A customer can receive every scheduled document and still make an investment decision based on a misleading sales conversation. Required product disclosures address both the information you provide and when the customer needs it.
As an agent, you represent a broker-dealer (BD), a firm that buys and sells securities for customers or its own account. Customers depend on your explanation when deciding whether to invest. A material fact is information a reasonable investor would consider important when making that decision.
Under §101(2) of the Uniform Securities Act of 1956, you must not misstate material facts about a security. You also must not omit material facts needed to keep your statements from misleading the customer in their circumstances. A technically true statement can therefore violate the rule when its missing context changes the customer's understanding. Uniform Securities Act, §101.
Suppose you describe a security as readily saleable while withholding a restriction that prevents this customer from selling it for several years. The restriction matters to the customer's access to money.
Common mistakes
- Treating a registration exemption as permission to omit material facts. A sale requiring no registration still faces §101's antifraud standard.
- Equating no initial sales charge with no costs. A 0% purchase charge can coexist with asset-based charges or a contingent deferred sales charge.
- Reading portfolio guarantees as protection of fund shares. Even a portfolio consisting entirely of guaranteed obligations can experience principal fluctuation.
Bottom line
- Section 101 prohibits misleading material statements and omissions even for securities or transactions exempt from registration.
- The model offering rule requires a final prospectus or complete preliminary-plus-additional-document package by the confirmation's due date.
- Investment company prospectus delivery alone does not establish full and fair disclosure.
- Disclose applicable fund sales charges, relevant breakpoints and available letters of intent that reduce charges.
Exam shortcut
Find the event being tested before comparing deadlines: recommendation, contract, account opening, order placement or completion. For Form CRS questions, arrange the events chronologically and select the first qualifying event. Ignore which event produced the most paperwork. When the stem mentions oral disclosure, identify the rule before judging it. The issuer-relationship provision and Reg BI handle writing differently. For prospectus alternatives, inspect the missing information.
The full lesson (about 3,253 words, 22 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- G14
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