific recommendations of an adviser, which were or would have been profitable to any person. However, the Rule does not prohibit an advertisement which sets out or offers to furnish a list of all recommendations made by such investment adviser during the preceding year, provided that the advertisement or the list contains certain specific disclosures about the recommendations. Those disclosures would include stating that past performance is no guarantee of future results and explaining the effect of material market or economic conditions on the results advertised; • that advertise gross performance data (i.e., performance data that does not reflect the deduction of various fees, commissions, and expenses that a client would pay) unless the adviser also includes net performance information in an equally prominent manner; and • that represent or imply that the adviser has been sponsored, recommended, or approved, or that its abilities or qualifications have in any respect been passed upon by the SEC or the Administrator (the SEC has taken the position that the use of the initials R.I.A. following a name on printed materials would be misleading because, among other things, it suggests that the person to whom it refers has a level of professional competence, education, or other special training, when in fact there are no specific qualifications for becoming a registered investment adviser; the term registered investment adviser may be used, but not the initials). TEST TOPIC ALERT In the same manner that the use of the designation RIA is prohibited, investment adviser representatives may not use the initials IAR on business cards or any other literature. Yes, the exam will frequently use IAR, but you can't. What you can use on your business card are certain recognized professional or academic designations (assuming you've earned them). Examples would include CPA, CLU® , CFA® , CFP® , MBA, JD, or PhD An advertisement under state law is defined as a communication to more than one person. In addition, although the rules do not prohibit testimonials for broker-dealers, they are strictly forbidden for use by IAs. One thing to look for on the exam deals with investment advisers who advertise a charting or similar system—they must indicate that there are limitations and difficulties inherent in using such programs. TAKE NOTE In March 2014, the SEC published an interpretive release dealing with testimonials for investment advisers using social media. Included in that release is the statement that third-party use of the "like" feature on an investment adviser's social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client's experience with the adviser.

Delivery Requirements for State-registered Advisers

The brochure delivery requirements for state-registered advisers are essentially the same as that for covered advisers with one very important exception. Under the NASAA Model Rule on adviser brochures, advisers are required to deliver the brochure to the client at least 48 hours before entering into an advisory contract or at the time of entering into an advisory contract, if the advisory client has the right to terminate the contract without penalty within five business days after entering into the contract. Some advisers charge a startup or setup fee. Any new client who does not receive a brochure at least 48 hours before entering into an advisory agreement may terminate the agreement and be refunded the setup fee. However, it would not be considered a penalty for the adviser to make a pro rata charge for management services rendered during that five-business-day period. Exemptions From the Brochure Rule There are two exemptions under both state and federal law from the delivery requirements of the rule. • Contracts with an investment company registered under the Investment Company Act of 1940 (e.g., mutual funds) are exempted because those contracts are covered by that act. • Advisers entering into a contract providing solely for impersonal advisory services—that is, publishers of market letters—are exempt from the rule's initial delivery requirements. But, if the annual charge for this service is $500 or greater, delivery of the brochure must be offered with the same two timing options listed previously.

Solicitor's Brochure

The disclosure document must include: • the name of the solicitor, • the name of the investment adviser, and • the nature of the relationship between the solicitor and the investment adviser. In addition, this document must disclose the fact that the solicitor will receive compensation, the terms of the compensation arrangement, and indicate whether the client will pay a specific charge or a higher advisory fee because a solicitor recommended the investment adviser to the client. Why is it important to include the terms of the compensation arrangement? Here is what the SEC said about that:

Investment Advisory Contract

The primary relationship between a client and an investment adviser is evidenced by an investment advisory contract. There are three major differences between federal and state law. The USA prohibits entering into, extending, or renewing any advisory services, unless the contract is in writing, while federal law permits the contract to be written or oral. Another difference concerns the amount of the fees. The USA requires that fees be competitive while federal law only requires that they be reasonable in view of the services rendered. Finally, the NASAA Model Rule on performance-based compensation is a bit more stringent than that of the SEC as we will cover in the next unit. Under both acts, the contract must disclose: • the services to be provided, including custody if appropriate; • the term of the contract (contracts can be of any length, not necessarily annual, but all renewals under state law, just as with initial contracts, must be in writing); • the amount of the advisory fee or the formula for computing the fee; • the amount or manner of calculation of the amount of any prepaid fee to be returned in the event of contract termination; • whether the contract grants discretionary power to the adviser or its representatives; • that no assignment of the contract may be made by the adviser without the consent of the other party to the contract (the client); and • that, if the adviser is organized as a partnership, any change to a minority interest in the firm will be communicated to advisory clients within a reasonable period of time. A change to a majority of the partnership interests would be considered an assignment. TAKE NOTE It is necessary for you to understand the technical definition of assignment as used in the acts. When an advisory firm is sold, what do you think its major asset is? Furniture? Computers? No. It is the advisory contracts with clients and, legally, that sale means the contracts have been assigned to the new buyer. This does not mean that the clients have to approve of the sale; they only have to approve of letting the new owner(s) manage their money. They can decide to take their money elsewhere. Assignment also includes any direct or indirect transfer or pledge of an investment advisory contract by the adviser or of a controlling block of the adviser's outstanding voting securities by a stockholder of the adviser. If the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the partners or from the admission to the adviser of one or more partners who, after admission, will be only a minority interest in the business while a change to a majority would be considered an assignment. However, a reorganization or similar activity that does not result in a change of actual control or management of an investment adviser is not an assignment. TEST TOPIC ALERT If a broker-dealer forms a subsidiary to start an investment adviser, existing clients of the BD wishing to become clients of the IA must enter into a new contract for advisory services.

GENERAL DISCLOSURE REQUIREMENTS

To provide some assurance that the disclosure requirements of the acts will not be violated, the regulators have recommended that each of the adviser's advisory clients be given a written statement (the brochure described shortly) prepared by the adviser that makes all appropriate disclosures. Disclosure must be made to all current clients and to prospective clients regarding material disciplinary action. Required disclosure would include the following: • State or regulatory proceedings in which the adviser or a management person was found to have violated rules or statutes that led to the denial, suspension, or revocation of the firm's or the individual management person's registration • Court proceedings, such as a permanent or temporary injunction, against the firm or management person pertaining to an investment-related activity or any felony • SRO proceedings in which the adviser or management person caused the business to lose its registration or the firm or individual was barred, suspended, or expelled, or a fine in excess of $2,500 or a limitation was placed on the adviser or management person's activities Examples of failures to disclose material information to clients would include the following: • An adviser fails to disclose all fees that a client would pay in connection with the advisory contract, including how fees are charged and whether fees are negotiable. • An adviser fails to disclose its affiliation with a broker-dealer or other securities professionals or issuers. • If a state-registered adviser has discretionary authority or custody over a client's funds or securities, or requires prepayment of advisory fees of more than $500 from a client, six or more months in advance, the adviser fails to disclose a financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to those clients. In the case of a federal covered adviser, the dollar limit is more than $1,200. • An adviser may defraud its clients when it fails to use the average price paid when allocating securities to accounts participating in bunched trades and fails to adequately disclose its allocation policy. This practice violates the act if securities that were purchased at the lowest price or sold at the highest price are allocated to favored clients without adequate disclosure. • Any material legal action against the adviser must be disclosed to existing clients promptly. If the action occurred within the past 10 years, it must be disclosed by a state-registered adviser to prospective clients not less than 48 hours before entering into the contract, or no later than the time of entering into such contract if the client has the right to terminate the contract without penalty within five business days. In the case of a federal covered adviser, the 48-hour rule does not apply; disclosure is part of the brochure delivered no later than commencing the advisory agreement.

contra party

When acting in a principal capacity, the BD is the contra party to the trade. That is, they're on the other side of the trade of the client. When the client is buying a security, the broker-dealer is selling it out of inventory. In this case, the firms profit comes from a markup. If the client is selling as security and the broker-dealer purchases it for its inventory, the firm again is acting as a principal ( every trade has two principals - the buyer and seller) and, in this case, the profit comes from a markdown. When acting in an agency capacity, the firm is acting like any other broker or agent (real estate broker, insurance agent, or employment agent) in that they are simply putting the buyer and seller together. And, like all agents or brokers, they earn a commission. For the exam, it is important to know that broker-dealers must always indicate their capacity on the trade confirmation, sent no later than completion of the trade (settlement date). They will indicate if they acted as a broker (and always disclose the amount of commission) or if they acted as a principal (and, depending on the circumstances—not tested—may have to indicate the markup or markdown).

Issues Related to Agents

While much of the supervisory burden revolves around broker-dealer use of various social media tools, the nitty-gritty, day-to-day work relates to their agents. Some things to be aware of include the following. • In addition to computers in the office, personal devices (Blackberry, iPhone, Android, etc.) used to communicate with clients in a social media setting are covered by the rules. • Depending on the nature of the media, prior approval by a supervisory person may or may not be required. For example, an "unscripted" participation in an interactive electronic forum (such as Twitter) generally does not require prior supervisory approval. On the other hand, a LinkedIn page would probably require pre-approval. • Look out for the red flags. Certain activities, such as linking to third-party sites or receiving data feeds from outside sources could contain information that NASAA considers objectionable. • It is not the device or technology that determines if a piece delivered by a broker-dealer or any agent is subject to approval and recordkeeping. Rather, it should always be the content that determines if a piece delivered by an agent is subject to approval and recordkeeping. It is suggested that Twitter posts are easy to monitor, but sites such as Facebook are not, given what they've termed entanglement issues (i.e., the firm or its personnel is involved with the preparation of a third-party post) and the challenges they pose. Essentially, who is responsible for links to a third-party site, and who is responsible for third-party postings to an agent's Facebook page? Definitions Adoption is a social media term meaning that a securities firm links to a third-party site and indicates that it endorses the content on that site. Entangled is a social media term meaning that a securities firm has participated in the development of content on a third-party site to which it publishes links. TAKE NOTE Two related terms may appear on your exam. If a firm permits a third-party post on its website or it provides links to a third-party site, it will be considered that the firm is entangled with that post or link if the firm participates in the development or preparation of the content. A firm may be deemed to "adopt" a third-party post or content on a third-party site if the firm or its personnel explicitly or implicitly endorses or approves the post or the content. The key to entanglement is that your firm had a part in its authorship whereas adoption is the use of content or a link that is solely the creation of someone else—your firm is just using it. Specifically regarding Twitter, posts do not need supervisory pre-approval except for an agent's initial tweet. LinkedIn is considered different from Facebook, as it is more of a business networking site than a social site. With that, it is believed that information limited to your current position, past positions, and job responsibilities allow the site to be left unmonitored as the firm would have no responsibility regarding that content for any individual. However, if testimonials are used on the site ("Joe is the best stockbroker in the world," or "I've made a ton of money because of Sheila's recommendations"), or if recommendations are posted on the site, then that would make it a business site that the firm is now responsible for.

Guaranteed Security

is where a party other than the issuer guarantees the payment of principal and interest or dividend. The important thing about that guarantee is that there is no guarantee on the performance of the investment. That is, gains cannot be part of the guarantee.

Broker-Dealer Advertising

the policy generally would view the following activities fall outside the definition of recommendation: • A broker-dealer creates a website that is available to customers or groups of customers. The website has research pages or electronic libraries that contain research reports (which may include buy-sell recommendations from the author of the report), news, quotes, and charts that customers can obtain or request. • A broker-dealer has a search engine on its website that enables customers to sort through the data available about the performance of a broad range of stocks and mutual funds, company fundamentals, and industry sectors. The data is not limited to, and does not favor, securities in which the BD makes a market or has made a buy recommendation. Customers use and direct this tool on their own. Search results from this tool may rank securities using any criteria selected by the customer, and may display current news, quotes, and links to related sites. • A broker-dealer provides research tools on its website that allow customers to screen through a wide universe of securities (e.g., all exchange-listed and Nasdaq securities) or an externally recognized group of securities (e.g., certain indexes) and to request lists of securities that meet broad, objective criteria (e.g., all companies in a certain sector with 25% annual earnings growth). The BD does not impose limits on the manner in which the research tool searches through a wide universe of securities, nor does it control the generation of the list to favor certain securities. For instance, the BD does not limit the universe of securities to those in which it makes a market or for which it has made a buy recommendation. Similarly, the algorithms for these tools are not programmed to produce lists of securities based on subjective factors that the BD has created or developed, nor do the algorithms, for example, produce lists that favor those securities in which the BD makes a market or for which the BD has made a buy recommendation. • A broker-dealer allows customers to subscribe to emails or other electronic communications that alert customers to news affecting the securities in the customer's portfolio or on the customer's watch list. Such news might include price changes, notice of pre-scheduled events (such as an imminent bond maturation), or generalized information. The customer selects the scope of the information that the firm will send to him. On the other hand, the regulators generally would view the following communications as falling within the definition of recommendation: • A broker-dealer sends a customer-specific electronic communication (e.g., an email or pop-up screen) to a targeted customer or targeted group of customers, encouraging the particular customer(s) to purchase a security. • A broker-dealer sends its customers an email stating that customers should be invested in stocks from a particular sector (such as technology) and urges customers to purchase one or more stocks from a list with buy recommendations. • A broker-dealer provides a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information such as age, financial condition, and risk tolerance. The BD, in this instance, then sends the customer a list of specific securities the customer could buy or sell to meet the investment goal the customer has indicated. • A broker-dealer uses data-mining technology (the electronic collection of information on website users) to analyze a customer's financial or online activity—whether or not it is known by the customer—and then, based on those observations, sends (or "pushes") specific investment suggestions that the customer purchase or sell a security.