The Back-Tested Email
A branch AP emails a one-page 'performance summary' to 43 retail prospects. It shows a chart of simulated results for his discretionary program labeled 'back-tested, 2019-2024, annualized 34%, verified by our outside accountant.' The text reads: 'The program has never had a losing quarter, and your principal is protected by the exchange's guarantee.' A client quote reads: 'I've made money every month since I joined.' There is no risk disclosure, no statement that the results are hypothetical, and no statement that past performance does not guarantee future results. The AP says he 'ran it by' the branch manager verbally last month and treated that as approval. Two recipients have already wired funds.
1. Identify each deficient element in the piece and explain why it fails, not just that it fails.
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Simulated results presented as performance. Back-tested numbers are hypothetical. They must be labeled as hypothetical prominently, with the limitations stated: the results were not achieved in an actual account, they are the product of hindsight, they assume liquidity and fills that may not have existed, and no customer received them. A label buried in a chart title is not a prominent disclaimer.
'Annualized 34%' over five years. Annualizing a back-test magnifies the impression of reliability and is only acceptable with the hypothetical disclosure and a plain statement that results were not achieved.
'Verified by our outside accountant.' An accountant's involvement must be described accurately. If the accountant reviewed the arithmetic of a simulation, saying it 'verified' the results implies an audit of actual performance. That is a material misrepresentation.
'Never had a losing quarter.' Implies a consistency that simulation cannot support and, combined with the next clause, becomes a promise.
'Principal is protected by the exchange's guarantee.' False in substance: exchange or clearinghouse guarantees address counterparty performance, not market losses, and futures positions can lose more than the amount invested. This is the most serious statement in the email.
Testimonial. A client claiming profits 'every month' must be representative, and no typical-results caveat is given.
Missing disclosures. No risk-of-loss disclosure, no hypothetical disclaimer, no past-performance caveat, no statement that the material is a solicitation.
2. What must happen before any corrected version goes out, and what should be done about the two funded accounts?
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Before distribution:
- Stop the piece. Instruct the AP in writing to send nothing further on this program and to preserve the sent version.
- Rewriting is not enough by itself. The corrected piece must strip the principal guarantee, restate the accountant's role accurately, carry a prominent hypothetical-results disclaimer with limitations, qualify or drop the testimonial, and include risk and past-performance disclosures.
- Review and approval by a qualified supervisor with the authority to approve communications with the public - before use, with the approval documented and dated. A verbal 'run it by' is not approval; a supervisor who accepted one created the exposure.
- Recipient universe check. Confirm whether any recipient is a person the firm may not solicit and whether the AP's registration covers the activity.
The two funded accounts:
- Contact each customer before further deposits, confirm whether the decision was induced by the guarantee language, and document the conversation.
- If the customer relied on a false guarantee, escalate to compliance and legal for a rescission/make-whole decision. Do not let the AP 'handle it.'
- Send a corrective communication to all 43 recipients that plainly retracts the guarantee, identifies the hypothetical nature of the results, and offers contact with a supervisor. Route the draft through compliance first.
3. How should the branch manager handle the AP's claim of verbal approval and the recordkeeping side of this?
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On the 'approval':
- Treat the claim as an aggravating fact, not a defense. Written supervisory procedures require documented pre-use review; a verbal exchange a month earlier cannot satisfy that and, if it happened, shows the supervisor approved material he never read.
- Write down what the AP says, when, and who the supervisor was. If the supervisor confirms he approved it, the file must show that - the problem is the firm's, not only the AP's.
- Disciplinary consequence should turn on the guarantee language and the distribution, not merely on the missing disclaimer.
Records:
- Preserve the exact email as sent, including headers, recipient list, and date. The version the AP 'meant' to send is irrelevant.
- Preserve the chart source, the back-test methodology, and the accountant's actual engagement letter - those documents determine whether 'verified' was accurate.
- Retain the supervisory review file, the corrective communication, and the customer conversations for the required retention period.
- Log the item in the branch's complaint/incident tracking so a pattern across APs is visible; one unapproved guarantee piece is usually not the only one.