Proposed Rule Change To Amend FINRA Rule 2210

Summary

SIFMA provided comments on FINRA’s proposed changes to Rule 2210. Although an additional exception to the rule’s general prohibition against the use of performance projections is welcome and SIFMA thanks FINRA for its efforts, Rule 2210 should be aligned further to the SEC’s Investment Adviser Marketing rule.

Excerpt

The Securities Industry and Financial Markets Association (SIFMA) ¹ provides comments on FINRA’s proposed changes to Rule 2210. Although an additional exception to the rule’s general prohibition against the use of performance projections is welcome and we thank FINRA for its efforts, Rule 2210 should be aligned further to the SEC’s Investment Adviser Marketing rule (“IA Marketing Rule”). The exception should be broadened to include retail investors. Alternatively, it should include accredited investors and knowledgeable employees and be product-agnostic. FINRA should also clarify expectations for the reasonable basis standard as well as provide other clarifications outlined below.

Background

In Regulatory Notice 2017-06, FINRA requested comment on proposed amendments that would have allowed performance projections to be more broadly distributed than the current proposal. SIFMA, along with other commenters, supported amendments that would have alleviated broker-dealers’ competitive disadvantage, lessened regulatory inconsistencies, and eliminated regulatory arbitrage between broker-dealers and investment advisers. Although the new proposal is not as expansive as contemplated in 2017, we appreciate FINRA partially advancing these goals with the proposed exception for institutional investors and qualified purchasers (QPs) in private placements sold only to QPs, as these investors “…are more likely to have the sophistication and resources to evaluate any performance projections or targeted returns they receive…when making an investment decision.” ² The proposed exception would be conditioned on, among other things, the member having written policies and procedures reasonably designed “…to ensure that the communication is relevant to the likely financial situation and investment objectives of the investor receiving the communication…” and a reasonable basis for the projected performance or targeted return. FINRA could advance these goals further by amending the proposal to more closely align with the IA Marketing Rule.

1. Align Rule 2210 more closely with the IA Marketing Rule. Brokers-dealers should be able to provide performance projections and targeted returns to all investors like investment advisers can do today.

Having acknowledged that Rule 2210 differed from the IA Marketing Rule to the detriment of broker-dealers and investors, FINRA should have proposed a more expansive rewrite of Rule 2210 considering recent regulatory developments, including the implementation of the IA Marketing Rule. The proposal should have allowed broker-dealers to communicate projected performance and targeted returns equally to all investors, subject to the same conditions as the IA Marketing Rule, which requires investment advisers to consider the intended audience for the communications. As FINRA acknowledges, retail investors may already receive this information from registered investment advisers. ³ SIFMA urges the SEC and FINRA to reconsider the proposal and to provide investors with access to more tools to further FINRA’s goals of contributing to investor protection and encouraging the use of registered broker-dealers by issuers over using unregistered firms or marketing securities directly.