Misrepresentation and Omissions

Misrepresentation and omissions of material facts are core violations under the anti-fraud provisions of the Uniform Securities Act. These violations can occur in any securities transaction and carry significant penalties.

What Is Misrepresentation?

Misrepresentation (also called a "misstatement") is making an untrue statement of material fact. It includes:

• Stating something that is factually false
• Exaggerating or embellishing facts
• Making predictions presented as facts
• Creating false impressions

Types of Misrepresentations

What Is an Omission?

An omission is the failure to disclose a material fact that is necessary to make other statements not misleading. Omissions are just as serious as affirmative misstatements.

When Is Disclosure Required?

Disclosure is required when:

1. A fact is material to the investment decision
2. Silence would make other statements misleading
3. There is a duty to speak (such as in advisory relationships)
4. The omission creates a false impression

Common Material Omissions

The Materiality Test

Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.

Factors Determining Materiality

Exam Tip: When in doubt, disclose. If information might be material, it should be disclosed. Only clearly immaterial facts need not be disclosed.

Half-Truths

A half-truth is a statement that is technically accurate but creates a misleading impression because important context is omitted.

Example of a Half-Truth

• Statement: "Our mutual fund has never had a down year."
• Omitted fact: "The fund was created 6 months ago during a bull market."
• Why it's misleading: Creates the impression of a long track record when none exists.

Key Point: A half-truth is just as fraudulent as a complete lie because it deliberately creates a misleading impression.

Duty to Update

Securities professionals have an ongoing duty to update previously disclosed information when:

• Circumstances have materially changed
• Previously accurate information becomes misleading
• New material information becomes available

Example

An agent tells a customer that a company's bonds are rated AA. Later, the agent learns the rating has been downgraded to BB (junk status). The agent has a duty to update the customer, especially if the customer relied on the original information.

Conflicts of Interest

Conflicts of interest must always be disclosed. Common conflicts include:

Principal Transactions

A principal transaction occurs when a broker-dealer buys from or sells to a customer from its own inventory. These transactions require:

1. Disclosure of the broker-dealer's role as principal
2. The customer's consent before completion of the transaction
3. Appropriate pricing (no excessive markups)

Performance Guarantees

Guaranteeing performance or predicting specific returns is prohibited:

• ❌ "This stock is guaranteed to go up 50%"
• ❌ "You will definitely make money on this investment"
• ❌ "I promise you won't lose any money"
• ✅ "Historical returns have averaged X%, but past performance doesn't guarantee future results"

Key Takeaways

• Misrepresentation is making an untrue statement of material fact
• Omission is failing to disclose material facts when there is a duty to speak
• Half-truths (technically true but misleading) are just as fraudulent as complete lies
• Material information is what a reasonable investor would consider important
• Conflicts of interest must always be disclosed
• Securities professionals have a duty to update previously disclosed information
• Performance guarantees and predictions of specific returns are prohibited