FINRA’s New Projection Rule Could Expand Use of Retirement Illustrations

The Securities and Exchange Commission’s recent approval of a Financial Industry Regulatory Authority rule allowing broker/dealers to communicate projected performance and targeted-return information carries implications for certain retirement investment offerings like private-market and guaranteed-income products.

The change largely aligns FINRA’s broker/dealer marketing framework with the SEC’s investment adviser marketing rule, potentially making it easier for private-fund sponsors and placement agents to use the same marketing materials across different distribution channels.

Issa Hanna, partner at Eversheds Sutherland (US) LLP, says the change primarily addresses a mismatch that has existed since the SEC’s Investment Adviser Marketing Rule became effective in 2022.

“There’s always been this misalignment between the Advisers Act marketing rule and [FINRA] Rule 2210,” he says. Under the 2022 marketing rule, private-fund advisers could present hypothetical performance, including projected and targeted returns, while broker/dealers distributing the same materials generally remained subject to a prohibition on such communications.

Putting the Rule into Practice

According to Hanna, the new exception allows broker/dealers to distribute materials containing targeted-return and projected-performance information, provided they comply with the rule’s conditions.

The biggest practical impact may be regarding private-market investments, where targeted-return information is commonly used to explain investment strategies to prospective investors.

Hanna says private fund managers have historically been permitted to include these projections in marketing materials, but broker/dealers acting as placement agents often could not distribute the same documents.

“Now they don’t have to come up with two different sets of marketing materials, depending on which channel they’re going through,” he says.

That view was echoed by attorneys at Sidley Austin LLP, who wrote in a firm article that the amendments are particularly significant for private fund sponsors and the broker/dealers that distribute their products because they help address a longstanding regulatory mismatch between advisers and broker/dealers.

Although the rule could affect how broker/dealer-affiliated advisers discuss projected outcomes associated with investment strategies, Hanna noted that FINRA already has separate provisions allowing broker-dealers to use certain investment-analysis tools and calculators.

Impacting Retirement Income

The practical impact on retirement-income illustrations and participant projections may depend on how firms choose to use the new exemption relative to existing tools.

Industry observers say firms should spend as much time preparing compliance frameworks as they do creating their investment performance projections.

Sidley Austin LLP’s analysis noted that firms relying on the exemption will need written supervisory procedures addressing audience eligibility, disclosures, recordkeeping and the use of third-party information.

Eversheds’ Hanna points to recordkeeping as a potential challenge, particularly when projections originate with private-fund managers rather than with the broker/dealer itself.

For example, firms must maintain information regarding the source of projected-performance and targeted-return data, which may require updates to distribution agreements with fund sponsors, he says.

For plan sponsors and advisers evaluating materials containing projected returns, Hanna says attention should be paid to both underlying assumptions and investor protections.

“If I were a plan sponsor, I would be looking to the broker/dealer to take care of qualifying participants who get those [projection] materials,” he says. “I’d also be looking at the materials to make sure that … the projection, or the target, is accompanied by the disclosures that they would expect, or that they think might be necessary for the participants in the plan … to fully understand the material.”

FINRA announced that the order’s effective date will be shared in an upcoming Regulatory Notice.