FINRA Requests Comment on Rule 2210

As part of FINRA’s retrospective review of its rules governing communications with the public, the self-regulatory authority is soliciting comment on proposed amendments to FINRA Rule 2210 (Communications with the Public). The proposed amendments would allow brokers to use performance projections in investment planning presentations, subject to certain conditions.

Background

Performance projections are generally prohibited under FINRA rules. The prohibition against performance projections is largely intended to protect retail investors from performance projections of individual investments, which often prove to be spurious, inaccurate or otherwise misleading. However, advocates of the amendment argue that investors would benefit from projections related to performance of an asset allocation or other investment strategy that does not project individual performance, noting that investment advisers often discuss performance in their communications with clients, so long as it’s in compliance with the anti-fraud provisions.

Rule Proposal

The exception would be available for all firms, including ones that operate only an online platform, and could be used with both current and prospective customers. More specifically, the amendment would require that:

  • The illustration projects performance of an asset allocation or other investment strategy and not an individual security
  • A reasonable basis exist for all assumptions, conclusions and recommendations upon which the Customized Projection is based
  • The presentation of the Customized Projection is accompanied by clear and prominent disclosure of all material assumptions and limitations applicable to the Customized Projection, that it is hypothetical, and that there are no guarantees that any described scenario or event will actually occur

The proposal would also establish specific supervisory requirements for the permitted illustrations. A firm could use a template, such as one provided by a reliable off-the-shelf software package, however, a registered principal would be required to approve the template before distribution. Firms that do not employ a template would additionally be required to have a registered principal review and approve each illustration before use and distribution.

Economic Impact

This rule proposal is intended to better harmonize regulatory standards between broker-dealers and investment advisory firms as well as simplify compliance and oversight for firms that are dually registered. In addition, the dismantlement of such projections would allow brokers to better inform investors about recommended investment strategies, including the underlying assumptions upon which the recommendations are based.

FINRA encourages all interested parties to comment on the proposal by March 27, 2017.

To read the complete Regulatory Notice, click here.