The SEC has approved amendments to how broker-dealers communicate projected returns, but only according to these specific conditions.
TL;DR: craft consistent target return language.
Broker-dealers have long been barred from putting performance projections into their fund communications – for decades, in fact, according to FINRA Rule 2210.
We have been following the story of this overturning, and now that the SEC has approved FINRA’s amendment on 15 October, it is time to look at the ‘conditions’ by which member firms can express targeted returns in their content:
- Firms must design written policies that are relevant to the likely financial situations and objectives of their intended audience.
- Criteria and assumptions behind a projection or target, and their risks and limitations, should be explained clearly.
- Records of the source of the figures must be kept.
- FINRA expects distribution to be with sophisticated investors with enough resources to evaluate given information independently. Mass retail audiences are largely excluded.
- FINRA did not treat institutional, qualified purchaser or accredited status as automatic proof of this ‘sophistication’ status.
- Backtested, model, related and extracted performance fall outside the exception.
While the change has not been set live yet, an effective date will be available in a future FINRA Regulatory Notice. The existing prohibitions will still exist until then.
So, what does this mean for fund marketers?
The gulf between the broker-dealer rulebook and how the SEC Marketing Rule governs advisers is being shortened here, as placement agents or distribution teams at the former have been tasked with treating targeted return very differently from the latter.
But the gap is not closing fully, as the FINRA conditions are their own independent tests, where the rule does not fully align with the Marketing Rule.
Broker-dealers can hold the reins now, and prepare their target-return language now before the effective date announcement:
- Segment your audiences to exclude groups not fully defined as ‘sophisticated audiences’, as IR teams need a defensible way to show distribution partners that even accredited or qualified-purchaser audiences can evaluate projections.
- Every target returns needs documented inputs, risks and limitations and a traceable source. Compiling this information early means that approvals will not hold up any future launches.
- The same target figure may sit under different tests, depending on whether it goes out via an adviser or a broker-dealer. Complying to one consistent standard rather than parallel versions is recommended.
- Hypothetical performance (backtested or model) is off-limits, so this material needs to be put to one side under this exception.
This is still welcome news for broker-dealers, where we await any news of any effective data from the regulator.
Sources
Sidney Austin, “SEC Approves FINRA Rule Change Permitting Projected Performance and Targeted Returns in Broker-Dealer Communications”
Mayer Brown, “Amendments to FINRA Rule 2210 Permit Use of Projected Performance and Targeted Returns in Broker-Dealer Communications Subject to Specified Conditions”
Morgan Lewis, “FINRA Finally Broadens Use of Projected Performance, Targeted Returns in Broker-Dealer Communications”
SEC Report
