Quick Answer
A recommendation's description of a product must rest on fair dealing and good faith, stay fair and balanced, and give a sound basis for evaluating the product. A stated benefit, like a target yield, cannot stand alone: it must be paired with the risk that could keep that benefit from being realized, such as loss of principal or illiquidity.
You already learned the general content standard that governs every communication with the public. This lesson applies that same standard to one specific job: describing a single recommended product's characteristics and risk.
What Must a Product Description Include?
- Content standard: the rule that a description of an investment product's characteristics must rest on principles of fair dealing and good faith, be fair and balanced, and give a sound basis for evaluating the product.
- The description cannot omit a material fact or qualification, such as a risk or a cost, if leaving it out would make the description misleading. The class is wider than risk: any material fact counts.
- This is the same fair-and-balanced standard you already learned for communications generally. Here, it is applied to the product-level detail inside a single recommendation, not to a piece's category or filing status.
Why Isn't a True Statement Always Enough?
- A stated benefit, such as a target yield or a tax advantage, cannot stand on its own. It must be paired with the risk that could keep that benefit from being realized.
- Risks that commonly pair with a stated benefit include loss of principal, illiquidity, and the absence of a public trading market for a privately placed security.
- A statement can be true on its face and still violate the standard if it leaves out a risk a risk-averse investor would need in order to weigh that benefit.
Exam Tip: Gotchas
- Being factually accurate about the upside is not enough. An accurately quoted target yield can still violate the fair-and-balanced standard if it omits a material risk needed to weigh that yield.
- Look for a stem that offers one number (a yield, a return, a tax break) with no matching risk. The missing pair is the violation, not the number itself.
What Should You Check on Exam Day?
- Confirm a stated benefit, such as a target yield or tax advantage, is paired with the risk that could keep it from being realized.
- Do not credit an answer as compliant just because the benefit it states is factually accurate; check whether a material risk is missing too.
- Recognize loss of principal, illiquidity, and lack of a public trading market as the risk categories most likely paired with a stated benefit.