Finra accepting comments on rule change to allow investment-strategy projections

Broker-dealer groups endorse the change, saying it would put them on a level playing field with investment advisers

Mar 8, 2017 @ 1:00 pm

By Mark Schoeff Jr.

Finra is accepting comments on a proposal that would allow brokers to project the performance of investment strategies in communications with clients.

Under the proposal by the Financial Industry Regulatory Authority Inc., a broker could distribute to clients a hypothetical financial plan that includes projected performance of an asset allocation or strategy but not a prediction of return on an individual stock.

The proposed easing of restrictions in Finra's public communications rule is the result of an assessment of current rules. It would allow brokers that do not have an investment-adviser arm to use projections in the same way that investment advisers do, Finra said.

"Finra anticipates that these benefits would largely accrue to clients that do not have investment advisory accounts and, as a result, are not already receiving projections-related communications," Finra wrote in its proposal. "Firms that are not dually registered or that do not employ dually-registered persons may be able to compete more effectively, as they now can provide a potentially valuable service to their clients."

Jon Hurd, chief executive of Asgard Regulatory Group, said that Finra is trying to harmonize its oversight of brokers with the standards that govern investment advisers.

"The broker-dealers have been handicapped by the difference in rulemaking," Mr. Hurd said. The Finra proposal would ensure that the "communications with the public rule will better align with the distribution of research reports."

In its comment letter, the Equity Dealers of America, a trade group, said that the change to Finra's rule on communications with the public would allow brokers the same latitude as investment advisers.

"[It] would place our members on a level playing field with stand-alone investment advisors that are not subject to the existing Finra prohibition," Christopher Iacovella, chief executive of Equity Dealers of America, wrote in its letter.

He added: "We believe that the proposed amendment is a common-sense way to make certain that Finra regulations do no inadvertently create an incentive for clients to choose one business model over another."

The Equity Dealers of America is a relatively new trade association that describes itself as an organization that "exclusively represents the interests of middle market financial services firms who provide 'Main Street' businesses with access to capital and advise hardworking Americans on how to create and preserve wealth." Its members include D.A. Davidson & Co., Janney Montgomery Scott, Raymond James Financial and Robert W. Baird & Co.

The Financial Services Institute, which represents independent broker-dealers and financial advisers, has not yet filed a comment letter on the proposal but backs Finra's rule review.

"This proposal is an effort by Finra to establish uniform requirements for broker-dealers and investment advisers in their communications with the public," Robin Traxler, FSI vice president of regulatory affairs and associate general counsel, said in a statement. "We applaud their efforts to reexamine existing rules that they know to be historically frustrating or confusing to their members."

The Finra rule change would require that a broker establish a "reasonable basis" for a projection and would prohibit the use of "hypothetical back-tested performance" or the past performance of a particular asset manager. It also would require that a firm principal approve each illustration if it is not based on a "reliable" software package.

"That's a great check-and-balance from a supervisory perspective," Mr. Hurd said.


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