How to Create Marketing and Advertising That’s Compliance Friendly

February 10, 2014 By Signator Investors


We’ve all heard this timeless guidance: “If it sounds too good to be true, it probably is.” It’s great advice for anybody and can come in handy with clients. It can also be great guidance for creating advertisements and other communications that are both compelling and compliant. The trick is to recognize the point at which “good” becomes “too good.”

Make no mistake, the consequences for violating rules and regulations about communications with the public can be severe. In May 2013 alone, FINRA fined and suspended three individuals for separate advertising violations. Ralph William Hicks, Jr. of New Mexico was fined $10,000 and suspended from association with any FINRA member in any capacity for 20 business days for disseminating web videos, seminar invitations, workshops, and letters that contained exaggerated, unwarranted, or misleading statements. He failed to describe risks and limitations of the investment and included incomplete comparisons and client testimonials.

In a separate case, Scott Lawrence Olson of Florida was censured, fined $10,000, suspended from association with any FINRA member firm for 20 business days, and required for one year to file all advertisements and sales literature with FINRA’s Advertising Regulation Department and to await approval before using that material. Olson marketed annuities, life insurance, and investment services to the public through the use of advertisements that contained misleading, unwarranted, unbalanced, and promissory statements; failed to identify the products or services he was using to implement his investment strategies; and failed to obtain pre-approval for some of the advertisements.

Finally, Michael Craig Perlmuter of Ohio was fined $40,000 and suspended for eight months for making material misrepresentations about the safety of an investment to clients. None of his communications provided a balanced discussion, and instead addressed only positive attributes of the investment and did not include an explanation of the risks involved.

These examples illustrate the vital importance of creating compliant communications. FINRA rules require that all communications with the public must:

  • Be based on principles of fair dealing and not omit material information, particularly information about risk;
  • Not make exaggerated, unwarranted, or misleading claims; and
  • Give the investor a sound basis for evaluating the facts in regard to any particular security, type of security, industry, or service.

What does these mean for you when creating a communication? Here are a few key points to keep in mind:

Be Fair and Professional

When creating communications, make sure they are professional in tone and do not disparage another representative, company, or product. A communication can highlight the benefits and features of what you are selling without calling into question the quality or integrity of the other person or company. A statement such as “I think that we have an opportunity to evaluate some alternatives that may be more aligned with your current financial circumstances, needs, and sensitivity to fees” is more appropriate than “ABC Group is notorious for putting clients into their proprietary product regardless of its high fees and poor performance. If you work with me, I’ll be sure to find you only the most reputable companies with which to put your money.”

Find Balance

Communications that discuss the benefits of a product or service must also include a discussion of the potential drawbacks. An essential test in this regard is the balanced treatment of risks and potential benefits. All of the products and services we offer clients have risks and costs associated with them, and these need to be clearly communicated and be as prominent as the features and benefits. For example, a communication that is intended to inform prospects about a Guaranteed Minimum Income Benefit, must also explain, among other things, that it is a rider associated with a variable annuity, available for an extra fee, and explain the costs, limitations, and long-term nature of the product. A well-balanced communication will help the client better understand the decision they are making and can help reduce confusion down the road.

A communication must be able to stand alone and contain all material information. Writing a communication that highlights the benefits of a product and referring the client to a prospectus or other document to explain the risks and costs is not sufficient. Demonstrate your thorough knowledge of a product and concern for a client by including all pertinent information in any communication you create.

Keep It Clear

Communications must be clear. It is tempting to impress prospects and clients with extravagant vocabulary, complex charts, and exciting announcements. But this can lead to communications that are both confusing and untrue. In trying to create a communication with pizzazz, it is easy for the claims to become exaggerated and unwarranted.

Descriptions of a product or its features must state facts and avoid absolute and superlative words. Words and phrases like “always,” “best,” “unique,” “never,” “maximum,” and “no risk” may only be used if they are factually true. For example, the statement “ABC Financial is the premier financial services company in the country” should be revised or otherwise substantiated with a source and date reference.

Use plain English when communicating with clients and prospects. Avoid jargon and remember that a complex or overly technical explanation may be more confusing than too little information.

Statements alluding to a particular product or service can cause a misunderstanding. To the extent that a communication concerns a product, feature, or service, the specific product or service must be conspicuously identified. For example, a variable annuity must always be identified as a variable annuity and not as “a mutual fund IRA with insurance protection and a free medical exam.” Clearly identifying the product and service will help avoid confusion and give the client a better understanding of what they are actually purchasing.

Once you have created a communication, take a moment to evaluate it. Overall, does the piece leave an unsophisticated client with the impression that you can provide more than what you are licensed and registered to offer? Does the communication clearly identify the product or service you are trying to promote? Is the piece written in plain English so it can be easily understood by the audience? Are both the benefits and drawbacks of a product and service clearly explained?

Clear communications not only help you avoid regulatory action, they help the investor better understand what they are purchasing and why, which can help reduce client turnover and client complaints. A communication that “sounds too good to be true” generally is, and will lead to trouble down the road.

Rebecca Babbitt is Senior Advertising Compliance Analyst at Signator Investors, Inc.


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