Guaranteed Securities & Performance Claims
Overview
If you’ve studied for a securities exam other than this material, you’ve probably noticed how sensitive the term “guarantee” is. In most situations, using it can suggest an unethical and/or illegal practice. The same caution applies here.
There is one context where the word can be used appropriately and legally: guaranteed securities.
Guaranteed securities
Definitions
| Term | Definition | Example |
|---|---|---|
| Guaranteed security | A security with backing from a third party in relation to interest, dividends, and/or principal | A local municipality issues a bond that is insured by Ambac (an insurance company) |
A security is considered guaranteed when a third party (usually an insurance company) promises to cover any unpaid interest, dividends, and/or principal.
🔑 What is and isn’t covered
It’s important to separate what’s guaranteed from what isn’t. A guarantee covers the promised payments, but it does not protect an investor from losing money due to changes in market value.
| Covered by the third-party guarantee | NOT covered |
|---|---|
| Interest | Losses due to changes in market value |
| Dividends | Any premium paid above par value |
| Principal | — |
Worked example from the text: suppose an investor buys a bond with a $1,000 principal (par) value* for $1,200. If the bond defaults (meaning the issuer can’t repay the borrowed funds), the insurance would cover only:
- The $1,000 principal, and
- Any unpaid interest up to that point
The extra $200 the investor paid above par would not be covered.
*📌 The specifics related to bonds and other securities are generally not tested on this material. You should know what the term “guaranteed security” refers to and what’s covered by the third party. The exam typically doesn’t go much further than that.
Performance guarantees
Outside of guaranteed securities, the term “guaranteed” is usually associated with unethical activity. In particular, financial professionals must never guarantee that a security will perform in a certain way.
🔑 Prohibited performance guarantees
| Prohibited practice |
|---|
| Guaranteeing a client will make a return |
| Guaranteeing a client will not lose money |
| Refunding any transaction or advisory fees for bad performance |
One defining characteristic of a security is the possibility of loss. That’s why performance guarantees and securities don’t mix.
Even if a guarantee against loss sounds appealing, it isn’t feasible for broker-dealers, agents, investment advisers, or investment adviser representatives (IARs) to offer one. If a registered person guarantees more than they can actually cover, the guarantee can threaten the financial stability of the firm — especially during a major bear market (e.g., the Great Recession). For that reason, financial professionals should avoid performance guarantees.
Key points
Guaranteed security
- Security with backing from a third party (e.g. insurance)
- Guaranteed by a third party:
- Interest
- Dividends
- Principal
Performance guarantees
- Always unethical and prohibited
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | Model Rule 102(a)(4)-1 — unethical practices of IAs and IARs | NASAA |
| 2 | Model rule — dishonest/unethical practices of BDs and agents | NASAA |
| 3 | Rule 2210 — communications with the public, approval and filing | FINRA |
| 4 | Achievable Series 65 — chapter 4.5.3 | Achievable (course text) |