An investment adviser's advertisement features a testimonial from a satisfied client describing exceptional investment results, with no additional context provided. Under standards governing adviser advertising, the most significant compliance concern is:

The testimonial may create a misleading impression of typical results and generally requires clear disclosures (e.g., that the experience may not be representative, and any compensation involved) to avoid being false or misleading

An investment salesperson claims that an investment doubled in a year without disclosing that the observed period was selected from a much longer history of losses. What is the concern?

Misleading performance presentation through selective time-period disclosure and omission of the losing years

An agent posts on her personal social media account a client's unsolicited comment stating, 'Thanks to [Agent], my portfolio has doubled in two years — best decision I ever made!' and encourages followers to contact her for similar results. Under the Uniform Securities Act's prohibitions on testimonials and communications with the public, this post is:

Generally prohibited/restricted — using a client testimonial referencing specific investment results to solicit new business is an unethical practice, and implying similar results are achievable for new clients compounds the violation

A mutual fund advertising brochure contains only factually accurate statements about the fund's historical returns and strategy but omits any mention of the fund's sales load and liquidity restrictions. Is this brochure permitted under the antifraud provisions governing advertising?

Prohibited, because omitting material facts necessary to make a communication not misleading is itself a violation, even where all statements made are literally true

Series 63 Prohibited Communications Practice Questions

Question 1
An investment adviser's advertisement features a testimonial from a satisfied client describing exceptional investment results, with no additional context provided. Under standards governing adviser advertising, the most significant compliance concern is:
- A. Testimonials are prohibited in adviser advertising under current standards, so any use of a client testimonial is a violation whether or not disclosures are made
- B. There is no concern, because the testimonial reflects a real client's genuine experience and a truthful statement cannot be misleading under the advertising standards
- C. Testimonials are not regulated as long as the client's name is withheld, since anonymous statements fall outside the advertising standards
- D. The testimonial may create a misleading impression of typical results and generally requires clear disclosures (e.g., that the experience may not be representative, and any compensation involved) to avoid being false or misleading
Show answer and explanation
Correct answer: D. The testimonial may create a misleading impression of typical results and generally requires clear disclosures (e.g., that the experience may not be representative, and any compensation involved) to avoid being false or misleading
Adviser advertising rules permit testimonials under specific conditions (disclosures about non-representativeness, any compensation, and other required elements), rather than banning them outright. The compliance risk with an undisclosed, uncontextualized testimonial is that it implies typical or guaranteed results, which is misleading even if the client's statement is factually true.
- A. Incorrect -- a flat prohibition overstates current advertising standards, which permit testimonials with proper disclosures.
- B. Incorrect -- genuineness of the testimonial doesn't eliminate the risk that it implies atypical results are typical or guaranteed; a true statement can still mislead without context.
- C. Incorrect -- withholding the client's name doesn't take the testimonial outside the advertising standards or address the misleading-impression concern.
- D. Correct -- identifies the real risk (misleading impression of typical results) and the disclosure-based remedy.
- Source: NASAA Model Rule 102(a)(4)-1 (Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisers)
Question 2
An investment salesperson claims that an investment doubled in a year without disclosing that the observed period was selected from a much longer history of losses. What is the concern?
- A. Securities advertising is exempt from antifraud standards when it is directed to the general public
- B. A numerically accurate one-year return is acceptable because the period reported is clearly identified
- C. The claim becomes acceptable if a general risk legend appears in smaller type at the bottom of the page
- D. Misleading performance presentation through selective time-period disclosure and omission of the losing years
Show answer and explanation
Correct answer: D. Misleading performance presentation through selective time-period disclosure and omission of the losing years
Showing a single best year while omitting a much longer record of losses creates a misleading impression even if the figure is accurate. Material omissions about performance violate antifraud and communications standards.
- A. Advertising is subject to antifraud standards whatever the audience.
- B. An accurate figure can still mislead when the period was chosen to hide the broader record.
- C. A generic risk legend does not cure the omission of the losing years.
- D. Cherry-picking the time period and omitting the losses distorts the picture investors receive.
- Source: SEC Rule 206(4)-1 (investment adviser marketing)
- Source: NASAA Model Rule 102(a)(4)-1 (Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisers)
Question 3
An agent posts on her personal social media account a client's unsolicited comment stating, 'Thanks to [Agent], my portfolio has doubled in two years — best decision I ever made!' and encourages followers to contact her for similar results. Under the Uniform Securities Act's prohibitions on testimonials and communications with the public, this post is:
- A. Generally prohibited/restricted — using a client testimonial referencing specific investment results to solicit new business is an unethical practice, and implying similar results are achievable for new clients compounds the violation
- B. Permissible because the client volunteered the comment and the agent did not write it herself; an unsolicited testimonial is treated as the client's own speech rather than the agent's communication
- C. Permissible as long as the agent adds a general disclaimer such as 'results may vary' anywhere on her profile, since a disclaimer cures any misleading impression created by the testimonial
- D. A violation if the agent paid or otherwise compensated the client for the testimonial; an unsolicited testimonial the agent did not pay for and merely reposted is not a prohibited communication
Show answer and explanation
Correct answer: A. Generally prohibited/restricted — using a client testimonial referencing specific investment results to solicit new business is an unethical practice, and implying similar results are achievable for new clients compounds the violation
Testimonials that reference or imply investment performance results are treated as misleading communications, particularly because they suggest atypical or unrepresentative outcomes are the norm and imply future clients will achieve similar results. It does not matter that the client volunteered the comment unprompted — the agent's choice to post and promote it is the affirmative act at issue. A generic disclaimer does not cure a specific-results testimonial.
- A. Correct — using a specific-results testimonial to solicit business, with an implication of repeatable results, is prohibited/unethical.
- B. Incorrect — the agent's choice to post and promote the testimonial is the act at issue; it isn't treated as the client's speech just because the client volunteered it.
- C. Incorrect — a generic disclaimer doesn't neutralize a specific-performance testimonial or the implication of repeatable results.
- D. Incorrect — payment to the client isn't a required element, and reposting an unpaid testimonial to solicit business can still be a prohibited communication.
- Source: NASAA Model Rule 102(a)(4)-1 (Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisers)
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Question 4
A mutual fund advertising brochure contains only factually accurate statements about the fund's historical returns and strategy but omits any mention of the fund's sales load and liquidity restrictions. Is this brochure permitted under the antifraud provisions governing advertising?
- A. Permitted, because every statement made in the brochure is factually true and the antifraud provisions reach affirmative misstatements, not omissions
- B. Prohibited when a client can prove reliance on the brochure and resulting damages, as in a common-law fraud action; absent such proof the Administrator generally may not act
- C. Permitted, as long as the fund's full prospectus is available online, because information disclosed elsewhere cures any omission in advertising material
- D. Prohibited, because omitting material facts necessary to make a communication not misleading is itself a violation, even where all statements made are literally true
Show answer and explanation
Correct answer: D. Prohibited, because omitting material facts necessary to make a communication not misleading is itself a violation, even where all statements made are literally true
A communication can be misleading — and thus prohibited — even if every individual statement is literally true, if it omits material facts (like sales loads or liquidity restrictions) necessary to make the overall impression not misleading. This omission-based standard is central to anti-fraud provisions covering advertising and sales literature.
- A. Literal truth of each statement doesn't save the brochure; the antifraud rules reach misleading omissions of material facts, not only affirmative misstatements.
- B. Antifraud violations for misleading communications don't depend on a client proving reliance and damages as a common-law fraud claim would, and the Administrator can act without such proof.
- C. A prospectus being available elsewhere doesn't cure a misleading advertisement; the ad itself must not omit material facts.
- D. Correct. Omitting material facts (like the sales load and liquidity restrictions) necessary to make the communication not misleading is itself a violation, regardless of whether every included statement is true.
- Source: SEC Rule 206(4)-1 (investment adviser marketing)

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