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Investor advocates raise concerns over FINRA marketing proposal

On Behalf of | Nov 29, 2023 | FINRA Compliance

Investor advocates have raised concerns about a new Financial Industry Regulatory Authority proposal involving the marketing of financial products, reports AdvisorHub.

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.  Brokers would be able to project investment performance when marketing to institutional investors or “qualified purchasers”, who have at least $5 million in investments.

The change is aimed at bringing FINRA 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.  Currently Rule 2210 prohibits projections of performance or targeted returns in member communications.

The objections expressed by investor advocates include concerns that more clients would be subjected to risks involving private placement investments as opposed to publicly traded securities, which carry stricter disclosure requirements.

Joe Peiffer, president of the Public Investors Advocate Bar Association, was quoted as saying the private investments “make up a significant part of the harm that we see to investors” and that loosening the marketing requirements to permit performance projections is “going to result in trouble for American investors.”

The report also noted the published comments of Stephen Hall, legal director of investor protection group Better Markets, who said that using projections of performance “is one of the easiest ways to mislead people.”

In proposing the rule change, FINRA said “Some broker-dealer customers, in particular institutional investors, request other types of projected performance that the current rules do not allow.”

But the 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.

The SEC may designate a public comment period of up to 90 days on the FINRA proposal. If the SEC approves the proposed rule change, FINRA will announce the implementation date in a Regulatory Notice.

The attorneys at Lewitas Hyman regularly monitor SEC, FINRA and other self-regulatory organizations’ rule-making activities to help ensure that our clients are aware of any new policies, while assisting them in implementing any recommended changes. Our clients include broker-dealers, RIAs, banks, investment companies and hedge funds, along with registered representatives and other individuals participating in the securities industry.  Should you be in need of experienced counsel regarding a matter involving a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.