NASAA Series 63Communication with Customers and ProspectsMedium
A broker-dealer's advertisement for a new bond offering states, 'These bonds are backed by the full faith and credit of the issuing municipality, making them a completely risk-free investment.' Which of the following is the most significant regulatory concern with this statement under the Uniform Securities Act?
- AThe use of the term 'new bond offering' without further explanation.
- BThe statement about 'full faith and credit' may be inaccurate.
- CThe claim that the investment is 'completely risk-free' is a prohibited guarantee.
- DThe advertisement does not specify the bond's maturity date.
Show answer & explanationAnswer & explanation
Correct answer: C. The claim that the investment is 'completely risk-free' is a prohibited guarantee.
No investment, even those backed by 'full faith and credit,' is 'completely risk-free.' Such a claim constitutes a prohibited guarantee and is misleading. While municipal bonds are generally considered low risk, they are not without risk (e.g., interest rate risk, inflation risk).
Why the other options are wrong
- A. The term 'new bond offering' is generally acceptable; the issue is with the guarantee.
- B. The 'full faith and credit' statement could be accurate for a general obligation bond, but this doesn't negate other issues.
- D. While important, omitting a maturity date is less egregious than claiming 'risk-free'.
Prohibited Risk-Free Claims
It is unlawful to represent an investment as 'risk-free' or to guarantee returns, as all investments carry some level of risk.
- Misleading to investors.
- Violates anti-fraud provisions.
- Even government-backed securities have risks (e.g., purchasing power risk).
Memory trick: Ads must be truthful, never promise 'risk-free' or 'guaranteed' gains.