Communication with Clients and Prospects

Communication with clients and prospects is the second-heaviest category on the Series 66 — 20% of the exam, roughly 1 in 5 questions. It covers what you must disclose, what you cannot say, how customer accounts are opened and maintained, how communications are categorized and supervised, and how records are kept and privacy is protected.

The chapter is organized around three lenses. Section 1 covers the affirmative disclosures professionals must make and the representations they cannot. Section 2 covers the documents and agreements required to open and maintain new accounts, margin accounts, and options accounts. Section 3 covers how communications are categorized, approved, supervised, retained, and how customer privacy is protected.

Required product and relationship disclosures

Both advisers and broker-dealers owe affirmative disclosure obligations to clients and prospects. The Series 66 tests three layers of required disclosure: product, relationship, and changes in circumstances.

Product disclosures — what must accompany every recommendation:

• Material risks associated with the recommended security, including market risk, credit risk, liquidity risk, and product-specific risks (interest-rate risk for bonds, leverage risk for options)
• Fees and expenses — management fees, 12b-1 fees, sales loads, surrender charges, and any other ongoing expenses that reduce return
• Material conflicts of interest related to the product, including compensation arrangements that may bias the recommendation
• Tax treatment where material to the recommendation (e.g., municipal bond interest, qualified dividends, IRA distributions)

Relationship disclosures — the documents that frame the engagement:

• Form ADV Part 2A (the Brochure) — must be delivered to advisory clients before or at the time of entering into the advisory contract; annual update plus interim amendments for material changes
• Form ADV Part 2B (Brochure Supplement) — biographical and disciplinary information about the specific IAR servicing the account
• Form CRS (Client Relationship Summary) — required for both BDs and IAs; a short, plain-English summary of services, fees, conflicts, standard of conduct, and disciplinary history; must be delivered at account opening and updated within 30 days of material change

Ongoing disclosures — changes that must be reported:

• Changes in financial condition that may impair the firm's ability to meet obligations to clients
• Disciplinary history and material legal proceedings (Form ADV Item 11, Form BD Item 11, Form U4 disclosure questions)
• Material changes to compensation arrangements or services offered

Required Disclosures

Product Disclosures

• Material risks associated with a recommended security
• Fees and expenses (management fees, 12b-1 fees, loads)
• Conflicts of interest related to the product

Other Required Disclosures

• Form ADV Part 2A (Brochure): Must be delivered to clients before or at the time of entering into an advisory contract
• Form ADV Part 2B (Brochure Supplement): Information about the specific IAR who will service the account
• Form CRS (Client Relationship Summary): Brief document describing the firm's services, fees, conflicts, and disciplinary history
• Changes in financial condition that may impair ability to meet obligations
• Disciplinary history and legal proceedings

Performance guarantees and the "no warranty of outcome" rule

FINRA Rule 2210(d) and the NASAA Statement of Policy both prohibit any representation that guarantees future investment performance or protects against loss. The prohibition is broader than candidates often realize — it covers any statement, written or oral, that explicitly or by implication promises a result.

Always prohibited:

• "You will earn X% annually" or "This will outperform the market"
• "You cannot lose principal" or "Your money is safe"
• "This strategy has never had a losing year" (even if literally true, it implies a future guarantee)
• Personal indemnification — an agent personally promising to make the customer whole on any loss

Permitted — specific true statements about specific products:

• "Direct obligations of the U.S. Treasury are guaranteed by the full faith and credit of the United States"
• "Bank deposits at this institution are FDIC-insured up to $250,000 per depositor"
• "This callable bond is guaranteed by [the issuer]" — if literally true and the guarantor's name is disclosed

The single-question diagnostic: is the guarantee a specific true statement about a specific product, naming the guarantor? If yes, permitted. If it is a general promise of outcome by the firm or agent, prohibited.

Unlawful registration representations

USA §404 and Securities Act §23 both prohibit any representation that registration with the state or the SEC constitutes approval of the registrant's qualifications, the merits of any security, or the accuracy of any disclosure. The rule is counterintuitive because registration is a regulatory event — candidates expect it to confer some endorsement. It does not.

Always prohibited:

• "SEC-registered, ensuring the quality of our advice"
• "This security has been approved by the state securities administrator"
• "Our registration is your assurance of integrity"
• "State-approved investment strategy"

Permitted — factual statements about registration status:

• "Registered with the SEC as an investment adviser"
• "Registered in [State] as a broker-dealer"
• "A registered representative of [BD] since [date]"

This prohibition applies equally to direct statements, indirect implications, and disclaimers crafted to suggest endorsement. The same rule appears in the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.

NASAA Senior-Specific Certifications and Professional Designations Rule

The NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations (2008) restricts how financial professionals may use titles that imply expertise in advising senior clients. The Rule was adopted in response to widespread misuse of credentials like "Certified Senior Adviser" by professionals targeting older investors.

Under the Rule, a designation may be used only if all of the following are true:

• The designation was issued by an accredited organization with reasonable qualifications, continuing education, and a public disciplinary process
• The credential has not been issued solely on the basis of paying a fee or attending a marketing session
• The designation is not used in a way that misleads investors about the holder's level of expertise

Designations that meet the test — CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), ChFC (Chartered Financial Consultant), CLU (Chartered Life Underwriter), and CPA/PFS (Personal Financial Specialist) — remain permissible. Designations that do not meet the test — including many seminar-issued "senior specialist" titles — may not be used in any communication with clients or prospects.

Tombstone advertisements — Securities Act §134

Securities Act §134 carves out a narrow exception to the general rule that no offering communication may be made before a registration statement is effective. A tombstone advertisement — named for its plain black-rule visual style — is a written communication that simply announces a securities offering and identifies the underwriter without soliciting orders.

A tombstone ad may include:

• Name of the issuer and the title and amount of the securities
• Per-unit offering price
• The names of the underwriters
• The date of public availability of the prospectus
• A statement directing readers to obtain the prospectus before investing
• A disclaimer that the advertisement is not an offer to sell or a solicitation of an offer to buy

A tombstone ad may not include:

• Recommendations to buy
• Forecasts of issuer performance or projected returns
• Solicitations of indications of interest (those are handled separately under Rule 134(d))
• Any content not authorized by the rule's enumerated list

New account opening — FINRA Rule 4512

FINRA Rule 4512 (Customer Account Information) establishes what a broker-dealer must collect, record, and update for every customer account. The rule's purpose is twofold: enable suitability and best-interest determinations, and create the audit trail regulators rely on in examinations and enforcement actions.

Information required at account opening:

• Customer's name and residence address
• Whether the customer is of legal age
• Customer's tax identification number (typically SSN for individuals, EIN for entities)
• Occupation of the customer, and the name and address of the employer
• Signature of the registered representative responsible for the account
• Signature of a principal of the firm signifying acceptance of the account

Information required for accounts where the firm will make recommendations (typically all retail accounts):

• Annual income and net worth (and liquid net worth)
• Investment objectives
• Risk tolerance
• Investment time horizon and liquidity needs
• Other holdings, investment experience, and tax status

Maintenance and update requirements:

• Customers must be sent the recorded account information within 30 days of opening and at least every 36 months thereafter
• The firm must request updates and incorporate any material changes the customer reports
• Records must be retained for at least 6 years after the account is closed

Margin accounts — Regulation T and FINRA Rule 4210

A margin account permits a customer to borrow part of the purchase price of a security from the broker-dealer, with the security itself serving as collateral. Two separate regulatory layers apply: the Federal Reserve's Regulation T sets initial margin requirements, and FINRA Rule 4210 sets ongoing maintenance requirements.

Regulation T — initial margin:

• 50% initial margin requirement for marginable equity securities (long or short)
• Reg T applies at the time of purchase — the customer must deposit at least 50% of the purchase price, with the remainder financed by the firm
• The minimum equity to open a margin account is $2,000, or 100% of the purchase if the security costs less than $2,000
• Not all securities are marginable: most listed equities and many OTC securities are; new IPO shares are not marginable for 30 days; options generally cannot be purchased on margin (premium paid in full)

FINRA Rule 4210 — maintenance margin:

• 25% minimum maintenance margin for long positions
• 30% minimum maintenance margin for short positions of stock priced $5 or more
• If equity falls below the maintenance level, a maintenance margin call requires the customer to deposit additional funds or have positions liquidated
• Firms may set house requirements above the FINRA minimums

Required customer agreements before any margin trade:

• Margin (Credit) Agreement — sets the terms of the lending arrangement, interest rate calculation, and the firm's right to liquidate
• Hypothecation Agreement — authorizes the firm to pledge customer securities as collateral for loans the firm takes to finance the margin
• Loan Consent Agreement — optional; authorizes the firm to lend the customer's securities to third parties for short selling

Options accounts — FINRA Rule 2360 and the OAD

Options trading carries unique leverage and loss profiles, so options accounts are subject to additional disclosure and supervisory requirements beyond standard FINRA Rule 4512. FINRA Rule 2360 governs the entire options sales practice.

The Options Account Document (OAD) — formerly called the OCC Options Disclosure Document (ODD) — is the standardized risk disclosure prepared by the Options Clearing Corporation. It must be delivered to a customer at or before the time the firm approves the customer's account for options trading. The OAD covers the risks, characteristics, and strategies of standardized options.

The Options Account Agreement is a separate, customer-signed document confirming the customer's understanding of the OAD and acknowledging the special risks. Under Rule 2360, the signed Options Account Agreement must be returned by the customer within 15 days after the account is approved. If not returned within 15 days, the customer's account may continue trading but only on a closing-transaction-only basis.

Approval workflow:

• Customer profile information collected, including investment objectives, experience, and risk tolerance specific to options
• OAD delivered at or before approval
• Account approved by a Registered Options Principal (ROP) — the supervisor responsible for options activity
• Options Account Agreement returned within 15 days
• Suitability determination tied to the specific options strategy permitted (Level 1 covered calls and protective puts; up through Level 4 uncovered writing for sophisticated customers)

Options valuation basics

The Series 66 tests a small set of options valuation concepts — not full pricing models, but the language and arithmetic of premiums.

The premium of any option is the sum of two components:

• Intrinsic value — the option's in-the-money amount, which is the positive difference between the market price and the strike price. A call has intrinsic value when market > strike; a put has intrinsic value when market < strike. Intrinsic value is never negative.
• Time value (also called extrinsic value) — the portion of premium attributable to remaining time until expiration. Time value erodes ("decays") as expiration approaches.

Moneyness terminology:

• In-the-money (ITM) — the option has intrinsic value. Call ITM when market > strike; put ITM when market < strike.
• At-the-money (ATM) — market price equals strike price.
• Out-of-the-money (OTM) — the option has no intrinsic value. Call OTM when market < strike; put OTM when market > strike. The entire premium of an OTM option is time value.

Worked example. A call option on XYZ has a $50 strike. XYZ is trading at $54. The call is in-the-money by $4 (intrinsic value). If the premium is $5.50, the time value is $1.50 ($5.50 premium minus $4 intrinsic). If XYZ falls to $48, the same call becomes out-of-the-money — intrinsic value is now $0 and the entire remaining premium is time value.

What Advisory Contracts Must Include

All investment advisory contracts must contain:

• Description of services to be provided
• Compensation arrangement — how fees are calculated and when they are charged
• Term and termination clause — the contract must allow the client to terminate without penalty within 5 business days
• No assignment without consent: The contract cannot be assigned to another adviser without the client's written consent
• Disclosure of conflicts of interest

"Assignment" includes: A change in control of the adviser (e.g., a sale of the advisory firm) that constitutes an assignment under the law. If an adviser is acquired by another firm, each client must consent before the new firm can manage their assets.

FINRA Rule 2210 — the framework for everything a BD says publicly

FINRA Rule 2210 (Communications with the Public) is the master rule governing how broker-dealers and their agents may communicate with customers and prospects. It divides every communication into one of three categories — each with different supervisory, recordkeeping, and filing requirements.

The three categories are defined by audience and volume, not by medium. A single tweet, a one-on-one email, and a televised commercial may each fall into different categories depending on who sees the communication and how widely it is distributed.

Approval, filing, and recordkeeping

Each FINRA 2210 category triggers different approval and filing obligations, and candidates should be able to map a fact pattern to the correct requirement.

Approval requirements:

• Retail communication — principal approval required before first use in most cases. Limited exceptions for previously-filed templates and certain research reports.
• Institutional communication — principal approval not required, but the firm must establish and enforce written supervisory procedures and conduct sample reviews.
• Correspondence — principal approval not required at the individual-message level. The firm must instead establish supervisory procedures for review of a representative sample.

Filing with FINRA:

• Pre-use filing within 10 business days before first use: retail communications about closed-end funds during the offering period, security futures, and certain BD performance rankings
• Post-use filing within 10 business days of first use: most other retail communications about registered investment companies, public DPP offerings, and similar products
• No filing for institutional communications, correspondence, or retail communications that fall within enumerated exemptions

Content standards apply across all categories:

• No false or misleading statements
• No predictions or projections of investment performance (limited exceptions)
• Fair and balanced presentation of risks and benefits
• Required disclosures included when relevant (e.g., past performance disclosures, fee disclosures)

SEC Marketing Rule — Testimonials and Endorsements

The SEC's revised Marketing Rule (effective November 2022) modernized how investment advisers can advertise. Key changes:

• Testimonials now permitted (previously banned) — with required disclosures about whether the person was compensated, any material conflicts, and that past experience may not be representative
• Endorsements permitted — with similar disclosures
• Performance advertising rules modernized:
  • Gross and net performance must be shown with equal prominence
  • Performance must include at least 1-, 5-, and 10-year periods (or since inception if less)
  • Hypothetical performance is permitted but only with extensive disclosures about methodology and limitations
• Social media: Advisers must supervise and archive social media content. An adviser's social media post is advertising and must comply with all marketing rules.

Social media, email, and digital messaging

Electronic communications are subject to the same Rule 2210 categorization framework as any other communication — the medium does not change the category, the audience and volume do. The supervisory challenge is operational, not regulatory: making sure the firm captures and retains every business-related electronic message.

Social media:

• Static content (profile information, biographical posts, advertising-style content) is typically retail communication and requires pre-use principal approval
• Interactive content (live tweets, comments, real-time replies) is typically treated as correspondence subject to supervisory review
• The firm must archive all business-related social media communications and have the ability to retrieve them on demand
• Personal social media accounts are out of scope unless they are used for business communications, in which case the firm's policies apply

Email and digital messaging:

• All business-related electronic communications must be captured and retained under SEC Rules 17a-3 and 17a-4 (covered below)
• The firm is responsible for adopting and enforcing acceptable-use policies, including prohibitions on conducting business through personal email or unmonitored messaging apps
• "Off-channel" communications — business conducted through unmonitored channels — have been a major recent enforcement area, with billions in fines across the industry

Website communications:

• The firm's public website is retail communication, fully subject to pre-use approval, filing where required, and the 2210 content standards
• Linked content that the firm endorses, controls, or systematically references becomes the firm's responsibility under FINRA's "entanglement" and "adoption" doctrines

Books and records — SEC Rules 17a-3 and 17a-4

SEC Rule 17a-3 specifies the records a broker-dealer must make. SEC Rule 17a-4 specifies how those records must be preserved. Together they form the backbone of the BD recordkeeping regime, and FINRA examinations begin and end with the records they require.

Rule 17a-3 — records that must be made:

• Blotters (records of original entry) showing all purchases and sales of securities, receipts and deliveries of securities, receipts and disbursements of cash
• Ledgers showing all customer assets, liabilities, capital, income, and expense accounts
• Securities records showing each security long or short with its location
• Order tickets capturing every order received
• Confirmations and account statements sent to customers
• Customer account records (the 4512 information)

Rule 17a-4 — retention periods:

• Lifetime of the firm plus 2 years — partnership articles, corporate charters, minute books, stock certificate books
• 6 years, with the first 2 years easily accessible — customer account records, blotters, ledgers, securities records, customer correspondence
• 3 years, with the first 2 years easily accessible — most other records including order tickets, trade confirmations, communications with the public (Rule 2210 records), trial balances, and customer complaints

Storage media requirements:

• Electronic storage must use a non-rewritable, non-erasable format (WORM — Write Once, Read Many), or any electronic system that meets the SEC's audit-trail requirements
• Records must be readily producible to examiners on demand
• An independent third-party access undertaking is required if records are maintained electronically

Regulation S-P — customer privacy

SEC Regulation S-P governs how broker-dealers and investment advisers may collect, use, and share customer nonpublic personal information. State law (USA §403 and the NASAA Investment Adviser Information and Security Privacy Rule) imposes parallel obligations for state-registered firms.

Initial and annual privacy notices:

• An initial privacy notice must be delivered to each customer not later than the establishment of the customer relationship
• An annual privacy notice must be delivered while the customer relationship continues, unless the firm has not changed its disclosed sharing practices and shares only within permitted exceptions
• Notices must describe what information is collected, how it is used, with whom it is shared, and how it is protected

Opt-out rights:

• Customers have the right to opt out of sharing their nonpublic personal information with nonaffiliated third parties (with limited exceptions for service providers and joint marketing arrangements)
• The opt-out notice must be clear, conspicuous, and provide a reasonable means to exercise the right
• A reasonable period (typically 30 days) must be provided before any nonexempt sharing begins

Safeguards Rule:

• Firms must adopt written policies and procedures reasonably designed to protect customer records and information
• The Safeguards Rule covers administrative, technical, and physical safeguards
• The 2024 amendments require written incident response programs and notification of affected individuals within 30 days of a covered breach

Prohibited Representations and Guarantees

• Unlawful representations: Cannot state or imply that registration with a state or the SEC constitutes approval of the person's qualifications or endorsement of their services
• Performance guarantees: Cannot guarantee future performance or promise that a loss will not occur

Client Contracts and Agreements

• Advisory contracts must be in writing
• Must disclose compensation arrangement and services provided
• Cannot assign the contract without client consent
• Must include a provision for termination without penalty

Advertising and Correspondence

• Social media: Must be supervised and archived; same rules as other advertising — no misleading claims or guarantees
• Email and digital messaging: Must comply with recordkeeping requirements and be subject to firm review
• Website communications: Must be accurate, not misleading, and include required disclosures
• Testimonials and endorsements now permitted under the SEC's Marketing Rule (with required disclosures)