NASAA Series 63Communication with Customers and ProspectsMedium
A broker-dealer's website highlights its membership with the Securities Investor Protection Corporation (SIPC). Which of the following statements, if also included on the website, would be considered a prohibited representation under the Uniform Securities Act?
- A“SIPC membership protects against market losses.”
- B“SIPC does not protect against fluctuations in the market value of your securities.”
- C“More information about SIPC is available at www.sipc.org.”
- D“SIPC protects customer accounts up to $500,000, including $250,000 for cash.”
Show answer & explanationAnswer & explanation
Correct answer: A. “SIPC membership protects against market losses.”
SIPC protects investors against the failure of a broker-dealer, not against losses due to market fluctuations or poor investment performance. Stating that SIPC membership protects against market losses is a material misrepresentation and creates a false sense of security, which is strictly prohibited.
Why the other options are wrong
- B. This is an accurate and important disclosure about the limits of SIPC protection.
- C. Providing the SIPC website for more information is a common and acceptable disclosure.
- D. This is an accurate statement of SIPC coverage limits.
SIPC Misrepresentation
It is a prohibited practice to misrepresent the nature or extent of SIPC coverage. Specifically, firms cannot claim that SIPC protects against market losses or guarantees investment performance.
- SIPC protects against BD failure, not market loss.
- Misrepresenting SIPC is prohibited.
- Must clearly state what SIPC does and does not cover.
- Creates false sense of security.
Memory trick: SIPC: a shield for BD failure, not a helmet for market falls.