The Securities and Exchange Commission last week approved a new marketingrule governing broker/dealer communications with the publicfiled by the Financial Industry Regulatory Authority on February 10 that calls for a change to FINRA Rule 2210.
Thenew rule will allow member broker/dealer firms to promoteprojected performance or provide information abouttargeted investmentreturns with respect to a security, a securities portfolio or an asset allocation or other investment strategy whenit communicates with the public, subject to specified conditions.
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Industry Reaction
The proposed rule change was published for public comment in the Federal Register on February 25 andthe comment period closed on March 18.
During the comment period, several industry groups and regulators weighed in on the proposal, including the North American Securities Administrators Association Inc., which argued that the rule should include stronger investor-protection guardrails.
NASAA’s comment letter stated that the association could not support the requested change without greater investor protection guardrails.
“Specifically, the proposal should require that broker/dealer written policies and procedures are designed to ensure that retail investors receiving projections ‘have the financial expertise and resources to understand the risks and limitations of such presentations,’ and limit projections to retail investors to circumstances where a broker/dealer ‘is recommending a securities transaction or investment strategy involving securities,’” stated the letter.
After reviewing NASAA’s comments and others’, FINRA on June 30 submitted a response and filed a partial amendment to the initialproposal. The amended proposal retained the general prohibition on communications that predict or project performance, but created a new, limited exception allowing broker/dealers to provide projected performance or targeted returns subject to specified conditions.
FINRA stated in itsresponse, “NASAA commented that FINRA should allow projections only in member communications to retail investors that include a recommendation of a securities transaction or investment strategy involving securities. NASAA also recommended that FINRA require that broker/dealer written policies and procedures be designed to ensure that retail investors receiving projections have the financial expertise and resources to understand the risks and limitations of such presentations.”
After reviewing public comments and FINRA’s subsequent amendments to the proposal, the SEC ultimately approved the rule change, creating a new exception to FINRA Rule 2210’s general prohibition on projected performance and targeted returns.
Dissecting the Rule
Prior to the amendment, FINRA Rule 2210 generally prohibited broker/dealers from including projected performance or targeted returns in communications with the public, subject to a limited number of exceptions.
Under the revised rule, firms that use projected performance or targeted-return information must adopt written policies and procedures designed to ensure the communications are relevant to the likely financial situation and investment objectives of the intended audience. Firms also must provide information about the assumptions and methodology used to calculate projections, explain the risks and limitations of relying on them and maintain records identifying the source of the projected-performance or targeted-return information.
According to FINRA, the exception is generally intended for investors with the resources and financial expertise to evaluate the information and is not aimed at broad retail advertising campaigns.
The amendment of the rule was a part of FINRA’s quarterly policy agenda published just a few days before the SEC finalized the rule.
The revisedrule may also affect communications around alternative investments orprivate-market strategies, where projected returns are commonly used by issuers and advisers when discussing expected outcomes with sophisticated investors.
FINRA’s proposal noted that investors may already receive projected-return information from registered investment advisers, issuers and other market participants, while broker/dealers have traditionally faced stricter restrictions.
The SEC’s approval order did not include an effective date. FINRA is expected to announce the effective date in an upcoming regulatory notice.
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