NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
A broker-dealer firm is preparing to offer a new proprietary mutual fund to its clients. The firm's marketing materials prominently feature hypothetical performance data for the fund, projecting annual returns of 15% based on a back-tested strategy. The materials do not clearly disclose that the performance is hypothetical, nor do they include any warnings about the limitations of such data. This practice is most likely a violation of which ethical standard?
- AThe prohibition against churning.
- BThe duty of best execution.
- CThe duty to supervise agents.
- DThe requirement for fair and balanced communications.
Show answer & explanationAnswer & explanation
Correct answer: D. The requirement for fair and balanced communications.
Using hypothetical performance data without clear disclosure and warnings makes the communication misleading and unbalanced, violating ethical standards for communication.
Why the other options are wrong
- A. Churning involves excessive trading for commissions, which is unrelated to advertising new funds.
- B. Best execution refers to transaction costs and efficiency, not marketing materials.
- C. While supervision is important, the direct violation is the content of the communication itself.
Fair and Balanced Communications
Ethical and regulatory standard requiring all communications with the public to be clear, accurate, and not misleading.
- Prohibits omissions of material facts.
- Requires prominent disclosure of hypothetical performance limitations.
- Applies to all marketing materials, websites, and client correspondence.
Memory trick: Speak clearly, honestly, and with both sides of the story.