FINRA Proposes Allowing Performance Projections in Broker Communications
Commentary by Steven Lofchie
FINRA proposed amending its rules governing communications with the public to allow broker-dealers to include projections of performance and targeted returns.
The proposal would amend FINRA Rule 2210 ("Communications with the Public"), which currently prohibits the use of performance projections or targeted returns, subject to limited exceptions. In doing so, the rule change would create a new, narrowly tailored exception allowing members to project the performance or provide a targeted return for a specific security, securities portfolio, or investment strategy, provided the communications are carefully derived from a sound basis and distributed to an appropriate audience.
Under the proposal:
- Members must adopt and implement "written policies and procedures reasonably designed to ensure that the communication is relevant to the likely financial situation and investment objectives of the intended audience;"
- Members must have "a reasonable basis for the criteria used and assumptions made in calculating the projected performance or targeted return, and [must] retain written records supporting that basis;"
- Communications must provide sufficient information for the intended audience to understand the underlying criteria and assumptions, "including whether the projected performance or targeted return is net of anticipated fees and expenses;" and
- Communications must disclose the "risks and limitations of using the projections or targeted return[s] in making investment decisions, including the reasons why actual performance might differ from the ... projections."
FINRA stated that these changes are intended to better align broker-dealer regulations with the SEC's Investment Adviser Marketing Rule, thereby reducing investor confusion and regulatory arbitrage by harmonizing the information investors can receive from both broker-dealers and investment advisers. While the proposal removes strict threshold limitations on which investors can receive these communications, FINRA noted the requirement to tailor communications to an intended audience's financial situation will generally preclude members from using projections in communications directed to mass retail audiences.
If approved by the SEC, the effective date of the proposed rule change will be published in a Regulatory Notice.
Commentary
This is, for the reasons noted in the proposal, a very sensible rule amendment. It made no sense that FINRA would impose a stricter rule on broker-dealers than the SEC imposed on investment advisers with respect to the same marketing materials. The divergence in regulatory requirements resulted in situations where, for example, marketing material that could be sent by an investment adviser would be illegal if mailed by a broker-dealer.