Performance Guarantees Prohibition
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.
NASAA Dishonest Practices Statement
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.
Related Prohibitions
Sharing in Customer Accounts
An agent may not share in the profits or losses of a customer's account unless:
- The agent has written authorization from both the customer and the broker-dealer
- The agent shares in proportion to their financial contribution to the account
Misleading Performance Claims
Under FINRA Rule 2210(d), communications may not:
- Predict or project future performance
- Imply that past results will recur
- Make exaggerated claims about potential returns
Antifraud Connection
Under USA Section 101 (antifraud), 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, plus proportional sharing
- Even suggesting past performance will repeat can be a violation under FINRA Rule 2210
- Guaranteeing against loss can also constitute fraud under USA Section 101 if it is a material misrepresentation in connection with the offer, sale, or purchase of a security