Material Misrepresentation

B is correct. Thomas violated anti-fraud provisions in two ways: (1) the affirmative false statement that the fund "consistently" outperformed when it did so in less than half the years constitutes material misrepresentation, and (2) the omission of the substantial 2%+20% fee structure is a material omission that would influence a reasonable investor's decision.

A is incorrect because the prohibition against material misrepresentation applies regardless of client sophistication; advisers cannot make false statements even to sophisticated investors. C is incorrect because the materiality standard is whether a reasonable investor would consider the information important, and misleading performance claims clearly meet this test. D is incorrect because false performance claims are not "puffery". they are specific factual misrepresentations that would influence investment decisions.

B is correct. The materiality standard is whether there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision. This is an objective standard based on what a reasonable person would find significant, not what the specific client actually considered.

A is incorrect because materiality does not require proof of actual reliance by the specific client; the reasonable investor standard is objective. C is incorrect because materiality is not determined by whether losses occurred; information can be material even if the investment ultimately performs well. D is incorrect because this describes scienter (intent or recklessness), not materiality; a statement can be material regardless of the adviser's knowledge or intent.

B is correct. This scenario demonstrates material misrepresentation through survivorship bias. excluding failed or closed accounts to inflate performance figures. The 5-percentage-point difference between 12% and 7% would substantially influence a reasonable investor's decision, and the methodology creates a false and misleading impression of the adviser's actual performance record.

A is incorrect because technical accuracy does not prevent misrepresentation when the presentation creates a misleading overall impression by omitting material information (the excluded accounts). C is incorrect because disclosure of a misleading methodology does not cure the fundamental misrepresentation; the adviser must present accurate, complete performance data, not merely explain why their data is misleading. D is incorrect because a 5-percentage-point annual difference compounded over time represents a substantial performance gap that any reasonable investor would consider material.

C is correct (the EXCEPT answer). Statements of opinion CAN constitute material misrepresentation if they lack a reasonable basis, are made recklessly, or omit material facts that make the opinion misleading. For example, an opinion that an investment is "very safe" without disclosing known material risks would be fraudulent even though "safe" is technically an opinion.

A is accurate: The Supreme Court has held that omissions of material facts can be just as fraudulent as affirmative misstatements, and Section 206 of the Investment Advisers Act prohibits both. B is accurate: Materiality is an objective standard (reasonable investor test), not a subjective standard (actual reliance by the specific client). D is accurate: Materiality focuses on whether the information would influence a reasonable investor's decision-making process, not on whether the investment ultimately resulted in profits or losses.

D is correct. All four elements constitute material misrepresentation that a reasonable investor would consider important.

Statement 1 is TRUE: The false factual claim about AAA rating is affirmative material misrepresentation. The current rating is A+, a significant difference that affects risk and yield.

Statement 2 is TRUE: The opinion that the bond is "extremely safe" constitutes misrepresentation because it lacks a reasonable basis given the known rating downgrade, pending lawsuit, and near-term call risk. Opinions can be fraudulent when they omit material facts or are not reasonably grounded.

Statement 3 is TRUE: Failing to disclose the major lawsuit is a material omission because litigation affecting creditworthiness would substantially influence a reasonable investor evaluating bond safety and risk.

Statement 4 is TRUE: Omitting that the bond is callable in six months is material because call features affect the investment's risk profile, potential duration, and suitability for a conservative investor seeking stable income.