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.
Prohibition on Guaranteeing 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").
Prohibition on Guaranteeing Returns
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
The Bond Coupon Exception
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.
| Statement | Permitted? | Why |
|---|---|---|
| "This bond pays 5% interest per year" | Yes | Factual statement about the issuer's contractual obligation |
| "I guarantee you'll make 5% on this investment" | No | Prohibited performance guarantee by the agent |
| "This stock will definitely go up 10% this year" | No | Prohibited guarantee of future performance |
| "Based on past results, I guarantee similar returns" | No | Past performance never guarantees future results |
Investment Adviser Performance Guarantees
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.
Performance-Based Fees Are NOT Guarantees
- An investment adviser (IA) may charge a performance-based fee to qualified clients:
- Net worth over $2.2 million, OR
- $1.1 million under management with the adviser
- A performance-based fee is compensation tied to results, not a guarantee of results
- The adviser earns more if the portfolio performs well, but does not promise that it will
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.