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Finra said a broker’s views on projected performance ‘may be
useful’ © REUTERS
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Brooke
Masters
in
New
York
SEPTEMBER 19 2023
Brokers would
be able
to market
some investments
with projections
of future
performance and promise targeted returns when they are working
with institutional and wealthy individuals, under a rule proposed by
an industry self-regulatory body.
The rule change floated by Finra would mark a departure from a general
ban on brokers promising
specific outcomes
when they
sell securities. That has
raised concerns
among some investor
advocates.
In the proposal,
Finra
said the change would pertain
to brokers’ sales to institutions and investors with more than $5mn in
assets. “A member’s views regarding the projected performance
of an
investment strategy
or single
security may
be useful,” the
authority said
in the proposal.
But Stephen
Hall, legal
director of
Better Markets,
which lobbies
for investor
protection, said: “Using projections is one of the easiest ways to mislead
people. It’s easy for people to think the result is guaranteed.
[Finra] are really opening a can of worms.”
Finra submitted
its proposal
to the
US Securities
and Exchange
Commission on Monday.
It then will
be released for
public comment
before the
SEC, which
must approve
the measure, decides
whether to
ask for
changes and
whether to
greenlight it.
The process
can take
more than eight months.
The proposal will have the most far-reaching effect on the marketing
of private funds, a rapidly
growing sector
that carries
higher fees.
Investors have
been piling
into these
funds in search of
better returns than they can get from public markets.
“This is
a big
change. It
is good
for fund
managers who
want to
use this
[information] in
marketing through brokers,” said Lance Dial, a partner at the K&L
Gates law firm.
Finra noted
in its 210-page filing
that the
changes would
bring the
rules for
brokers closer
to the SEC
regulations for fund
managers and
registered investment advisers, who
are allowed to use
projections in some marketing material for sophisticated investors.
However,
securities law experts
said brokers
and investment
advisers have
slightly different
obligations to their clients. Advisers have a fiduciary duty to put
client interests first at all times.
Brokers must
recommend products
that are
in a
client’s best
interest, but
they do
not have ongoing responsibilities.
The SEC
has zealously
guarded against
allowing
money managers
to
make promises
about the future to
ordinary people. In September the SEC fined nine asset managers a
total of
$850,000
for putting
hypothetical results on
websites that
were available to the
general public.
Finra’s
proposal includes some investor safeguards. Brokers would be required
to have a reasonable basis
for their
estimates and
to make sure
that investors
“have access
to resources to
independently analyse this information or have the financial expertise
to understand the risks and limitations”.
But critics are worried the safeguards are inadequate. The proposal
“is ill-considered and could
open the
door to
lots of
mischief. Even sophisticated
investors can be
duped,” Hall
said.
The SEC,
Finra and
the Sifma,
the industry
lobby group
for brokers,
declined to
comment.
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Limited 2023. All rights reserved.