The Securities and Exchange Commission on Thursday approved a rule change that will allow brokers and their firms to include investment products’ performance projections and targeted returns in their marketing materials distributed to certain clients and prospects.
The change will overturn prior restrictions that already had some exceptions and narrow a regulatory gap between the rules governing brokers and registered investment advisors.
The Financial Industry Regulatory Authority had submitted the proposed change to its Rule 2210, which governs communications with the public, to the SEC in February. Finra has not said when the change will take effect.
The SEC said in its October 15 order approving Finra’s proposed change that it creates a “reasonably tailored” exception to the rule that would allow members to market performance “subject to requirements reasonably designed to protect investors and the public interest.”
Firms must adopt written policies and procedures to ensure that the communications containing projections are relevant to the intended audience’s financial situation and investment objectives. They must also provide sufficient information for recipients to understand the projections’ assumptions, risks and limitations.
But the change dropped an explicit requirement that brokers and their firms have a “reasonable basis” for projections and maintain written records supporting those assumptions. While the SEC expressly requires investment advisors to present performance net of fees, Finra’s rule could allow brokers to market performance projections without factoring in the cost of fees and commissions.
Joseph P. Savage, a Finra vice president and associate general counsel, told the SEC in a June letter that the “reasonable basis” requirement was unnecessary. Other existing Finra rules require brokers’ public communications to be based on “principles of fair dealing and good faith” and rely on a “sound basis for evaluating the facts” regarding a security or service, Savage wrote.
Existing rules already permit certain hypothetical illustrations of mathematical principles, investment analysis tools and price targets in securities research reports.
Finra’s push to relax marketing restrictions comes as the industry’s self-regulator has embarked on a broader review of its rulebook, enforcement practices and arbitration procedures. In line with a deregulatory agenda under the Trump administration, Finra in late June published a report suggesting an overhaul of its approach to disciplining firms.
