The Financial Industry Regulatory Authority is relaxing a proposed rule amendment that would allow broker-dealers and their associated persons to project performance of securities and investment strategies in their marketing materials.
Finra in February submitted to the Securities and Exchange Commission a proposed change to rule 2210, in which the self-regulator sets guidelines for firms’ public communications. The change would allow firms to publicize performance projections and targeted returns for securities, portfolios, asset allocations and other investment strategies, provided that certain guidelines are met.
Last week, at the conclusion of the SEC’s window for submitting comments on the proposed amendment, Finra Vice President and Associated General Counsel Joseph Savage submitted to the SEC an amendment to the proposed change, bowing to multiple comments seeking looser requirements for performance-based marketing.
Per February’s proposal, firms projecting a security’s performance or publicizing a targeted return were required to implement written policies and procedures ensuring that the communication was relevant to the intended audience’s likely financial situation and investment objectives.
Firms also had to provide sufficient information for the intended audience to understand the projection or target’s underlying criteria and assumptions — including whether anticipated fees and expenses were included — and to disclose the risks and limitations of using the projection or target and why the estimates might differ from actual performance.
Firms were further required to have a “reasonable basis” for the projection or target’s underlying criteria and assumptions, and they had to retain written records supporting that methodology.
The reasonable-basis requirement drew widespread objection from commenters, with dissenters arguing that broker-dealers would have difficulty demonstrating their own reasonable basis for a projection or target that had been provided by a fund or its distributor.
In removing that requirement from last week’s amended proposal, Savage in a letter to the SEC said that the reasonable-basis standard was already baked into existing rule 2210 content standards that say all member communications must be “based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.”
Savage also cited other rule 2210 provisions preventing false or exaggerated statements and preventing publication of any information that a member firm knows, or has reason to know, is untrue, false or misleading.
The other main change in last week’s amended proposal is Finra’s removal of the language requiring firms to indicate whether a projection or target includes anticipated fees and expenses or why projected performance might differ from actual performance. Savage in explaining the decision to remove those requirements again cited rule 2210’s existing content standards.
“FINRA believes that, in retrospect, these disclosure requirements may be too narrow for communications that contain a projection of performance or targeted return, since Rule 2210’s general content standards may require different disclosures to ensure that a communication that includes a projection of performance or targeted return is fair, balanced, and not misleading,” Savage wrote.
The rule in its amended form falls more closely in line with the SEC’s marketing rule, satisfying a request made by several commenters who raised compliance concerns.
Meanwhile, investor advocates say the amendments to rule 2210 will result in investor harm.
Columbus, Ohio–based attorney Courtney Werning, whose firm represents investors in securities-industry litigation, told FA-IQ that rule 2210’s general content standards are not an adequate replacement for the specific parameters that were removed in the amended rule.
“Specific rules exist because general ones are not enough,” Werning, of Meyer Wilson Werning, said via email. “This is a significant step backward for investor protection.”
“The idea that a broker-dealer should be able to pass along a third-party projection without independently substantiating it is deeply troubling,” Werning added.
Pensacola, Florida–based attorney Michael Bixby, president of the Public Investors Advocate Bar Association, was an opponent of Finra’s move to allow performance projections and targeted returns for securities even before last week’s amendment.
“Allowing members to make projections with complicated disclaimers will almost certainly result in greater investor confusion, and it is difficult to see how these changes advance FINRA’s investor protection mission,” Bixby told FA-IQ via email on Tuesday.
“If these rule changes are adopted, supervision and compliance will need to watch any such communications like a hawk and FINRA will need to take real regulatory enforcement actions to curb abuses,” he added.
The newly amended proposal, which is available on the SEC’s website, was published in the Federal Register on Tuesday, marking the beginning of a 21-day SEC comment period.