FINRA moves to harmonize rules for investment performance data

A targeted exception attempts to improve clarity and reduce regulatory friction and confusion without diluting investor protection.

FINRA is seeking approval from the SEC for a narrow scope amendment to FINRA Rule 2210.

To help protect investors, especially less experienced retail investors, Rule 2210 currently includes a general prohibition against the communication of performance projections.

FINRA has received industry feedback indicating that some investors, particularly institutional investors, (such as retirement plan investment fiduciaries) request projected performance information “to help them make informed investment decisions”.

But despite some exceptions baked into the rule, they are unable to receive the information because of the general nature of the prohibition.

What the rule change seeks to achieve

The proposed rule change is formulated as an exception to the existing prohibition that would permit members to project the future performance or targeted returns of investments when communicating with more sophisticated investors, namely:  

  • institutional investors; and
  • investors who meet the definition of “qualified purchaser” under the Investment Company Act.

Essentially, this means permitting the use of such projections when communicating with institutional investors with at least $25m in assets under management. Broker-dealers would be permitted to do the same for qualified purchasers with at least $5m in investments for private placements only.

Communication of performance projections or targeted return would be permitted to those parties in connection with an asset allocation or other investment strategy.

“As a general matter, the proposed rule change would not alter the current prohibitions on including projections of performance or targeted returns in most types of retail communications,” FINRA specified.

Industry feedback

In a change from FINRA’s initial proposal notice, it would also be possible to communicate these in connection with a security. This change is the result of industry feedback suggesting that “single investment products that operate similar to a diversified asset allocation model” should also be included in the exemption.

Such securities might include:

  • ETFs;
  • diversified mutual funds;
  • unit investment trusts;
  • variable annuities;
  • private equity funds; and
  • real estate funds.

The proposed rule incorporates supplementary material that outlines what the reasonable basis for the assumptions and criteria being used to calculate the projected or targeted returns may include:

  • macroeconomic conditions;
  • fact-based assumptions of capital market performance;
  • issuing company operating and financial history in the case of a single security;
  • industry and sector market conditions and business cycle;
  • reliable multi-factor financial models if available;
  • quality of assets;
  • appropriateness of peer-group comparisons;
  • reliability of research sources;
  • historical performance and volatility of comparable asset classes;
  • track record of comparable accounts or funds;
  • average weighted duration and maturity for fixed income investments;
  • impact of fees, costs, and taxes; and
  • expected contribution and withdrawal rates.

The rule change would also align the requirements for broker-dealers and investment advisers. Proponents of the rule change argue that this would not only benefit dually registered firms, which would now be able to use the same compliance processes for brokerage and advisory clients, but would help alleviate confusion and encourage the use of registered broker-dealers.


Thomas Hyrkiel

Given the overwhelmingly positive feedback from stakeholders in connection with this relatively uncontroversial proposal, as well as the targeted nature of the amendment, it would be unusual for the SEC not to approve the rule change.

In my view the limitation of the exception to institutional and experienced investors will limit any concern for watering down investor protection measures more generally.

It’s also worth noting in this context that the rule already includes exceptions permitting the use of calculators and investment analysis tools – the latter of which is able to leverage technology to calculate the probability of investment outcomes given certain assumptions. And the ability for brokers to make similar projections using reasonable basis assumptions is likely to result in higher quality information being available to such investors.

Julie DiMauro

Since the projected performance can be used only for institutional investor viewing, plan fiduciaries will have to be sure not to include it in communications with participants. That means retirement plan sponsors can view this information, but they can’t share it with participants who are (typically) retail investors.

This is a risk that the SEC in its current composition will not take lightly. This SEC just passed sweeping rules for private funds that went into some detail on concerns the majority of commissioners had with retirement and pension plan participants.

Since there is a reasonableness standard here, the SEC will be looking for careful documentation requirements in the rule and in actual practice to ensure those reasonableness factors were assessed, such as the historical performance and volatility of the same or similar asset classes.

The proposed rule aligns with the SEC’s Marketing Rule, since that rule allows for hypothetical performance data to be shared, if documentation and disclosure is provided.

The securities regulator offered some clarity around the Marketing Rule and hypothetical performance data in September when it conducted a sweep enforcement action against nine firms for sharing such data to a mass audience on their respective websites. The SEC said that doing so to a general audience was clearly wrong, because “an adviser generally could not form any expectations about their financial situation or investment objectives”.

So, guardrails must be built into firms’ policies and procedures to meet regulatory expectations and ensure retail investor protection here, plus an updated training of the relevant persons in the business who create and review communications with the public.