FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsMedium
A registered representative (RR) is developing a new marketing pamphlet for a mutual fund that invests primarily in emerging markets. The pamphlet highlights the fund's historical returns, which have been exceptionally strong over the past three years. To comply with FINRA's communications rules, what is the most important disclosure the RR must include regarding these performance figures?
- AA statement that past performance is indicative of future results.
- BA guarantee that the fund will continue its strong performance in the future.
- CA prominent statement that past performance does not guarantee future results.
- DA comparison of the fund's returns to a broad market index without further explanation.
Show answer & explanationAnswer & explanation
Correct answer: C. A prominent statement that past performance does not guarantee future results.
FINRA Rule 2210 (Communications with the Public) explicitly requires that any sales material discussing past performance must include a prominent statement that past performance is not indicative of future results. This is crucial to prevent investors from having unrealistic expectations and to ensure fair and balanced communication.
Why the other options are wrong
- A. This statement is prohibited as it misleads investors about the predictability of returns.
- B. Guarantees of future performance are strictly prohibited in securities communications and are considered fraudulent.
- D. While comparisons are often included, merely comparing without the past performance disclaimer is insufficient and potentially misleading.
Past Performance Disclosure
A mandatory statement in all communications discussing historical investment performance, explicitly stating that past performance does not guarantee or indicate future results, as required by FINRA Rule 2210.
- Prevents investor misconception.
- Ensures fair and balanced communication.
- Must be prominent and clear.
Memory trick: Past performance is a guide, not a ride.