A promised high return with little or no risk is a major red flag because legitimate investments involve some level of risk. Requiring payment through a Western Union wire to an offshore account is also suspicious because it may be difficult to trace or recover the funds. Registration with the SEC or state regulators does not guarantee that an investment is safe, but it is not automatically a red flag. Payment to an escrow account at a large bank is generally less suspicious than wiring money offshore.

An investment adviser may advertise services as free or complimentary as long as those services are genuinely provided under the stated terms. Advisers may not guarantee future performance, exaggerate their qualifications, or selectively present only successful past recommendations.

Why the other answers are incorrect:

• Guaranteeing that clients will earn a specific rate of return.
  Incorrect because investment advisers may not guarantee future investment performance.

• Highlighting only the firm’s most successful past recommendations.
  Incorrect because presenting only favorable recommendations is misleading. If past recommendations are shown, the presentation must not cherry-pick only the winners.

• Exaggerating the experience and abilities of the firm’s advisory personnel.
  Incorrect because misleading statements about the firm or its personnel are prohibited.

When an investment adviser refers to charts, formulas, tables, or similar devices used to forecast securities prices, the advertisement must explain the difficulties and limitations associated with those methods. The adviser is not required to disclose how long the system has been used or provide its performance history.

Why the other answers are incorrect:

• I and III only
  Incorrect because neither the length of time the method has been used nor its performance history is required.

• I, II, and III
  Incorrect because only the method’s difficulties and limitations must be disclosed.

• II and III only
  Incorrect because historical performance is not a required disclosure.

Promises of high returns with little or no risk are a common warning sign of investment fraud. All investments involve some degree of risk, and claims that suggest otherwise should be viewed with caution.

Why the other answers are incorrect:

• The issuer provides audited financial statements for potential investors to review.
  Incorrect because audited financial statements provide investors with additional information about the issuer’s financial condition.

• Investor funds will be held in escrow at an established financial institution.
  Incorrect because a legitimate escrow arrangement may provide investors with added protection.

• The offering includes a prospectus filed with the SEC.
  Incorrect because SEC registration does not guarantee investment success, but the availability of a prospectus is not itself a warning sign of fraud.

Affinity fraud targets members of a group, such as a religious, professional, ethnic, or fraternal organization, by exploiting the trust among its members. Promises of unusually high or guaranteed returns, pressure based on the participation of other members, and requests to send money abroad are additional warning signs.

Why the other answers are incorrect:

• A legitimate private offering because it is available only to members of the organization.
  Incorrect because limiting an offering to a particular group does not make it legitimate.

• An acceptable investment program if the promoter also belongs to the organization.
  Incorrect because shared group membership does not establish that an investment is lawful or suitable.

• A suitable foreign investment because many other members have already participated.
  Incorrect because widespread participation does not prove legitimacy and may be used to pressure others into investing.

An investment adviser that pays an unaffiliated third-party promoter more than $1,000 during a 12-month period for an endorsement must have a written agreement with that promoter. Investment adviser advertisements are not generally required to be filed with the SEC, and properly presented past performance is not automatically prohibited.

Why the other answers are incorrect:

• The adviser must submit the advertisement to the SEC before it is distributed.
  Incorrect because federal rules do not generally require investment advisers to file advertisements with the SEC before use, although a state Administrator may impose filing requirements.

• The adviser must avoid including any information about past investment performance.
  Incorrect because past performance may be presented when it complies with applicable advertising rules and is not misleading.

• The adviser must charge the promoter the same fee offered to advisory clients.
  Incorrect because the rule focuses on the written agreement and required disclosures, not matching the promoter’s compensation to client fees.

An agent may discuss the performance of a past recommendation, but the discussion must not imply that similar results are guaranteed or likely to continue. Past performance does not predict future investment results.

Why the other answers are incorrect:

• “Because the stock doubled once, it is likely to double again.”
  Incorrect because prior gains do not establish that the stock will produce similar future returns.

• “My recommendations regularly produce returns of 100%.”
  Incorrect because this broad performance claim is misleading and may create an unrealistic expectation.

• “The stock’s prior increase proves that it now has even greater upside potential.”
  Incorrect because past appreciation does not prove that additional gains will occur.

A communication is more likely to be considered a recommendation when it is directed to a particular group of customers and identifies specific securities or investment opportunities. General research tools, broad screening functions, and searchable libraries typically allow customers to make their own selections and generally fall outside the definition of a recommendation.

Why the other answers are incorrect:

• Providing an online screening tool that allows customers to search all exchange-listed securities using criteria they select.
  Incorrect because a broad screening tool generally does not recommend a particular security.

• Maintaining a searchable online library containing third-party research reports and their authors’ ratings.
  Incorrect because simply providing access to a general research library is not ordinarily treated as a recommendation by the broker-dealer.

• Offering a website search feature that allows users to access charts for a broad group of large-cap stocks.
  Incorrect because a general search function covering many securities does not direct customers toward a specific investment.

When an investment adviser advertises a chart, formula, graph, or similar method for evaluating securities, the advertisement must explain the method’s limitations and the difficulties involved in its use. The adviser is not required to disclose how long the system has been used or provide its full performance history.

Why the other answers are incorrect:

• The complete performance history of the formula since it was developed.
  Incorrect because performance history is not a required disclosure merely because the system is advertised.

• Proof that the formula has consistently predicted market movements.
  Incorrect because no investment system can be presented as foolproof or guaranteed to predict market results.

• The number of years the formula has been used by the adviser.
  Incorrect because the length of time the system has been used is not required.

A communication is considered a recommendation when it uses a customer’s personal financial information, goals, and risk tolerance to suggest specific securities or transactions. The fact that the recommendation is generated by an automated tool does not change its status.

Why the other answers are incorrect:

• Is not a recommendation because the customer chooses whether to follow the results.
  Incorrect because a customer is never required to follow a recommendation. The personalized suggestion of specific securities is what makes the communication a recommendation.

• Is not a recommendation because the analysis is generated automatically.
  Incorrect because automated recommendations are still recommendations when they are based on customer-specific information.

• Is considered general educational content because it is delivered through an online platform.
  Incorrect because the tool does more than provide general information. It identifies specific securities based on the customer’s individual circumstances.