Quick Answer
A broker-dealer or agent may never guarantee a customer against loss in any account or transaction, written or verbal, with no exceptions. Sharing in a customer's profits or losses requires written authorization from both the customer and the firm. Predicting future performance or implying past results will recur can also violate the antifraud provisions.
Closely related to unlawful representations is the absolute prohibition on guaranteeing investment performance. If you cannot say the state "approved" a security, you certainly cannot guarantee a customer will not lose money on it.
What Does the NASAA Dishonest Practices Statement Prohibit?
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (1983, as amended), it is a prohibited practice for a broker-dealer or agent to:
- Guarantee a customer against loss in any securities account carried by the broker-dealer
- Guarantee a customer against loss in any securities transaction effected by the broker-dealer with or for the customer
This prohibition is absolute: a broker-dealer or agent may not guarantee that a customer will not lose money, regardless of the circumstances.
Exam Tip: Gotchas
A guarantee against loss does not have to promise a profit. Simply promising a customer will not lose money, with no mention of a return, is enough to violate this prohibition.
What Related Prohibitions Should You Know?
Sharing in Customer Accounts
Under the NASAA Statement of Policy, an agent may not share directly or indirectly in the profits or losses of a customer's account without the written authorization of both the customer and the broker-dealer the agent represents. Dual written authorization is the entire state-law condition.
Under Financial Industry Regulatory Authority (FINRA) rules, a member firm's associated person must also share only in proportion to their financial contribution to the account. State law does not explicitly state the proportionality requirement, but FINRA's standard applies to FINRA member firms. Accounts of the associated person's immediate family are exempt from the proportionality limit (the written authorizations are still required).
Misleading Performance Claims
Under the USA antifraud provisions and the NASAA dishonest-practices standards, communications may not:
- Predict or project future performance
- Imply that past results will recur
- Make exaggerated claims about potential returns
Antifraud Connection
Under the USA's antifraud provision, guaranteeing performance or guaranteeing against loss may also constitute fraud if it is a material misrepresentation or omission in connection with the offer, sale, or purchase of a security.
What Is and Is Not Permitted?
| Permitted | Prohibited |
|---|---|
| Discussing historical returns with disclaimers | Guaranteeing a specific rate of return |
| Explaining that past performance does not guarantee future results | Promising a customer will not lose money |
| Describing the potential range of outcomes | Guaranteeing against loss in any account or transaction |
| Noting that a bond pays a fixed coupon rate | Saying "you are guaranteed to make money" |
Exam Tip: Gotchas
- The prohibition applies to both broker-dealers and agents
- The guarantee does not need to be in writing: a verbal promise ("you cannot lose money on this") is equally a violation
- Sharing in profits/losses requires written authorization from both the customer and the firm. That is the whole state-law test. Proportional sharing is FINRA's additional requirement for member firms, and immediate-family accounts are exempt from the proportionality limit (they still need both authorizations)
- Even suggesting past performance will repeat can be a violation of the USA antifraud provisions
- Guaranteeing against loss can also constitute fraud under the USA's antifraud provision if it is a material misrepresentation in connection with the offer, sale, or purchase of a security
What Should You Check on Exam Day?
- The performance-guarantee ban is absolute and covers both broker-dealers and agents, written or verbal.
- Sharing in a customer's profits or losses needs written authorization from both the customer and the firm; proportional sharing is a FINRA overlay, not a state-law element, and immediate-family accounts skip only the proportionality piece.
- Predicting future performance or implying past results will recur can violate the antifraud provisions even without a formal guarantee.