Chapter 4: Communication with Customers and Prospects - E. Performance Guarantees

Question 1

Performance Guarantees

Answer 1

Agents and adviser representatives may not make any statement that implies a specific performance of a security for which advice was given. No guarantees of specific results may be made based on advice given for a portfolio of investments.

• General claims concerning past performance are allowed, but must be verifiable with historical performance data. Any such claims must also be accompanied by the basis for the performance calculation and a statement explaining that past performance is no guarantee of future results. Failure to disclose that the results relate only to a select group of the adviser’s clients and specific investment considerations, and/or that the model was based on hypothetical investment considerations and results would be considered a violation.
• Firms and their representatives may not manipulate data that is reported to a client in such a way as to overemphasize a short-term period of positive performance.
• It is important that the communications be fair and balanced. Failure to disclose that the results relate only to a select group of the adviser’s clients and specific investment considerations, and/or that the model was based on hypothetical investment considerations and results would be considered a violation. It is also a violation to only make claims about the potential for profit without also disclosing the possibility of loss. - - - For example, if the investment adviser shares several positive facts about a particular investment, the adviser should make it a point to share an equal amount of the risks associated with the investment.

Important: Guarantees can ONLY be provided on insurance company and government products and these guarantees pertain to payments of interest and/or dividends and principal at maturity, NOT capital gains or investment performance. All other products or securities have NO guarantees. Claims concerning past performance must be verifiable: “Past performance is no guarantee of future results.”