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Everyone wants to know what tomorrow will bring, and FINRA has proposed amendments to Rule 2210 (Proposed Amendments) that would give broker-dealers more flexibility to communicate exactly that – at least as it relates to projected performance and targeted returns. If adopted, the Proposed Amendments would more closely align FINRA Rule 2210 with the rule governing investment adviser marketing (the Marketing Rule).
Background
FINRA Rule 2210 has long prohibited projections of performance, subject to a few narrow exceptions. The concern is not unreasonable: projections have the potential to be especially misleading, overly persuasive, or misunderstood, particularly by retail investors. At the same time, the utility of projections led the SEC to permit them in advertisements (subject to certain conditions) under the Marketing Rule. This disparate treatment of projections has been a source of tension within the market, preventing brokerage customers from accessing the same information as an advisory client simply because their financial professional is associated with a FINRA member. FINRA sought to address that tension in 2023; however, the SEC prevented that rule change from taking effect.
The New Proposal
Under the Proposed Amendments, Rule 2210 would permit projected performance and targeted returns for securities, portfolios, or investment strategies, subject to three core conditions:
- adoption of written policies and procedures (WSPs) reasonably designed to ensure the projections are relevant to the intended audience;
- a reasonable basis for the criteria used and assumptions made and related records;
- and disclosure as to whether the performance is net of fees and the risks and limitations of projected performance or targeted returns.
While the FINRA conditions are intentionally modelled after the framework under the Marketing Rule, the Proposed Amendments are narrower in scope, covering only projections and targeted returns rather than the full universe of "hypothetical performance."
Takeaway
This proposal comes as a relief for those concerned that the 2023 proposal represented the end of FINRA's willingness to conform Rule 2210 requirements to the Marketing Rule. Comments are due 21 days after the Proposed Amendments are published in the federal register and based on the 2023 proposal we anticipate a significant number of commenters.
A more detailed firm client alert will be forthcoming.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
