FINRA Issues Interpretive Letter Regarding “Related Performance Information” for Institutional Investors (with Lofchie Comment)
FINRA issued an interpretive letter to an underwriter and wholesale distributor of registered mutual funds. The letter concerns the use of "Related Performance Information" in communications that are distributed solely to institutional investors pursuant to FINRA Rule 2210(a)(4).
In the letter, FINRA stated that the presentation of Related Performance Information in communications with the public, in some cases, is inconsistent with the content standards of Rule 2210(d)(1). On the other hand, FINRA has recognized that communications provided solely to institutional investors do not raise the same investor protection concerns as sales materials provided to retail investors, and therefore, has permitted member firms to provide certain related performance information to certain institutional investors, with appropriate safeguards.
FINRA referenced an interpretive letter from 2003, that stated it would not object if a member firm included Related Performance Information in sales materials for private funds, if the information was made available only to qualified purchasers, as defined in the ICA, and the member firm complied with all other applicable standards. FINRA agreed that the same rationale can be applied in the instant case regarding the distribution of Related Performance Information with respect to public mutual funds.
Lofchie Comment: FINRA's ban on the use of Related Performance Information raises very material public policy questions. It is far from obvious that the public interest is served by prohibiting investors from seeing how well advisers have performed in managing other funds; in fact, a good argument may be made that such information would be useful to investors. Rather than prohibiting the presentation of Related Performance Information to retail investors, FINRA should do a 180ordm; turn, and mandate the disclosure of such information, and require that the disclosure be made in a straightforward plain-English manner.
See: FINRA Interpretive Letter; FINRA Rule 2210.