Marketing And Advertisement Quiz Questions
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Questions and Answers
- 1.
When putting together a partial list of clients for your firm's marketing materials, you cannot use performance-related criteria to select which clients will appear on the list. In other words, you can't select your top ten highest-performing accounts to appear on the list.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
You can. The SEC staff discussed the use of partial client lists in its August 28,1997 Cambiar Investors no-action letter. There, it said that a partial client list that does no more than identify particular clients of the adviser is not a testimonial. The staff expressly stated that its view was not conditioned on the adviser's use of nonperformance-related criteria to select the clients to appear on the list.
However, the staff strongly cautioned that an advertisement could be false and misleading if an adviser selected clients on the basis of performance and did not adequately disclose this selection bias on the face of the ad. "A list that includes only advisory clients who have experienced above-average performance could lead an investor who contacts the clients for references to infer something about the adviser's competence or about the possibility of enjoying a similar investment experience that the investor might not have inferred if criteria unrelated to the client's performance had been used to select the clients on the list or if the selection bias was fully and fairly disclosed," said the staff.
Of course, for business reasons if not legal ones, you'll want to obtain each client's consent before using their names in the partial client list.Rate this question:
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- 2.
Advisers can market a "satisfaction guaranteed or your money back" claim.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In the December 6, 2004 Trainer, Wortham & Co. no-action letter, the SEC staff stated that an adviser could provide clients with a money-back satisfaction guarantee. Under the guarantee discussed in the letter, the adviser promised certain groups of new clients that they could obtain a full refund of all advisory fees paid to the adviser during the first twelve months of the client relationship if the client was displeased with account performance, unsatisfied with the adviser's service, or for any other reason. Of note: While the adviser represented that it would market the satisfaction guarantee in direct mail campaigns to specific groups of prospects and in its Form ADV Part" brochure, it also represented that it would not reference the guarantee in a broader advertising campaign conducted in print or broadcast media. The staff did not indicate in its response whether or not it viewed that latter representation as a material factor in granting the relief.
It also should be noted that in its response, the staff declined to address the issue of whether the satisfaction guaranteed claim implicated Rule 206(4)-1 (a)(4), the provision of the advertising rule that prohibits an adviser from marketing a service as "free" unless it really, truly is free. The staff said that the adviser's request letter failed to explain how the satisfaction guaranteed claim would implicate the rule (i.e., whether the ad would state that any service would be provided for free).Rate this question:
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- 3.
An advertisement may contain a testimonial, provided that the client who provided the testimonial was not solicited to do so. For example, if your firm receives a warm thank you note praising your services, the text of that note and the client's name can be used in an advertisement (assume the client has consented to such use).
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Under Rule 206(4)-1 (b), all testimonials are prohibited in advertisements, regardless of whether the adviser asked for the testimonial or not.
With one exception: See the SEC staff's March 24, 1998 letter to rating firm DALBAR, in which the staff took a no-action position allowing the use of numerical DALBAR ratings in adviser advertisements, despite the fact that the SEC staff viewed them as testimonials. See also the staff's December 2, 2005 letter to the Investment Adviser Association.Rate this question:
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- 4.
An adviser prepares a quarterly client newsletter, which is often sent to prospects as well. In the newsletter, the adviser discusses macroeconomic events as well as recent stock purchases in client accounts. The adviser is careful to use objective, non-performance-based criteria to select the securities that it will discuss. For example, one quarter it may discuss the securities that represented the largest purchases in equity client accounts. The next quarter, it may select the largest positions held in those accounts. True or false: This is an acceptable practice. (Assume that actual profits or losses are not discussed, that the newsletter discloses that the selected securities do not represent all of the securities purchased, sold, or recommended to clients, and that the adviser retains appropriate back-up records and provides them to the SEC staff on request.)
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The selection criteria must remain consistent from quarter to quarter. In the December 10, 1998 Franklin Management no-action letter, the SEC staff stated that an adviser would not violate the Advisers Act advertising rule's prohibition on past specific recommendations if it used objective, non-performance related criteria to select securities to be discussed in reports provided to existing clients as well as prospects. However, in that letter, the staff expressly stated that it was relying on Franklin's representation that it would use the same selection criteria for each quarter for each investment category.
What if you have legitimate reasons for wanting to make a switch? Say you've historically highlighted stocks in alphabetical order (i.e., this quarter, all stocks beginning with the letter A; next quarter, all stocks beginning with the letter B, etc.). You hire a marketing consultant who suggests that, instead, you highlight your top ten holdings by asset size. Presumably, you could make this one-time switch of criteria - after talking about it with your favorite lawyer and determining what, if any, disclosure might be required and whether or not to check in with the SEC staff.Rate this question:
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- 5.
Promotional materials sent solely to existing clients are not advertisements.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The SEC and staff have long taken the view that materials designed to maintain existing clients are considered advertisements. Of course, if the adviser is responding to an unsolicited information request by a client, prospect, or consultant, the communication may not be deemed an advertisement - see the SEC staff's March 1, 2004 Investment Counsel Association of America letter.Rate this question:
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- 6.
An adviser may discuss the profitability of past stock picks to prospective clients that ask for such information, provided that the adviser did nothing to encourage such a request.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In the Franklin Management no-action letter, the SEC staff indicated that it would not recommend enforcement action if an adviser discussed past stock picks selected on an objective, nonperformance basis. That letter was conditioned, among other things, on the adviser's agreeing not to discuss the profitability of any particular recommendation in the advertisement.
However, the staff subsequently took the position in the ICAA letter that an adviser that responded to unsolicited requests for past specific recommendations from clients, prospects, or consultants, would not be providing an "advertisement" in the first place, and therefore could discuss the profitability or nonprofitability of the past specific recommendations. Since such a communication was not an advertisement, reasoned the staff, Rule 206(4)-1 's prohibitions on past specific recommendations, as well as testimonials, did not apply.Rate this question:
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- 7.
Advisers may no longer claim AIMR-PPS compliance in advertisements.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Once a firm that was formerly compliant with AIMR-PPS switches over to GIPS, it may no longer reference prior period claims of compliance with the AIMR-PPS standards. However, the CFA Institute's Investment Performance Council has recognized that RFPs and other requests for information received by an adviser may incorrectly continue to ask about AIMR-PPS compliance. The CFA Institute has taken the position that if a firm previously claimed compliance with AIMR-PPS, the firm may respond that yes, they are AIMR-PPS compliant. However, such claims of compliance may only be made for the purpose of responding to requests for information, and the firm must "attempt to explain to the requestor why the questions" concerning AIMR-PPS "are incorrect."
Having said all that, 1M Insight has heard several reports that some firms are still using references to AIMR-PPS in their current performance presentations, so you might want to see what your favorite lawyer has to say about this particular issue.Rate this question:
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- 8.
Your firm lures a star small cap equity portfolio manager away from your direct competitor, where she had been the only manager responsible for the firm's small cap separate accounts. Let's call her Elizabeth. At your firm, Elizabeth will be the only manager responsible for your firm's small cap separate accounts. She will have sole discretion over those accounts, just like she did at her old firm. When Elizabeth announced to her old employer that she was resigning to join your firm, she was allowed to remove only personal effects and was then promptly escorted to the door. But while her old firm may not be happy about it, there's no reason - from a regulatory perspective - why your firm can't advertise Elizabeth 's past performance at her old employer.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Under Rule 204-2(a}( 16}, firms must have backup for their advertised performance - including past performance earned by portfolio managers at a former employer. Although Elizabeth's departure appears to feature all the factors in the SEC staff's August 7, 1996 letter to Elizabeth Bramwell (same responsibilities at old and new firms), the new firm still will need performance back-up of its own. So, unless the manager's performance was publicly published contemporaneously (see the SEC staff's July 23, 1999 Solomon Smith Barney Asset Management no-action letter), there may be no way for Elizabeth's new firm to substantiate her past performance.Rate this question:
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- 9.
An advertisement is any written material sent to a group of ten or more people.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The Advisers Act record keeping rule requires advisers to maintain copies of each communication that the adviser circulates or distributes, directly or indirectly, to 10 or more persons. However, under Rule 206(4)-1, any material designed to attract new clients or maintain existing ones is generally considered an advertisement, even if it is sent to only one person.Rate this question:
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- 10.
From the SEC's perspective, advisers must present since-inception returns.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The SEC has not specified a set time period for presenting returns. However, cautioned Stradley Ronon partner Lawrence Stadulis, firms that do not use since-inception returns may draw comments from SEC examiners. All performance numbers remain subject to the Advisers Act anti-fraud provision, he noted, and selective use of a time period may be deemed false and misleading. A firm that does not use since-inception returns because it has cherry-picked a particularly impressive time period, he warned, could run afoul of the anti-fraud provision. A firm that has chosen not to present since-inception returns for legitimate reasons still should consider whether disclosure of that limitation is necessary.Rate this question:
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Current Version
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Mar 21, 2023Quiz Edited by
ProProfs Editorial Team -
Nov 13, 2017Quiz Created by
Sheila Powers
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