Broker-dealers that also run advisory businesses may get the fastest start to get in line with FINRA’s newly approved rule on performance projections, which was adapted substantially from the SEC’s marketing rule for investment advisers.
This month, the Securities and Exchange Commission approved amendments to FINRA Rule 2210 adding a fourth carve-out to its long-standing ban on public-facing communications that predict or project performance.
Under the SEC's approval order published in the Federal Register last week, member firms will be able to present projected performance or targeted returns for a security, a securities portfolio, or an asset allocation or other investment strategy, subject to specified conditions.
“The rule is derived from the Investment Adviser Marketing Rule’s conditions regarding hypothetical performance nearly word for word,” Andrew Mount, counsel at Eversheds Sutherland, told InvestmentNews in a recent interview.
Before the change, Rule 2210 allowed projections in only three settings: hypothetical illustrations of mathematical principles, certain investment analysis tools, and price targets in research reports. The newest exception blessed by the SEC comes with three conditions.
First, firms must adopt written policies and procedures reasonably designed to ensure a communication is relevant to the likely financial situation and investment objectives of its intended audience. Second, they must give that audience enough information to understand the criteria and assumptions behind a projection, along with its risks and limitations. Third, they must keep records showing the source of any projection or targeted return they use.
Importantly, FINRA said such communications should go only to investors with the resources and financial expertise to evaluate them. The rule generally would not permit projections in communications aimed at a mass audience or the general retail public, and the change is set to mainly affect institutional and other sophisticated investors.
Read more: Modernizing Rule 2210: What FINRA’s recent proposals signal for broker-dealer communications
FINRA first floated the idea nearly a decade ago in Regulatory Notice 17-06 in February 2017. A narrower 2023 version, limited to specified sophisticated investors, won SEC staff approval in July 2024, though just days later the commission stayed that approval for review.
FINRA refiled in February this year, inviting feedback to the latest iteration of the proposal. In response to comments, it then dropped an express reasonable-basis requirement and two prescribed disclosures, one on whether figures are net of fees and one on why projections might differ from actual results.
Mount said dually registered firms, including many of the largest hybrid RIAs operating in the country, will have an edge over pure broker-dealer firms by virtue of the processes and systems their compliance teams built for the RIA side when the SEC marketing rule took effect in 2021.
“A dual registrant who, on the advisory side, allows hypothetical performance and has defined a certain audience that can receive hypothetical performance can leverage that work when presenting brokerage pieces under amended Rule 2210,” he said. “That’s the biggest advantage of this rule for dual registrants.”
Standalone broker-dealers face a heavier lift, he said, as they will for the first time have to go through the work of "determining what that audience limitation should be [and] what are the type of retail investors that should receive these types of communications with projected performance and targeted returns."
In the past, the SEC has been willing to police hypothetical performance on the advisory side, notably in 2024 when it fined five advisory firms over hypothetical performance advertising for failing to adopt the required audience policies. In its approval order this month, the SEC stated that disclosures meeting its marketing rule will not automatically satisfy Rule 2210.
“FINRA has content standards, and FINRA’s content standards aren’t changing as a result of this amendment,” Mount clarified. “So while there’s an alignment between the type of audience that can see hypothetical performance on the advisor side and projected performance or targeted returns on the broker-dealer side, the rules are not identical.”
Many broker-dealers distribute figures prepared by fund sponsors and alternative investment managers rather than producing their own. FINRA said it would not generally expect firms to independently verify every assumption behind a third-party projection, though it would expect them to evaluate the source, assess whether the available information supports the projection, and confirm the presentation meets Rule 2210’s content standards.
Mount said the disclosure condition effectively builds in that obligation. “There’s a part of that that requires you to understand the data that you’re getting from third parties before you pass it on to your retail client base,” he said.
As the competition has grown among asset managers to get a spot on wealth firms' product shelves, there's also been growing pressure for them to provide support across various areas, including product intelligence. Faced with FINRA's newly approved rule change, distributors may decide to cut managers who cannot adequately validate their numbers, though Mount does not see that as an absolute certainty.
“I really think it remains to be seen how this plays out in practice,” he said.
The latest change is an incremental one, as FINRA declined to extend the exception to backtested, model, related or extracted performance. Still, the self-regulator also did not rule out the possibility of future amendments.
“I think this is the first in a few different steps to move Rule 2210 communications with the public closer to the SEC marketing rule,” he said.
The newest tweak in marketing communications is part of FINRA’s rule modernization initiative, which has also produced a streamlined outside activities rule that the SEC approved in September, as well as a proposed 10-business-day fraud hold rule. Mount also pointed to a FINRA regulatory notice from earlier this year that addresses eliminating the principal pre-use approval requirement for retail communications.
“We haven’t seen a regulatory notice yet from FINRA setting an effective [implementation] date,” Mount said. “I’d imagine ... in the months leading up to that effective date, we’ll start to see firms really start to consider how they’re going to change their policies and procedures and their business practices to align with it.”
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