INVESTMENT COMPANY SALES
LITERATURE AND MARKETING
April 18, 2008
Definitions
• Advertisements: Any material published or used in any
electronic or other public media
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No control over the audience • Television and radio advertisements
Newspaper and magazine print advertisements
Web sites and website updates
Press Releases
• Sales Literature
– Other written or electronic communications made generally available
to customers or the public
– distributed or mailed to particular audiences of existing or
prospective investors
Marketing Materials
 Brochures/pamphlets
 Form letters and mass (“blast”)
emails
 Performance advertisements or
sales literature
 Articles or whitepapers
 Quarterly or monthly fact sheets
(“Periodicals”)
 Sales ideas (presentation or
advertising templates)
 Reprints of news articles
 Speeches
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Telemarketing scripts
Videos
Voice response systems
Invitations
Automated teller machine
screens
 Presentations and slide shows
 Banner ads
 Advertising specialty items
(mugs, caps, other give-aways)
Marketing Mutual Funds
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Does the material reference the Fund?
Anti-fraud (Rule 156 and 10b-5)
Is the material accompanied or preceded by the Prospectus?
Exceptions:
– Generic advertisement: no reference to a specific fund
(e.g. magazine ads)
– Rule 482
• Rules apply equally to internet advertising
– Effect on marketing to non-US jurisdictions
• Distributor reviews materials, but sponsor responsible for
drafting
• Consider Investment Company Act, Investment Advisers
Act, FINRA Rules
Preceded by a Prospectus
 Prospectus Compliance Requirement. Section 5(b)(1) of the Securities Act makes it
unlawful to transmit a prospectus relating to any security for which a registration statement
has been filed unless such prospectus meets the requirements of Section 10 of the
Securities Act.
 Prospectus Definition. Section 2(10) of the Securities Act defines the term “prospectus”
to include, among other things, any “notice, circular, advertisement, letter, or
communication, written or by radio or television which offers any security for sale,” other
than a communication accompanied or preceded by a prospectus (a “statutory
prospectus”) that meets the requirements of Section 10(a) of the Investment Company
Act of 1940, as amended (the “1940 Act”).
 Applicability to Sales Literature and Advertisements. Substantially all sales literature
and advertisements are prospectuses within the meaning of Section 2(10) of the Securities
Act (other than sales literature or advertisements accompanied by or preceded by a statutory
prospectus). Therefore, unless the sales literature or advertisements meet the requirements
of a statutory prospectus (which is unlikely) or are accompanied or preceded by a statutory
prospectus, such materials cannot be distributed or used without an available regulatory
exemption.
Generic Ads; Tombstones
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Generic Ads (Rule 135a)
– Can’t refer to a particular fund or security
– Describe services/benefits of sponsor/complex
– An invitation to inquire for further information
– Include information about distributor
Tombstones (Rule 134)
– Permitted Information
 Name of the fund and adviser;
 Title and amount of the security offered;
 The type of fund
 General description;
– Legends
 For more complete information about [name of company] including charges and
expenses [get] [obtain] [send for] a prospectus [from (name of company)] [by sending
this coupon]. Read it carefully before you invest or [pay] [forward funds] [send
money].
 The required legend(s) must be spoken or stated in the ad, if the ad is to
be used in a radio or television commercial.
 No performance figures or purchase application
Rule 482 Materials
• Specific disclosures
– Consider investment objectives, fees, risks
– Obtain and read prospectus
– Past performance does not equal future performance
– To determine if this Fund is an appropriate investment for you, carefully consider the Fund’s
investment objectives, risk factors and charges and expenses before investing. This and other
information can be found in the Fund’s prospectus, which may be obtained by calling 1-800-1234567 or visiting our website at www.fundwebsite.com. Read it carefully before investing.
• Standardized presentation and calculation of performance information
– Formulas for average annual total return
– Must present 1, 5 and 10 year performance
– Current to the most recent calendar quarter
– Disclosures about past performance, risk, loads
– The performance data quoted represents past performance. Past performance does not guarantee future
results. The investment return and principal value of an investment will fluctuate so that an investor’s
shares, when redeemed, may be worth more or less than their original cost and current performance
may be lower or higher than the performance quoted. For performance data current to the most recent
month end, please call [toll free telephone number] or visit our website at [www.abcfunds.com.]
Performance
• Present 1, 5, and 10-year performance (or “since
inception”)
• ETFs: Calculate returns based on midpoint of
bid/ask spread or closing market price
– Market returns are based upon the midpoint of the bid/ask spread at 4:00 PM Eastern time (when
NAV is normally determined for most of the EFG funds), and do not represent the returns you
would receive if you traded shares at other times.
• Compare to relevant index
• Indicate fee waivers if applicable
• Explain “extraordinary” performance (e.g. IPOs,
technology companies)
Rankings (FINRA IM 2210-3)
• Independent ranking entity e.g. Morningstar
• Required Disclosures: category, number of
investment companies in the category; period,
criteria
• Disclose Effect of Waivers and Reimbursements
• If ranking consists of a symbol (e.g. star system)
rather than a number, the meaning of the symbol
should be disclosed.
Other Marketing Rules
• Add disclosure about qualifications and limitations on past
performance presentation
– Conveying an unjustified impression
– Caution with respect to future investment performance
without adequate qualification
• Balance benefits of fund structure/attributes with risks (e.g. high
yield bonds, emerging markets, IPOs, international)
• Exaggerated claims about manager skill or process
• Misleading comparisons to other funds or indexes
• Testimonials
• Only Creation Units available from Fund
• Premium/Discount of bid/ask vs. NAV
• Include FINRA member name
Anti-Fraud (Rule 156)
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Sales literature is materially misleading if it (1) contains an untrue statement of a material
fact; or (2) omits to state a material fact necessary in order to make the statement made, in
the light of the circumstances of its use, not misleading.
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Consider
– totality of statements made
– absence of explanations, qualifications, limitations or other statements necessary or
appropriate to make such statement not misleading
– General economic or financial conditions or circumstances
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Performance
– Don’t misrepresent performance by omitting explanations, qualifications, limitations,
or other statements necessary or appropriate to make the portrayals not misleading
– Future performance must include appropriate limitations
• Expenses, security
• Too much reliance on past performance
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Statements about the manager
– Disclose risks/limits along with methods (e.g. momentum investor)
– Exaggerated claims about the manager’s skills or techniques (e.g. the quantitative black
box)
– Comparisons to other funds
Independently Prepared Reprints
• Publisher is independent and in the business of providing
research and issuing updates
• Piece not commissioned
• Not materially altered
• If a customized report is prepared at the request of the
investment company, it may only contain information that
the research firm has compiled and published separately and
may not omit information necessary for the report to be fair
and balanced
• All other marketing rules (e.g. performance presentation)
apply
Related Account Performance
• Permissible in marketing material if
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Disclosure that it is not fund’s performance
Cannot omit fund’s performance
Explanation of purpose of related performance
Disclosure of material differences
• FINRA members cannot use sales literature that
includes related account information
• Note: Portfolio Holdings Policy and disclosure
Internet Marketing
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No legal difference from paper
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Accompanied or Proceeded by a Prospectus:
― Materials will be deemed to be accompanied or proceeded by a prospectus if the
Marketing Materials disseminated via the Internet include a hyperlink to the fund’s
prospectus or is delivered on a Website in close proximity to the prospectus and the
investor is able to access the prospectus.
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Hyperlinks to a Third-Party’s Website:
― Responsibility for the content of a third-party’s Website depends on whether a fund or
its distributor was involved in the preparation of the information and whether the
fund or the distributor has endorsed or approved the information explicitly or
implicitly.
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Other Issues to Consider:
― Currentness Requirement. A higher standard of currentness (in addition to the
standard set forth in Rule 482 and Rule 34b-1 discussed above) may be implied with
respect to performance information in light of the immediacy of this form of
communication and the relative ease with which a fund may update its performance
information on a Website.
― Jurisdictional Issues. Use of Websites to advertise may inadvertently result in the fund
or the distributor becoming subject to the securities laws of a foreign jurisdiction.
FINRA Regulation of Marketing
• Observe principles of fair dealing and good faith; communications
must be balanced
• No false or exaggerated claims
• No predicting future results
• Limits on testimonials
• Fair presentation of comparisons
• Specific ranking guidelines
• Principal must approve sales material
• Must file marketing materials within 10 days of first use
– Often file before use to avoid re-printing
– Pre-filing and approval if certain rankings or bond fund volatility
ratings included
Recordkeeping
FINRA
• Members are required to maintain a separate file of all marketing
materials (including Internet Websites).
• The file should include the name of each person who prepared the
materials and/or approved their use.
• Files must be kept for three (3) years from the date of each use.
SEC
• Must maintain marketing materials addressed to or intended for
distribution to prospective investors for six (6) years form the end of the
fiscal year last used.
• Materials must be kept in an easily accessible place for the first two (2)
years
• SEC examiners regularly request advertising files during routine
inspections.
Adviser Marketing
• Marketing cannot contain any untrue statement of material fact, or be
otherwise false or misleading
― Too promissory
― Too much about the advisor’s greatness
• Specific Prohibitions
― Testimonials
― Cherry-picking past specific recommendations or performance
― Black box
• Compliance Policies and Procedures: 38a-1 and 206(4)-7
― Ensure policies are in place to comply with securities laws
― Testing
― Recordkeeping
Summary
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Does the piece reference the Fund?
Is it accompanied/preceded by Prospectus?
Does it include performance information?
Is performance driven by specific investments or
other factors?
Reprints, Rankings, Related Account Performance
Filing with FINRA
Recordkeeping and Compliance
Consult your Legal or Compliance Professional
Cipperman & Company is a unique law firm devoted exclusively to the
investment management industry. Our lawyers have spent their careers in the
investment management industry, including significant experience at major
industry players. Our shared heritage and experience make our lawyers unique
and creative industry partners who can give you practical, real-world advice for
making informed business decisions and controlling your legal risk. We have
worked on a wide range of transactional and regulatory matters, but we
concentrate on three core areas - Distribution, Technology and Fund Formation.