What’s next for reforms for mandatory RIA arbitration

The Financial Industry Regulatory Authority’s Board of Governors voted to advance a proposal that would allow brokers to market targeted returns and performance projections in certain cases, according to a statement from the regulator on Friday.

Finra’s board said it approved amendments that “would create a narrowly tailored exception to the general prohibition on projections and permit the presentation of projected performance and targeted returns when members meet specified conditions.”

Those conditions would include “adopting policies and procedures, having a reasonable basis for the criteria and assumptions made in calculating the projections or targeted returns, and providing specified information,” the Finra board said.

The Securities and Exchange Commission, which must approve Finra’s rule changes prior to them becoming effective, last July stayed an order allowing a previous related Finra proposal.

A spokesperson for Finra, which has launched a broad review of its rules, declined to comment beyond the summary of the board meeting.

Finra’s earlier proposal, which it first published in November 2023, would have allowed firms to “use projected performance and target returns in communications limited to institutional investors and qualified purchasers,” according to a July blog post by Morgan Lewis, a law firm that represents broker-dealers.

The changes would have also altered the requirement governing Finra-registered brokers’ communications with the investing public so they more closely resemble those that SEC-registered investment advisors must follow after the Commission updated its rules in 2021.

In its release last week, Finra’s board similarly described its soon-to-be submitted amendments as “better” aligning “the regulatory requirements for broker-dealers and investment advisers related to performance projections in written communications to investors.”

An investor advocate, however, expressed dissatisfaction with Finra’s resubmitted changes to loosen Rule 2210. His organization “is deeply concerned that permitting performance projections—even in limited circumstances—risks misleading investors,” Adam Gana, who is the president of the Public Investors Arbitration Bar Association, wrote in an email.

“History has shown that hypothetical returns, no matter how well-disclosed, can create unrealistic expectations and obscure actual risk,” Gana added. “Any exception to the prohibition on projections must be implemented with extreme caution, strict oversight, and robust investor protections.”

Industry representatives said harmonizing the rules makes sense.

Morgan Lewis lawyers wrote in the 2024 blog post that the industry has “long criticized the asymmetry between broker-dealer and [the SEC regulated] investment adviser advertising rules.”

Finra’s rule barred “or significantly limited much content that is generally permitted for investment advisers, such as projections of performance and hypothetical, backtested, and related performance, resulting in an uneven playing field in favor of investment advisers,” the lawyers wrote.