Proposed Rule Change to Amend FINRA Rule 2210

Summary

SIFMA provided comments to the SEC in support of FINRA’s proposed rule change to amend Rule 2210, with a caveat that FINRA should use this opportunity to further align the rule with the SEC’s Investment Adviser Marketing Rule (the “Marketing Rule”).

Excerpt

Incomplete alignment between Rule 2210 and the Marketing Rule directly affects investors, particularly clients of dual registrants, by resulting in uneven access to information about the same investment strategies depending solely on the regulatory channel through which the communication is delivered. Projections and hypothetical performance, when appropriately prepared and disclosed, provide investors with additional context regarding potential outcomes, assumptions, and limitations, and the inability to provide this information in broker-dealer communications can impair investors’ ability to compare options and make informed decisions. FINRA recognizes this problem in part: “Rule 2210’s prohibition on projections can lead to investor confusion, as it results in investors receiving different information about the same investments depending on the financial professional with whom they engage.” ¹

We commend FINRA for reconsidering its earlier proposal and incorporating feedback that it received. As SIFMA requested in our December 15, 2023 comment letter, an additional exception to the general prohibition for performance projections and targeted returns is positive. However, we believe FINRA can align Rule 2210 with the Marketing Rule further. We see no reason for the inconsistencies and urge the Commission to direct FINRA to revise the current proposal further. FINRA should instill the Marketing Rule’s concepts of investor education and suitability for the intended audience into a revised proposal in a manner that is operationally workable for broker‑dealers, particularly when acting as distributors of third‑party products.

1. Remove the Reasonable Basis Requirement and Align Standard with the Marketing Rule

While we appreciate that FINRA did not prescribe the factors that would form a reasonable basis, we remain concerned about the application of this standard when broker-dealers are acting in their common capacity as distributors, an issue we raised in our comment letter on the earlier proposal.4 We view this standard with uncertainty and believe that FINRA is missing an opportunity to level the playing field for broker-dealers completely.

Our members’ foremost concern is practical, and it is uncertainty about what would constitute a reasonable basis where a third party is responsible for the criteria and assumptions used to calculate performance projections or targeted returns. Third parties often do not provide sufficient information about their criteria and assumptions to evaluate the reasonableness of their hypothetical returns. The Proposal’s intended purpose is negated if broker-dealers cannot confidently form a reasonable basis. Moreover, whether they had a reasonable basis is often determined by examiners with the benefit of hindsight. Faced with this uncertainty, broker-dealers may be deterred from sharing useful forward‑looking information out of fear that a projection or target later proves inaccurate or is second‑guessed. Acting as distributors is a core part of the business, and this standard could leave broker-dealers at significant disadvantage still. This uncertainty may deter broker-dealers from sharing forward-looking information that would otherwise enhance investor understanding, resulting in broker-dealer clients receiving less complete information than advisory clients evaluating the same investment opportunities.

We recognize that FINRA “views this requirement as foundational” but it has not articulated why broker-dealers should be subject to a different standard than investment advisers, whose communications must simply be fair and balanced. Particularly when there are other requirements of the rule, namely the existing prohibition of false or misleading claims, and the Proposal’s disclosure requirements, that safeguard investors.