The Financial Industry Regulatory Authority (FINRA) is on the cusp of a significant shift in how brokers can market investment strategies and products.
Traditionally bound by rules that only allow the use of historical results in advertising, provided they are presented impartially, FINRA is now proposing a transformative change. This change would, for the first time, enable brokers to showcase hypothetical investment performance and prospective return targets in their promotional materials.
This initiative is primarily driven by a desire to harmonize broker regulations with the marketing rules applicable to the registered investment advisor (RIA) sector. The Securities and Exchange Commission’s (SEC) new Marketing Rule, which firms have been adhering to for the past year, incorporates conditions under which advisors can use hypothetical returns in their advertising efforts. On November 13, FINRA presented an amendment to its Rule 2210—governing public communications—to the SEC for review and public commentary.
Rule 2210 traditionally restricts the projection of performance or targeted returns in member communications. The proposed amendment, however, seeks to allow members to project performance or provide targeted returns related to specific securities, asset allocations, or other investment strategies. This change is intended to align with the SEC’s Marketing Rule, setting similar boundaries on the intended audience for messages incorporating hypothetical performance or target returns. Both frameworks emphasize the need to avoid false or misleading statements and require that any claims be contextualized adequately for the audience’s understanding.
However, this proposed change comes with its limitations. Only communications aimed at institutional investors or qualified purchasers—those with a minimum of $5 million in investments—would be allowed to include performance projections or return targets.
According to Issa Hannah, a partner at Eversheds Sutherland law firm, this amendment could significantly benefit brokers working with private funds. Currently, private fund sponsors and their advisors routinely include target returns in their promotional materials, which they can present to potential investors under the Marketing Rule.
However, when a private equity fund sponsor employs a broker-dealer placement agent to market their fund, the current FINRA rules prohibit the broker-dealer from advertising target returns, creating a regulatory gap.
Should FINRA’s proposal be enacted, it will undoubtedly introduce compliance risks. The SEC has already pursued enforcement actions under its Marketing Rule against advisors for improperly promoting hypothetical performance. These cases often involve firms accused of presenting performance projections to a broad audience, contrary to the rule’s stipulation that such messaging be restricted to a sophisticated, narrow group for whom the investment would be suitable.
The SEC's concern about protecting less experienced investors from being misled by hypothetical performance presentations is a long-standing policy priority at FINRA as well. While the SEC has not publicly commented on FINRA’s proposal, there is a possibility that the commission could request a redraft of the proposal based on public feedback.
Hannah anticipates that the SEC is likely to approve the proposal, though he acknowledges this is speculative. He suggests that if approval is granted, it would likely occur within a year, a typical timeframe for such regulatory processes. However, the final decision rests on how the SEC interprets the proposal in the context of its broader regulatory objectives.
