FINRA looking to adopt a more liberal view permitting the use of projections and target returns in marketing communications:

In a development that broker-dealers and sponsors alike have been hoping to see, FINRA filed revisions to Rule 2210 with the SEC today that will further liberalize the rules of the road for including projections in ads. As stated by FIRNA in its release accompanying the proposed rule change:

“Currently, Rule 2210 prohibits projections of performance or targeted returns in member communications, subject to specified exceptions. The proposed rule change would allow a member to project the performance or provide a targeted return with respect to a security, a securities portfolio, or an asset allocation or other investment strategy in its communications, subject to specified conditions to ensure these projections are carefully derived from a sound basis." Specifically, the new language would create a "new, narrowly tailored exception to the general prohibition of projections for a communication that projects performance or provides a targeted return with respect to a security, a securities portfolio, or an asset allocation or other investment strategy when members meet specified conditions.”

The exception would be conditioned on:

(1)  the member adopting and implementing written policies and procedures reasonably designed to ensure that the communication is relevant to the likely financial situation and investment objectives of the intended audience of the communication;

(2)  the member having a reasonable basis for the criteria used and assumptions made in calculating the projected performance or targeted return; and

(3)  the member providing sufficient information to enable the intended audience to understand (i) the criteria used and assumptions made in calculating the projected performance or targeted return, including whether the projected performance or targeted return is net of anticipated fees and expenses; and (ii) the risks and limitations of using the projected performance or targeted return in making investment decisions, including reasons why the projected performance or targeted return might differ from actual performance.

The first and last points, importantly, track concepts that the SEC uses in its own Marketing Rule for investment advisers - to wit, the member firm must:

1. ensure that the communication "is relevant to the likely financial situation of the intended audience," thus making the target audience - basic retail versus more a more sophisticated user set - a key part of the analysis; and

2. consider whether the intended audience will understand "the criteria used and assumptions made" in calculating the projected performance or targeted return and thus will understand the "risks and limitations of" using the information in making investment decisions."

These recipient-driven tests parallel the approach taken by the SEC in permitting hypothetical performance to be present in marketing materials created and used by investment advisers.

Join us at ADISA's Spring Conference (March 30-April 1 in Arlington, Texas) where FINRA Vice President Gaby Aguero will discuss this rulemaking initiative and other developments impacting broker-dealers.