A Finra proposal on performance advertising aims to align its oversight of broker marketing with the SEC’s marketing rule for investment advisors — a move that would help dually registered advisors adhere to both regulations.
The Financial Industry Regulatory Authority Inc. filed a proposal last week with the Securities and Exchange Commission that would allow brokers to use projections of performance or targeted returns when touting securities, asset allocations or investment strategies to an institutional investor or non-public offerings to qualified purchasers, who must have $5 million or more in investible assets. The amendments to Finra’s rule on communications with the public give brokers more leeway when marketing to the two groups.
Finra is seeking SEC approval for the changes following the implementation last year of the SEC’s marketing rule, which for the first time in more than 60 years overhauled how registered investments advisors can advertise their firms.
The SEC rule also allows for performance advertising as long as advisors adhere to certain prohibitions. Investment advisors have been operating under the SEC marketing rule since it went into force a year ago.
Those who also are registered as brokers will find the SEC rule complements Finra’s proposal, said Russell Fecteau, who is of counsel at Davis Wright Tremaine.
“Much of what they have done for the [SEC] marketing rule will pair nicely with what Finra is proposing in this rule,” said Fecteau, a former Finra counsel. “What they’re trying to do here is come into alignment with the SEC marketing rule.”
It’s something brokers have been anticipating. The Finra proposal was first released in 2017. It likely is moving ahead now that the SEC promulgated its marketing rule.
“This is a welcome change to the [Finra] rule and a sensible one given the changes in the SEC’s marketing rule,” said Steve Stone, a partner at Morgan Lewis. “We’re assuming this reflects a fair amount of dialogue with SEC staff. The overall purpose is to harmonize the [marketing regulation] approach where possible.”
Finra’s easing of the prohibition on performance projections is subject to certain conditions. The investment or strategy must fit the financial situation and objectives of the investor. The broker must have a reasonable basis for the criteria and assumptions used in calculating the projected performance and must make clear that it is hypothetical, with no guarantee that the performance promises will come true.
The requirements are similar to those the SEC put in place for investment advisors but are more restrictive, said Thayne Gould, director at Vigilant, a compliance consulting firm.
“There seems to be a little more detail in the Finra rule about the guardrails on the use of the projections,” Gould said. “It is definitely narrow. Because this is so prescriptive, it’s probably going to be a best practice to lean toward the specifics that are given by the Finra rule if there’s a situation in which there’s an overlap between the two marketing rules.”
Investor advocates have raised concerns about the Finra proposal because of the potential harm retail investors could suffer by being misled by performance projections. As with all Finra rule changes, the amendments to the communications rule must be approved by the SEC. The SEC could seek public comment, and the timeline for its decision is not clear.
Finra asserted it is taking care to protect investors even while allowing performance advertising.
“The proposed rule change is narrowly tailored to address the need for projections or targeted returns by restricting their use only in specified scenarios involving institutional investors or [qualified purchasers], well-established categories of persons that have been previously determined to be financially sophisticated or able to engage expertise for purposes of the securities laws,” the Finra proposal states.
Fecteau calls the proposal “a step in the right direction” to allow brokers to make performance projections to investors who are purchasing private placements.
“There’s no reason they shouldn’t have access to this information,” he said.
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