NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesHard
A broker-dealer firm is developing a new advertising campaign for a high-yield, speculative bond fund. The campaign materials prominently feature past performance figures, including a period of exceptional returns during a bull market. However, the materials do not clearly or conspicuously disclose that past performance is not indicative of future results, nor do they include a balanced presentation of risks. Under the Uniform Securities Act (USA) and related regulations, this advertising campaign is most likely considered:
- AAcceptable, as long as the target audience is accredited investors.
- BAcceptable, provided the past performance figures are factually accurate.
- CPermissible, if disclaimers are added in small print at the bottom of the page.
- DA fraudulent and unethical business practice.
Show answer & explanationAnswer & explanation
Correct answer: D. A fraudulent and unethical business practice.
Omitting material facts, such as the inherent risks and the disclaimer that past performance is not indicative of future results, or presenting them in a non-conspicuous manner, renders the communication misleading. This constitutes a fraudulent and unethical business practice under the Uniform Securities Act, as it can induce investors to make decisions based on incomplete or biased information.
Why the other options are wrong
- A. The ethical standards apply to all clients; while accredited investors may have more sophistication, misleading advertising is still prohibited.
- B. Factual accuracy alone is insufficient; material omissions and lack of balanced risk disclosure make it unethical.
- C. Disclaimers must be clear and conspicuous, not hidden in small print, to be effective and ethical.
Misleading Advertising (USA)
Advertising that omits material facts, presents unbalanced information, or uses exaggerated claims is considered fraudulent and unethical under the Uniform Securities Act.
- All communications must be fair and balanced.
- Past performance must always be accompanied by a prominent disclaimer that it's not indicative of future results.
- Risks must be disclosed clearly and conspicuously, not just benefits.
Memory trick: Don't 'sell the sizzle' without the 'risk warning' steak.