FINRA — the Financial Industry Regulatory Authority, Inc. — has proposed changes to FINRA Rule 2210, governing communications with the public. Currently, FINRA member broker-dealers cannot include performance projections or target returns in institutional communications or communications to qualified purchasers. However, the SEC — the Securities and Exchange Commission — marketing rules allow SEC-registered investment advisers to include that information in their advertising materials subject to certain conditions. The rule change would align the SEC and FINRA rules.
The current FINRA rule creates challenges for investors, broker-dealers, and sponsors. Most investors want some idea of targeted returns and performance projections. Without them, it is not easy to decide whether or not to invest in a fund. Since many of these investors are sophisticated, the risk of them being misled by projections or targeted returns is unlikely. Furthermore, they often use these projections to determine whether or not to invest in a fund. The result is that funds offered through FINRA broker-dealers are at a disadvantage to other funds since the FINRA rule only applies to FINRA members.
The proposed rule change would be conditional. To qualify, FINRA member broker-dealers would be required to adopt written policies and procedures regarding the relevance of their communications, have a reasonable basis underlying the calculations in their targets or projections, provide specific information to investors, and make required disclosures. In addition, the proposal for the rule outlines what constitutes a reasonable basis for calculations.
While the proposed rule would narrow the gap between the current FINRA rule and the SEC rule, there would still be differences between the two standards. The full proposal is available on the FINRA website.
Quadrant’s team of experts will keep you informed of proposed rules that may impact your compliance program.