FINRA Proposes Rule Change to Permit Projections of Performance and Targeted Returns in Member Communications

The Financial Industry Regulatory Authority, Inc. (“FINRA”) has proposed changes to FINRA Rule 2210 (Communications with the Public) that would permit FINRA member broker-dealers to include performance projections and targeted returns in communications with investors, subject to specified conditions.¹ If approved by the Securities and Exchange Commission (the “SEC”), the proposed changes to FINRA Rule 2210 (the “Proposal”) would more closely align FINRA’s Rule 2210, applicable to broker-dealers, with the SEC’s marketing rule applicable to SEC-registered investment advisers (the “IA Marketing Rule”).² The Proposal is broader than the November 2023 proposal to amend FINRA Rule 2210 (the “2023 Proposal”), which would have permitted broker-dealers to include performance projections and targeted returns in institutional communications and in communications to qualified purchasers under § 2(a)(51) of the Investment Company Act (“QPs”) regarding private placements.³ Unlike the 2023 Proposal, the Proposal does not explicitly limit the universe of investors who can receive projections and thus would allow the use of projections with a wider range of investors, potentially including investors in private funds exempt from registration under Section 3(c)(1) of the Investment Company Act. The changes would be a particularly welcome development for broker-dealers that market private funds, as well as for private fund sponsors that market their funds through placement agents and other registered broker-dealers.

Background

Current FINRA Rule 2210 expressly prohibits the use of projections of performance in broker-dealer communications.⁴ Projections of performance reflect an estimate of the future performance of an investment or investment strategy and are commonly established through mathematical modeling based on historical data and assumptions about future conditions. Although targeted returns are commonly considered to be distinguishable from projections because targets are aspirational and do not necessarily reflect all of the same inputs and assumptions as projections, FINRA has generally viewed targeted returns as a species of projection that is likewise restricted.⁵

FINRA’s prohibition on the use of projections and targeted returns has created challenges for investors, broker-dealers, and private fund sponsors. Investors—particularly institutional investors such as foundations, endowments and family offices and other sophisticated investors who are QPs—often request projections of performance or targeted returns to help them make informed investment decisions, but broker-dealers are unable to provide this information while complying with FINRA Rule 2210. Moreover, because registered investment advisers (“RIAs”) are permitted to provide investors with this type of performance information under the IA Marketing Rule, the current prohibition can lead to investor confusion, as investors may receive different information about the same investments depending on the type of firm with which they engage.

The Proposal

Eligible Communications. The Proposal generally would permit broker-dealers to project performance or provide a targeted return with respect to a security, a securities portfolio, or an asset allocation or other investment strategy, subject to specified conditions. Notably, unlike the 2023 Proposal, the current Proposal does not contain any express threshold limitation on the categories of investors who may receive projections or targeted returns. Instead, the Proposal requires members to adopt written policies and procedures to ensure that communications with projections or targeted returns are only distributed to appropriate audiences. Specifically, as discussed more fully below, members’ policies and procedures must be reasonably designed to ensure that the communication is relevant to the likely financial situation and investment objectives of the intended audience.

As a practical matter, FINRA does not expect the Proposal to permit projections or targeted returns to be included in communications directed to a mass audience or intended for general circulation, including to a general retail investor audience. However, the Proposal does not explicitly prohibit a member from including projections or targeted returns in communications with retail investors, provided that the member satisfies the conditions discussed below. Additionally, the Proposal notes that FINRA expects to interpret this requirement consistently with how the SEC interprets a similar requirement in the IA Marketing Rule requiring RIAs to adopt policies and procedures reasonably designed to ensure that hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience.

Conditions. The Proposal provides that broker-dealers would be required to meet all of the following conditions in order to present projections or targeted returns:

1. Written Policies and Procedures. As discussed above, the broker-dealer must adopt and implement 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. The Proposal specifies that the broker-dealer should have a reasonable belief that investors for whom the communication is intended have the financial expertise and resources to understand the risks and limitations of such presentations. The Proposal notes that a broker-dealer’s policies and procedures need not address each recipient’s particular circumstances but may account for the grouping of investors into categories or types based on the broker-dealer’s reasonable judgment as to the likely investment objectives and financial situation of that investor category.
2. Reasonable Basis Standard. The broker-dealer must have a reasonable basis for the criteria used and assumptions made in calculating the projected performance or targeted return and must retain written records supporting the basis for such criteria and assumptions. While the Proposal does not prescribe a specific methodology or factors, FINRA notes that relevant factors may include global and regional macroeconomic conditions, an issuing company’s operating and financial history, industry and sector conditions, the quality of assets included in a securitization, and the appropriateness of peer-group comparisons.
3. Investor Information. The broker-dealer must provide 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.

Third-Party Projections. If a broker-dealer relies on third-party models or software to create a projection or targeted return, the broker-dealer would be expected to establish and maintain a supervisory system reasonably designed to ensure that any projections or targeted returns created by a third-party vendor comply with the Proposal’s requirements. The broker-dealer would need to obtain enough information to form a reasonable basis as to the third party’s assumptions and underlying criteria and would need to retain written records supporting the basis for such criteria and assumptions.

Key Differences from the 2023 Proposal

The current Proposal differs from the 2023 Proposal in several material ways:

• No Investor Threshold Limitation. The 2023 Proposal limited projections and targeted returns to institutional communications and communications to QPs in connection with specified exempt private offerings. The current Proposal eliminates this threshold restriction and instead relies on the policies and procedures requirement to ensure that communications with projections and targeted returns are only distributed to appropriate audiences, consistent with the IA Marketing Rule.
• No Mandatory Hypothetical Disclosure. The 2023 Proposal required communications to prominently disclose that the projected performance or targeted return is hypothetical in nature and that there is no guarantee that the projected or targeted performance will be achieved. The current Proposal removes this express disclosure requirement, which FINRA views as sufficiently addressed by the separate requirement to disclose the limitations and reasons why projections might differ from actual performance.
• Removal of Supplementary Material Regarding Factors for Reasonable Basis Determination. The 2023 Proposal included in a proposed Supplementary Material to Rule 2210 a list of factors that a broker-dealer should consider when forming its reasonable basis for projections and targeted returns. The current Proposal does not include such Supplementary Material or enumerate specific factors in the text of the proposed rule, although the Proposal describes factors (referenced above) that broker-dealers may consider in making their reasonable basis determination.
• No Express Prohibition on Projections Based on Back-Tested Performance. The 2023 Proposal explicitly prohibited broker-dealers from basing projected performance or targeted returns upon hypothetical, back-tested performance or the prior performance of a portfolio or model created solely for the purpose of establishing a track record. While the current Proposal does not contain these express prohibitions, the Proposal states that broker-dealers should keep in mind that the criteria and assumptions underpinning a projection or targeted return must have a reasonable basis, appropriate disclosures must be included, and the presentation must be fair and balanced. The Proposal does not address the direct presentation of back-tested performance.

Comparison to IA Marketing Rule

The Proposal is in many respects consistent with the IA Marketing Rule, and FINRA has stated that it anticipates it would interpret requirements in the Proposal that align with similar requirements in the IA Marketing Rule consistently with how the SEC has interpreted those IA Marketing Rule requirements. Key similarities and differences (italicized) include:

	FINRA Proposal	IA Marketing Rule
Scope	Addresses performance projections and targeted returns only.	Addresses hypothetical performance, including projections, targets, back-tested performance, and model portfolio performance.
Eligible Investors	Does not expressly limit universe of eligible investors but does impose conditions based on the intended audience of a communication.	Does not expressly limit universe of eligible investors but does impose conditions based on the intended audience of an advertisement.
Basis for Criteria and Assumptions	Express requirement that broker-dealers have a reasonable basis for the criteria used and assumptions made in calculating the projected performance or targeted return.	No express reasonable basis requirement but fair and balanced standards apply.
Policies and Procedures	Broker-dealer must adopt and implement 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.	Adviser must adopt and implement policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience.
Required Information – Criteria & Assumptions	Provide sufficient information to enable the investor to understand the criteria used and assumptions made in calculating the target or projection, including whether the target or projection is net of anticipated fees and expenses.	Provide sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating such hypothetical performance.
Required Information – Risks & Limitations	Provide sufficient information to enable the investor to understand the risks and limitations of using the target or projection in making investment decisions, including reasons why the projected performance or targeted return might differ from actual performance.	Provide (or, if the intended audience is an investor in a private fund, provide or offer to provide promptly) sufficient information to enable the intended audience to understand the risks and limitations of using such hypothetical performance in making investment decisions.

 
Observations

If approved as proposed, the Proposal would mark a significant step towards aligning FINRA Rule 2210 and the IA Marketing Rule by permitting FINRA member broker-dealers to provide targeted returns and performance projections under the specified conditions. Greater alignment between the FINRA and SEC marketing regimes stands to benefit multiple stakeholders: investors who seek this information to make informed decisions, broker-dealers that have long operated under restrictive rules compared to their RIA counterparts, and fund sponsors that rely on placement agents to market their offerings.

Coming on the heels of FINRA’s proposed updates to its rules governing outside activities of broker-dealer personnel,⁶ the Proposal is indicative of continued momentum within FINRA to modernize and right-size the commercial impact of its rules, while maintaining appropriate guardrails for investor protection. The current Proposal addresses salient concerns raised during the comment process for the 2023 Proposal, including the most significant discrepancies between Rule 2210 and the IA Marketing Rule regarding projections and targets, but several notable gaps regarding hypothetical performance remain. In particular, the Proposal does not address the presentation of back-tested performance, which FINRA has long viewed as misleading when shown to retail investors,⁷ nor does FINRA state whether the Proposal would impact FINRA’s guidance regarding the presentation of IRR for partially realized portfolios in retail communications.⁸ FINRA deflected comments on both issues raised with respect to the 2023 Proposal,⁹ but given that the current Proposal would allow projections and targeted performance to be shown to a broader universe of investors than the 2023 Proposal, it seems likely that FINRA will contend with questions regarding these issues again.

Additionally, in connection with the 2023 Proposal, commenters questioned the expected practical implications of the reasonable basis requirement with respect to projections prepared by a third party, and at that time, FINRA indicated that broker-dealers would have flexibility to determine what is reasonable based on the particular facts and circumstances.¹⁰ However, FINRA did not specifically address whether, for example, a broker-dealer could satisfy its reasonable basis requirement by obtaining a certification from a third party that prepared a projection or target, or what the reasonable basis requirement would entail for a broker-dealer seeking to present projections or targets prepared by an RIA affiliate fund sponsor. Such issues are likely to be raised again in connection with the current Proposal.

Once the Proposal is published in the Federal Register, interested parties will have 21 days from publication to submit comments. Under the statutory timeframe, a decision by the SEC could be expected around or shortly after the third quarter of 2026; if the Proposal is approved, FINRA will announce the implementation date in a Regulatory Notice.

If you would like to learn more about the developments in this Alert, please contact your usual Ropes & Gray attorney contacts or a member of our Broker-Dealers practice.