A federal covered investment adviser's advertisement for its large-cap composite shows gross returns for the 1-, 5- and 10-year periods ended December 31, 2025, in large bold type on the front page. Net returns for the same periods, calculated with the same method, appear only in a footnote on the back page in smaller type. The advertisement will be distributed in August 2026 and does not concern a private fund.
Under the applicable federal advertising rules, which statement is correct? Answer: The advertisement violates the rule because net returns must be shown at least as prominently as gross returns.
SEC Rule 206(4)-1 (the marketing rule) permits gross performance in an advertisement only if net performance is also shown with at least equal prominence, for the same time period, and calculated with the same methodology. Outside private funds, it also requires 1-, 5- and 10-year periods ending no earlier than the most recent calendar year-end. Here the periods and method match and the periods end December 31, 2025, but the net returns sit in a back-page footnote in smaller type while the gross returns are in large bold type on the front page, so the prominence condition fails. The statement that the footnote is enough treats the mere presence of net returns as sufficient and ignores prominence. The statement that the period-ending date is the only condition ignores the net-prominence condition. The statement that gross performance can never be shown is wrong because the rule allows it alongside net performance of equal prominence.
A federal covered investment adviser displays on its website a "Top 10% Adviser" award badge from a financial magazine. The magazine ranked advisers based on assets under management reported by the advisers themselves. The adviser paid the magazine $2,500 to be considered for the ranking and to display the badge. The badge names the magazine and shows the date of the award, but neither the badge nor the magazine's published ranking states how much the adviser paid or the time period the ranking covers.
Under the applicable federal advertising rules, which of the following statements about the adviser's use of the badge is correct? Answer: The adviser must disclose the compensation paid and the period covered by the ranking and have a reasonable basis to believe the ranking is unbiased.
SEC Rule 206(4)-1 permits third-party ratings only if the adviser has a reasonable basis to believe the rating is unbiased and the advertisement discloses, or the adviser reasonably believes the rating discloses, the date and period on which the rating is based, the rater, and any compensation paid. Here the badge names the magazine and shows the date, but neither the badge nor the magazine's published ranking states the fee paid or the time period the ranking covers, and the payment was made in connection with the rating. The adviser must add those disclosures and have the required reasonable basis. The statement that the payment was only for the right to use the badge is wrong because compensation paid in connection with a rating must be disclosed regardless of the payment's purpose. The net-performance option confuses third-party-rating requirements with the performance-presentation requirements of the rule. The statement that ratings are prohibited is wrong because third-party ratings are permitted with the required conditions.
- A federal covered investment adviser's advertisement presents a gross performance return of 12.4% for a portfolio over the past five years. Which of the following statements is true regarding this presentation?
Answer: The advertisement must present net performance at least as prominently as the gross return, over the same period and using the same methodology.
Governing authority: SEC Rule 206(4)-1. When an advertisement shows a gross performance figure, it must also show net performance with at least equal prominence, over the same period and using the same methodology. The statement that a fee schedule disclosed elsewhere in the document suffices is wrong: the net performance figure itself must be shown with at least equal prominence. The statement that one-, five-, and ten-year returns are required for a portfolio only five years old is wrong: the rule uses the portfolio's life when it is shorter than ten years. The statement that gross-only presentation is permitted to accredited investors is wrong: the net-performance requirement applies without regard to the audience's accredited status.
An investment adviser representative of a state-registered adviser sends a personalized e-mail to a prospective client stating: "Our firm has not had a losing account in 15 years. If your account ever declines in value, I will personally reimburse you for the loss."
Under the applicable state rules governing communications with clients and prospects, which statement is correct? Answer: The e-mail is unlawful because the IAR has guaranteed the client against loss, a practice prohibited in all client communications.
The NASAA Unethical Business Practices of Investment Advisers Model Rule prohibits guaranteeing a client against loss, and the prohibition applies to all communications, including correspondence addressed to a single person. The IAR's promise to reimburse the client for any decline is a guarantee against loss. The option finding the e-mail permissible because it is addressed to one person misstates the rule's scope; the guarantee prohibition is not limited to advertising. The option relying on the IAR's personal promise is wrong because the IAR's own conduct violates the rule even if the firm is not bound. The option requiring reliance and a loss is wrong; neither is an element of the violation.
A federal covered investment adviser received an unsolicited letter from a current client praising the firm's investment process. The client received no compensation. The adviser wants to include the letter in a brochure for prospective clients, with the client's permission.
Under the applicable federal advertising rules, which statement is correct? Answer: The adviser may use the letter with disclosure of the client's relationship and material conflicts, and no written agreement is required.
SEC Rule 206(4)-1 governs advertising by federal covered advisers. Testimonials are permitted if the adviser clearly and prominently discloses the person's client status, any compensation paid, and material conflicts. Because the client received no compensation, the testimonial is unpaid, and the written-agreement and reasonable-basis conditions do not apply. The adviser may therefore use the letter with the required disclosures and without a written agreement. The option requiring a written agreement before use misstates the rule, which conditions the written agreement on compensation paid to the promoter. The option requiring disclosure that no compensation was paid is wrong because only compensation actually paid must be disclosed; there is no duty to disclose that none was paid. The option stating that client testimonials are categorically prohibited misstates the rule, which permits testimonials with the required disclosures.
- A federal covered investment adviser's advertisement includes a third-party rating of the adviser based on a survey of the adviser's clients. Which of the following statements is true regarding this advertisement?
Answer: The adviser must have a reasonable basis for believing the survey is unbiased, and must disclose the rating date and period, the rater, and any compensation paid or received.
Governing authority: SEC Rule 206(4)-1. To use a third-party rating, a federal covered adviser must have a reasonable basis for believing the survey or questionnaire behind the rating is unbiased, and must disclose the rating date and period, the identity of the rater, and any compensation paid or received. The statement that compensated ratings are prohibited is wrong: compensation must be disclosed, not eliminated. The statement that one-, five-, and ten-year performance returns must accompany any rating is wrong: those presentation periods govern the adviser's own gross and net performance advertisements, not the use of a third-party rating. The statement that the adviser must disclose payment but not the rater's identity or the rating period is wrong: the rule requires disclosure of the rater and the period as well.
An adviser registered with the SEC under the Investment Advisers Act of 1940 plans to distribute an advertisement in July 2026. The advertisement states: "Composite returns for the 1-, 5-, and 10-year periods ended December 31, 2024." For each period, the gross return is shown with the net return for the same period displayed directly below it in the same type size.
Which of the following actions must the adviser take before distributing the advertisement? Answer: Revise the performance information so that the 1-, 5-, and 10-year periods end no earlier than the most recent calendar year-end.
Under the SEC Marketing Rule (Rule 206(4)-1), an advertisement that presents performance must include the 1-, 5-, and 10-year periods (or the portfolio's life, if shorter) ending no earlier than the most recent calendar year-end, and gross performance must be accompanied by net performance with at least equal prominence for the same periods. Because the advertisement will be distributed in July 2026, the most recent calendar year-end is December 31, 2025; the advertised periods ended December 31, 2024, are stale, so the adviser must revise the performance information. The net returns are shown in the same type size directly below the gross returns, so the prominence condition is met; distributing the advertisement as written overlooks the stale period-end dates. Gross performance is not prohibited for retail investors when net performance appears with at least equal prominence. The claim that the adviser must add a statement that the SEC has not approved or reviewed the performance is wrong: the rule prohibits stating or implying approval, but it imposes no such disclaimer requirement.
- A state-registered investment adviser with a December 31 fiscal year first used an advertisement on March 1, 2026, and last used it on November 15, 2026. Under the NASAA recordkeeping rules, until what point must the adviser retain this advertisement, and where must it be maintained?
Answer: Until December 31, 2031, with the first two years maintained at the adviser's principal office.
Governing authority: NASAA recordkeeping rules applicable to state-registered investment advisers. An adviser must keep advertising and sales-literature records for five years from the end of the fiscal year of the last entry, with the first two years maintained in the adviser's principal office. Here, the last use occurred in fiscal year 2026, so retention runs through December 31, 2031. The December 31, 2029 option applies the three-year retention period used for most broker-dealer records under SEA Rule 17a-4 instead of the adviser's five-year rule, and is wrong. The November 15, 2032 option applies the six-year broker-dealer blotter and ledger period, measured from the date of last use, and is wrong. The December 31, 2028 option confuses the two-year principal-office sub-period with the full retention period, and is wrong.
- Which of the following statements is true regarding advertising by a state-registered investment adviser under the Uniform Securities Act?
Answer: An advertisement may not contain any statement or implication that the state Administrator has approved, reviewed, or endorsed the adviser's services or performance.
Governing authority: NASAA Unethical Business Practices of Investment Advisers Model Rule (advertising provisions) and Uniform Securities Act § 405. An advertisement may not contain any statement or implication that the Administrator has approved, reviewed, or endorsed the adviser's services or performance, and § 405 separately makes it unlawful to represent that registration or any filing means the Administrator found the filings accurate or approved their merits. The statement that an adviser may guarantee a minimum return if risk is disclosed is wrong: guarantees of performance are prohibited regardless of accompanying disclosure. The statement that filing without objection for 30 days deems the advertisement approved is wrong: no such deemed approval exists, and the Act prohibits implying approval from the mere fact of a filing. The statement that written Administrator approval exempts an advertisement from the antifraud provisions is wrong: the antifraud provisions apply to every offer, sale, and purchase and to adviser communications, and no Administrator action can remove them.
- Under SEC rules, which of the following statements regarding the time periods for which a federal covered investment adviser's advertisement must show the performance of a separately managed account strategy is true?
Answer: Returns for 1-, 5- and 10-year periods ending no earlier than the latest calendar year-end are required, or the strategy's life for a missing period.
SEC Rule 206(4)-1 (the SEC Marketing Rule). An advertisement of performance for any portfolio other than a private fund must show results for 1-, 5- and 10-year periods, each ending on a date no earlier than the most recent calendar year-end, and where the portfolio has not existed for one of those periods, the life of the portfolio is shown in its place. The statement that a strategy with less than 10 years of history may not advertise performance is wrong because the portfolio's life substitutes for the missing period. The statement letting each period end on any disclosed date is wrong because the periods must end no earlier than the latest calendar year-end. The statement that the period requirement applies only to private funds reverses the rule: private funds are the exception, and a separately managed account strategy is covered.
An adviser registered with the SEC under the Investment Advisers Act of 1940 is preparing a promotional brochure for prospective clients. The brochure includes a statement from a current client: 'This adviser has managed my portfolio successfully for years.' The adviser paid the client $1,200 during the past 12 months to make the statement. Directly next to the statement, the brochure clearly discloses that the client is a current client and was paid $1,200 for the statement. The adviser has documented a reasonable basis for believing the statement is accurate. No written agreement with the client regarding the statement was signed.
Under federal securities law, which of the following is correct about the brochure? Answer: The brochure violates the rule because the $1,200 payment exceeded the de minimis amount and no written agreement with the client was obtained.
Under the SEC Marketing Rule (Rule 206(4)-1), a compensated testimonial requires a written agreement with the promoter unless the compensation is de minimis ($1,000 or less during the preceding 12 months). The client was paid $1,200 during the past 12 months, so the de minimis exception does not apply; because no written agreement was obtained, the brochure violates the rule. The disclosure and reasonable-basis facts are present, but they do not satisfy the separate written-agreement condition. The claim that $1,200 is de minimis misapplies the $1,000 threshold. The claim that any compensated client testimonial is categorically prohibited misstates the current rule; compensated testimonials are permitted when the required conditions, including a written agreement, are satisfied.
A state-registered investment adviser's website states: "Our firm's registration with the state Administrator confirms that our investment advice meets the highest standards of the securities industry."
Under the Uniform Securities Act, which of the following statements is correct? Answer: The statement is unlawful because it implies the Administrator approved the adviser's advice, and registration is not an approval.
Uniform Securities Act § 405 provides that registration does not constitute a finding by the Administrator that any filing is true or that the adviser is approved, and it is unlawful to represent otherwise. The website statement goes beyond a factual registration claim by saying that registration "confirms" that the adviser's advice meets the highest standards, which implies official approval of the adviser's merits. The option treating the statement as permissible because the adviser is registered, even though it may state the fact of registration in advertising, misses the distinction between a factual registration claim and an implied endorsement. The option citing the Administrator's power to deny registration is wrong because reviewing applications and denying unqualified applicants does not make acceptance an approval of the adviser's advice. The option stating that registration status may be disclosed only in Form ADV is wrong; advisers may disclose their registration status in advertising, but may not imply approval.
- A federal covered investment adviser includes in an advertisement an unsolicited written statement from a current advisory client praising the adviser's services. The client received no payment for the statement. Which of the following statements is true?
Answer: The adviser must disclose prominently that the client is a current client, but no written agreement is required because the client received no compensation for the statement.
Governing authority: SEC Rule 206(4)-1 (the Marketing Rule). Testimonials and endorsements are permitted for federal covered advisers, but the advertisement must disclose, clearly and prominently, the person's relationship to the adviser (here, that the person is a current client), any compensation actually paid, and material conflicts. Because the client was unpaid, the adviser need not obtain a written agreement; the rule exempts unpaid testimonials from the written-agreement and reasonable-basis conditions, and the adviser has no duty to state that no compensation was paid. The statement that a current client may not provide a testimonial is wrong: the rule permits client testimonials with the required disclosures. The statement that compensation must be disclosed only above $1,000 in 12 months is wrong: the $1,000 de minimis applies to the written-agreement condition for compensated promoters, not to the disclosure obligation for compensation actually paid. The statement that a written agreement and SEC approval are required is wrong on both counts: unpaid testimonials need no written agreement, and the rule has no pre-publication approval mechanism.
A state-registered investment adviser's print advertisement states: "Independent research confirms that our equity strategy is the best-performing strategy of its kind." The adviser has never seen the research and has no data to support the claim.
Under the applicable state advertising rules, which statement is correct? Answer: The advertisement is unlawful because it contains an unsubstantiated material claim that the adviser cannot support.
NASAA Unethical Business Practices of Investment Advisers Model Rule: an advertisement may not contain an untrue or misleading statement or an unsubstantiated material claim, a standard shared by the rule's old and 2026 advertising text. The adviser has never seen the research and has no data, so the claim that independent research confirms the strategy is the best of its kind is unsubstantiated. The option treating the claim as permissible because it is attributed to independent research is wrong; the adviser is responsible for claims in its own advertising regardless of their source. The option treating the claim as opinion is wrong because the advertisement presents a verifiable factual assertion, not mere puffery. The option requiring the research firm's written consent is wrong because the rule does not impose a consent requirement; the defect is the lack of substantiation.
- All of the following statements would violate the advertising standards applicable to a state-registered investment adviser EXCEPT:
Answer: The performance figures on this page are net of all fees and are presented together with a description of the material risks of the strategy.
Governing authority: NASAA Unethical Business Practices of Investment Advisers Model Rule (advertising provisions), which, both before and after the 2026 amendments, prohibits untrue or misleading statements, unsubstantiated material facts, presentations that are not fair and balanced, and guarantees of performance. The statement guaranteeing an annualized return of at least 8% is a prohibited performance guarantee. The statement asserting that the research team has never issued a losing recommendation, based on records not available to anyone outside the firm, is an unsubstantiated material fact. The statement showing only the months in which the model outperformed its benchmark is a misleading, cherry-picked presentation. The statement presenting net-of-fee performance figures together with a description of the material risks is balanced and substantiated, and is therefore the only statement permitted under both versions of the rule.
