Performance Guarantees Prohibition

Just as securities professionals cannot claim that registration equals approval, they also cannot promise or guarantee investment results. This section covers the prohibition on performance guarantees for broker-dealers, agents, and investment advisers.

Why Can't an Agent Guarantee Against Loss?

Under the North American Securities Administrators Association (NASAA) Statement of Policy on Dishonest Practices (1983), it is a dishonest and unethical business practice for a broker-dealer or agent to:

• Guarantee a customer against loss in any securities account or transaction
• Promise or guarantee any specific result or return on an investment
• Share in profits or losses in a customer's account (with limited exceptions)

Guarantees against loss include both explicit promises and implicit guarantees (e.g., "I'll make up any losses you have").

When May an Agent Share in a Customer's Account?

Under state law, an agent may share in the profits or losses of a customer's account only if both of these conditions are met:

• The agent obtains written authorization from the customer
• The agent obtains written authorization from the employing broker-dealer

Dual written authorization is the entire state-law condition. Sharing without both authorizations is a prohibited practice.

Under FINRA rules, a member firm's associated person must also share only in proportion to their financial contribution to the account, with accounts of the associated person's immediate family exempt from that proportionality limit (the written authorizations are still required). State law does not state a proportionality requirement, but FINRA's standard applies to FINRA member firms.

Exam Tip: Gotchas

• Proportionality is FINRA, not NASAA. On a state-law question the test is the two written authorizations, full stop. An answer choice calling an arrangement prohibited solely because the sharing was not proportional is reaching for the wrong rulebook.

Can an Agent Promise a Specific Return?

Broker-dealers and agents may NOT:

• State or imply that a security will achieve a specific rate of return
• Guarantee future performance based on past results
• Use hypothetical or projected returns in a way that implies a guarantee

Is a Bond's Coupon a Performance Guarantee?

There is one important distinction: a guaranteed interest rate on a fixed-income security is a factual statement, NOT a performance guarantee. The coupon is a contractual obligation of the issuer.

Does the Prohibition Apply to Investment Advisers Too?

Investment advisers and investment adviser representatives (IARs) are similarly prohibited from guaranteeing against loss or promising specific investment results under the Uniform Securities Act (USA) and NASAA Model Rules. An IA may charge a performance-based fee to a qualified client, generally one with at least $1.4 million under management with the adviser or a net worth over $2.7 million, but that fee structure compensates for results achieved; it is not a promise of what those results will be.

Exam Tip: Gotchas

A bond's stated coupon rate is a contractual promise by the issuer, NOT a performance guarantee by the broker-dealer selling it. An agent saying "This bond pays 5% per year" is stating a fact. An agent saying "I guarantee you'll make 5% on this investment" IS a prohibited performance guarantee. The exam tests this distinction directly.

What Should You Check on Exam Day?

• Separate the two prohibited acts: guaranteeing against loss, and promising or guaranteeing a specific return. Either alone is a violation.
• Confirm the sharing exception needs both written authorizations (customer and employing broker-dealer); proportionality is a FINRA add-on, not a state-law element.
• Distinguish a factual coupon statement from an agent's own guarantee of return.
• Remember investment advisers and IARs are held to the same no-guarantee standard as broker-dealers and agents.