SR-FINRA-2023-016

On November 14, 2023, the Financial Industry Regulatory Authority (FINRA) announced on its website an upcoming consultation on proposed amendments to FINRA Rule 2210 relating to „communications“ (e.g. sales literature or research reports) to enable FINRA member firms to include projected performance and targeted returns in institutional communications (communications to institutional investors) and communications exclusively distributed to qualified purchasers (QPs) that promote or recommend certain non-public offerings. The consultation has meanwhile been published in the Federal Register for public consultation, feedback on which may be provided up to December 15, 2023.
#### Background
The proposed amendments to Rule 2210 by FINRA stem from concerns raised during a retrospective review of FINRA’s rules, which indicated that the existing prohibition on projecting performance unduly restricts broker-dealer and their customers, especially institutional investors and qualified purchasers, without corresponding benefits. To address this, the proposal permits the use of performance projections in specific communications aimed at institutional investors and QPs promoting certain non-public offerings, subject to specific conditions. Also, as FINRA notes, full-service broker-dealers providing performance projections pose no additional risk to such customers who might already have access to such information from other financial market intermediaries.
#### Conditions for the disclosure of performance projections
In order to include such projections in communications with institutional investors and QPs, FINRA member firms would have to meet some stringent requirements including the following:
(1) Establishment of adequate policies and procedures: Member firms would have to establish and implement written policies and procedures to ensure the relevance of communications to investors‘ financial situations and investment objectives, as well as compliance with all other applicable requirements and obligations. This requirement would align with those in the marketing rule under the Investment Advisers Act of 1940 for private fund and investment adviser marketing materials containing targeted or projected performance returns.
(2) Reasonable basis for the computation of such figures: Broker-dealers would have to possess a reasonable basis for criteria and assumptions used in calculating projected performance or targeted returns. Also, member firms would have to maintain written records supporting the basis for these criteria and assumptions. Supplementary Material to Rule 2210 would thereby provide a list of factors to consider when forming a reasonable basis for projections, including macroeconomic conditions, financial models, historical performance, fees, industry-specific factors, and reliability of research sources.
(3) Disclosure requirements: Any communication would have to prominently disclose that projected performance or targeted returns are hypothetical and not guaranteed. Additionally, broker-dealers would be required to provide sufficient information for investors to understand the criteria and assumptions behind the projections, including whether they account for fees and expenses. Moreover, firms would have to disclose ALL risks associated with using the projections for investment decisions, clarifying potential disparities between projected and actual performance.
(4) Supervisory requirements: Registered principals would have to review and approve communications sent to more than 25 non-institutional QPs over a 30-day period. Broker-dealers using third-party models or software for projections would also have to establish and maintain a supervisory system ensuring compliance with applicable regulations and rules.
Also, member firms would be prohibited from basing projected performance on hypothetical, back-tested performance or prior portfolio performance created solely for establishing a track record. Moreover, they would be required to adhere to the general standards in Rule 2210 as to fairness, balance, and the avoidance of false or misleading content in the communications.