SEC to Review FINRA Rule Change to Allow Projections on Fund Performance

The SEC instituted proceedings to decide whether to approve a FINRA rule amendment that would let member firms project investment performance and advertise targeted returns to the public.

In its Order, the SEC said it would determine whether to approve or disapprove the change, which would amend FINRA Rule 2210 ("Communications with the Public"). The rule generally prohibits member firms from predicting or projecting performance in communications with the public, subject to three narrow exceptions, "(i) certain hypothetical illustrations of mathematical principles; (ii) certain investment analysis tools or written reports produced by such investment analysis tools; and (iii) certain price targets contained in research reports on debt or equity securities."

The proposal would add a fourth exception, allowing a member firm to project the performance of, or provide a targeted return for, a security, a securities portfolio, or an investment strategy, if it:

• adopted written policies and procedures designed to ensure the communication was relevant to the intended audience;
• had a reasonable basis for the criteria and assumptions used and kept written records supporting them; and
• disclosed those criteria and assumptions, including whether the projection was net of fees, along with the risks and limitations of relying on it.

The SEC said it instituted proceedings in view of the legal and policy issues raised by the proposal, and that the step did not indicate any conclusion. 

The SEC requested written comments within 21 days of the Order's publication in the Federal Register, and any rebuttal comments within 35 days.