NASAA Series 63Communication with Customers and ProspectsEasy
An agent is discussing a new mutual fund with a client. The agent states, 'This fund has consistently outperformed its benchmark for the past five years, and I guarantee it will continue to do so, providing you with a minimum 8% annual return.' Which part of this statement constitutes a prohibited practice under the Uniform Securities Act?
- AStating that the fund has consistently outperformed its benchmark.
- BGuaranteeing a minimum 8% annual return.
- CDiscussing the fund's past performance relative to its benchmark.
- DDiscussing a 'new' mutual fund with a client.
Show answer & explanationAnswer & explanation
Correct answer: B. Guaranteeing a minimum 8% annual return.
Under the Uniform Securities Act, agents are prohibited from guaranteeing specific returns on investments, as all investments carry some degree of risk. Statements about past performance are permissible if accurate, but future performance guarantees are not.
Why the other options are wrong
- A. Accurately stating past performance is not prohibited, but must be accompanied by disclaimers.
- C. Discussing past performance is generally permissible, with proper context and disclaimers.
- D. There is no prohibition against discussing new mutual funds with clients.
Prohibited Performance Guarantees
Agents and investment advisers are prohibited from guaranteeing specific returns or protection against loss for any investment product.
- All investments carry risk.
- Guarantees are misleading and unethical.
- Applies to principal and rate of return.
Memory trick: Never promise a locked future return, as markets always sway.