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U.S. Securities and Exchange Commission

"Free Lunch" Sales Seminar Examination Sweeps

I. Introduction

Financial seminars are a marketing tool often used by broker-dealers and other entities to attract prospective clients. These seminars may be invitation-only or they may be advertised in local papers or on the internet. Financial seminars are often held at hotels or restaurants and may offer enticements such as free meals, books or trips for attendees. At these seminars, participants are provided with a sales pitch and sales materials that describe possible investment strategies. The seminars may be of particular interest to seniors as the sponsors may claim to offer advice on how to attain a secure retirement or how to protect assets from market fluctuation.

Regulators have received complaints and have seen indications of possible unsuitable sales of securities as a result of presentations at these seminars.

II. Securities Laws

A. Registration

Many seminars are designed to sell non-securities products (i.e., insurance) or unregistered securities. Any firm that sells securities products (e. g., variable annuities, mutual funds) must be registered as a broker-dealer. In addition, in order to discuss investments at a seminar, the presenter must be a licensed registered representative (NASD Rule 1031). Sponsors of seminars may also provide investment advice about securities, and may be registered as investment advisers with the SEC or a state securities regulator.

B. Sales Literature

Materials used or distributed at seminars by broker-dealers are considered “sales literature” under NASD rules, and as such, are subject to firm supervision approval and record keeping requirements pursuant to NASD Rule 2210(b)(2)(A). Sales literature is defined as “any written or electronic communication, other than an advertisement, independently prepared reprinted, institutional sales material and correspondence, that is generally distributed or made generally available to customers or the public, including circulars, research reports, market letters, performance reports or summaries, form letters, telemarketing scripts, seminar texts, reprints or excerpts or any other advertisement, sales literature or published article and press releases concerning a member’s products or services.” (NASD Rule 2210(a)(2)) (emphasis added).

C. Supervisory Approval

Member firms must supervise all seminar activities of their registered representatives. Sales literature used at the seminar must be approved by a registered principal prior to the seminar; the member must maintain all sales literature in a separate file for three years; and the file must include the name of the registered principal that approved the seminar and the materials (NASD Rule 3010). The member must also maintain information concerning the source of any illustrative data used in the seminar (NASD Rule 2210(b)(2)(B)). NYSE rules also require advance approval by a supervisor of all advertisements and sales literature material.1

D. Communications with the Public

The federal securities laws prohibit making any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they made, not misleading, in the offer or sales of securities (Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder).

Under NASD rules, seminars are public appearances (as are radio or television interviews or other public appearance or public speaking activity)(NASD Rule 2210). NASD rules require that: “all member communications with the public shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security” (NASD Rule 2210(d)(1)(A)). These standards also apply to registered representative involvement at seminars.

When a broker-dealer recommends a security to a customer, it must determine that the security is suitable for that customer in light of that customer’s particular age, financial situation, risk tolerance, and investment objectives (NASD Rule 2310 and IM 2310-2).

E. Restrictions on the Use of Testimonials

NASD rules prohibit exaggerated and misleading endorsements of investments or of investment returns (NASD Rule 2210(d)(1)). Testimonials must also include certain information: “advertisements or sales literature providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following: (1) the fact that the testimonial may not be representative of the experience of other clients; (2) the fact that the testimonial is not indicative of future performance or success; and (3) if more than a nominal sum is paid, the fact that it is a paid testimonial” (NASD Rule 2210(d)(2)(A).

III. Targeting Examinations

Given that Florida is home to many senior citizens who may be particularly vulnerable to predatory sales tactics, regulatory examinations will be focused on whether broker-dealers (and possibly investment advisers) in Florida are ensuring that they comply with regulatory requirements related to seminars. In particular, regulators will identify firms that are the subject of customer complaints relating to sales seminars, sales of unsuitable recommendations in securities and/or abusive or fraudulent sales tactics. Regulators will also seek to identify firms that often sponsor sales seminars.

With this information, regulators will conduct targeted examinations of these firms’ Florida offices to determine whether these firms are providing adequate supervisory oversight of sales seminars. Examinations will include a review of supervisory approvals of seminars and seminar materials. Examinations will also review seminar materials to detect any fraudulent or misleading sales literature.

The goal of this project is to identify supervisory lapses, identify any fraudulent sales literature, and to increase awareness of firms’ supervisory responsibilities with respect to sales seminars and senior citizens.

1 Specifically, “each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member or member organization to customers or the public must be approved in advance by a member, allied member, supervisory analyst, or qualified person….(NYSE Rule 342(b)(1)).



Modified: 07/13/2006