Performance Guarantees Prohibition
With unlawful representations about registration covered, this section addresses another category of prohibited statements: guarantees about investment performance.
The Prohibition
Under the North American Securities Administrators Association (NASAA) Statement of Policy on Dishonest or Unethical Business Practices, it is a prohibited practice for a broker-dealer or agent to:
- Guarantee a customer against loss in any securities account or transaction
- Promise a specific rate of return on any investment
- Represent that losses are impossible or that gains are certain
What Constitutes a Performance Guarantee
- Any oral or written representation that a customer will not lose money
- Promising to make up for any losses in a customer's account
- Representing that a specific security will achieve a particular return
- Sharing in a customer's losses to cushion the impact of a bad investment
Exam Tip: Gotchas
- Sharing in losses is treated as a guarantee. An agent who privately agrees to reimburse a customer for investment losses has effectively guaranteed against loss, even without using the word "guarantee." This is a separate NASAA prohibition (sharing in profits/losses) that also violates the performance-guarantee rule.
Guarantees vs. Legitimate Disclosures
The critical distinction is who is making the guarantee:
| Statement | Permissible? | Why |
|---|---|---|
| "This bond pays a 5% coupon" | Yes | Describes a contractual feature of the issuer |
| "U.S. Treasuries are backed by the full faith and credit of the U.S. government" | Yes | Describes a feature of the issuer |
| "You are guaranteed to earn 5% on this investment" | No | The agent is personally guaranteeing an outcome |
| "I promise you won't lose money" | No | Agent guarantee against loss |
| "If you lose money, I'll make it up to you" | No | Sharing in losses to cushion impact |
Exam Tip: Gotchas
- Describing a bond's coupon is not a guarantee. "This bond has a 5% coupon" is permissible because it describes a product feature of the issuer. "You are guaranteed to earn 5%" is prohibited because the agent is personally guaranteeing an outcome. The distinction is always WHO is making the guarantee: issuer features are fine, agent promises are not.
The Key Rule
- A bond issuer's contractual obligation to pay interest is a product feature, not a prohibited guarantee
- An agent or broker-dealer promising or guaranteeing any particular outcome IS prohibited
- The prohibition applies to both oral and written representations