NASAA Series 63Communication with Customers and ProspectsEasy
A broker-dealer's advertisement promotes a new investment product by stating, 'This product is so safe, it's virtually risk-free!' Under the Uniform Securities Act, such a statement is considered:
- AA prohibited misrepresentation of the investment's characteristics.
- BA standard marketing exaggeration common in the financial industry.
- CAcceptable if the product's historical performance supports the claim.
- DPermissible if accompanied by a comprehensive risk disclosure statement.
Show answer & explanationAnswer & explanation
Correct answer: A. A prohibited misrepresentation of the investment's characteristics.
Statements implying an investment is 'risk-free' or 'virtually risk-free' are prohibited misrepresentations under the Uniform Securities Act because all investments carry some degree of risk. Disclosures do not negate the misleading nature of such a direct claim.
Why the other options are wrong
- B. The Uniform Securities Act specifically prohibits misleading statements, classifying this as more than mere exaggeration.
- C. Historical performance does not guarantee future results and cannot validate a 'risk-free' claim.
- D. Risk disclosures do not justify a 'virtually risk-free' claim, which is inherently misleading.
Prohibition on Misleading Risk Claims
The Uniform Securities Act prohibits agents and firms from making statements that imply an investment has no risk or is 'risk-free,' as all investments carry some level of risk.
- No investment is truly risk-free.
- Claims like 'guaranteed,' 'safe,' or 'risk-free' are prohibited if they misrepresent the actual risk.
- Disclosures do not cure an inherently false or misleading statement.
Memory trick: No 'Sure Thing' Says the Securities Act.