SEC approves FINRA Rule 2210 change letting broker-dealers cite projected returns

The SEC on Oct. 15 approved an amendment to FINRA Rule 2210 that lets broker-dealers include projected performance or a targeted return, according to AltsWire. The change covers communications about a security, a securities portfolio, or an investment strategy and is subject to three conditions. It takes effect on a date FINRA will announce in a Regulatory Notice.

The provision, new Rule 2210(d)(1)(F)(iv), creates an exception to Rule 2210(d)(1)(F), which bars member communications from predicting or projecting performance, implying that past performance will recur, or making an exaggerated or unwarranted forecast. FINRA has read the bar to cover targeted returns; in 2020, it told members that private placement communications may not project yields, income, or appreciation. FINRA told the SEC that institutional and other sophisticated customers ask for the information and can already get it from the issuer or a registered investment adviser.

The conditions mirror the ones the SEC imposed on investment advisers for hypothetical performance under the Marketing Rule, Rule 206(4)-1, adopted in 2020. The first condition requires written policies and procedures reasonably designed to ensure the communication is relevant to the likely financial situation and investment objectives of the intended audience. Broker-dealers have not operated under the Marketing Rule, but years of adviser practice, examination findings and enforcement under those conditions are the best available guide to how FINRA will examine against the new exception, according to AltsWire.

Until FINRA publishes the Regulatory Notice, the amendment is not in effect and the prohibition it modifies remains in force. The amendment follows another FINRA move touching private fund distribution this year, a proposal to shift uncertificated private fund positions to quarterly reconciliation. The SEC on Sept. 30 separately proposed changes on performance fees and repurchase terms for interval funds, and that proposal also sought comment on qualifying accredited investors by exam or credential rather than thresholds.