The Financial Industry Regulatory Authority is proposing amendments to its Rule 2210 governing communications with the public, reports ThinkAdvisor.
Currently the rule prohibits projections of performance or targeted returns in member communications. The proposed rule change, filed with the Securities and Exchange Commission, would allow a FINRA broker-dealer to project the performance or provide a targeted return regarding a security or asset allocation or other investment strategy in a communication to institutional investors or in a communication distributed solely to qualified purchasers that promotes or recommends specified non-public offerings.
The change is aimed at bringing Rule 2210 into closer alignment with the SEC’s Marketing Rule, Rule 206(4)-1, which generally allows the use of such projections in communications.
FINRA said the general prohibition against performance projections is intended to protect investors who may lack the capacity to understand the risks and limitations of using projected performance in making investment decisions. But in proposing the change, the authority noted that some broker-dealer customers, in particular institutional investors, request other types of projected performance that the current rules do not allow.
ThinkAdvisor reported that broker-dealers who want to provide projected performance or targeted returns in marketing communications would have to meet certain conditions, “including but not limited to adopting applicable written policies and procedures and having a reasonable basis for the criteria and assumptions made in calculating the projected performance or targeted return.”
In its effort to align with the SEC’s marketing regulation, FINRA said broker-dealers should be able to comply with proposed requirements in Rule 2210 “similar to how investment advisers must comply with similar requirements applicable to the use of hypothetical performance under the IA Marketing Rule.”
FINRA’s proposal does require that members using performance projections or targets have a reasonable basis for the criteria and assumptions used, to ensure that projections are not wildly optimistic and are made in good faith.
If the SEC approves the proposed rule change, FINRA will announce the implementation date of the rule change in a Regulatory Notice.
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