Notice2026-03705
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 2210 (Communications With the Public)
Primary source
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Published
February 25, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 37 (Wednesday, February 25, 2026)</title>
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[Federal Register Volume 91, Number 37 (Wednesday, February 25, 2026)]
[Notices]
[Pages 9308-9318]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-03705]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104877; File No. SR-FINRA-2026-004]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 2210 (Communications With the Public)
February 20, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 10, 2026, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 2210 (Communications with
the Public). Currently, Rule 2210 prohibits projections of performance
or targeted returns in member communications, subject to specified
exceptions. The proposed rule change would allow a member to project
the performance or provide a targeted return with respect to a
security, a securities portfolio, or an asset allocation or other
investment strategy in its communications, subject to specified
conditions to ensure these projections are carefully derived from a
sound basis.
The text of the proposed rule change is available on FINRA's
website at <a href="https://www.finra.org">https://www.finra.org</a> and at the principal office of FINRA.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Rule 2210's General Prohibition of Projections and Its Exceptions
Rule 2210 provides that communications \3\ may not predict or
project performance, imply that past performance will recur or make any
exaggerated or unwarranted claim, opinion or forecast.\4\ The general
prohibition against performance projections is intended to protect
investors who may lack the capacity to understand the risks and
limitations of using projected performance in making investment
decisions.
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\3\ ``Communications'' consist of correspondence, retail
communications, and institutional communications. See Rule
2210(a)(1). Correspondence means any written (including electronic)
communication that is distributed or made available to 25 or fewer
retail investors within any 30 calendar-day period. Rule 2210(a)(2).
Retail communication means any written (including electronic)
communication that is distributed or made available to more than 25
retail investors within any 30 calendar-day period. Rule 2210(a)(5).
Institutional communication means any written (including electronic)
communication that is distributed or made available only to
institutional investors but does not include a member's internal
communications. Rule 2210(a)(3). Rule 2210(a) defines each of these
three communication types as communications that are ``distributed
or made available'' to investors, with the definitions varying based
on the specific audience and number of investors to whom the
communication is distributed or made available.
\4\ See Rule 2210(d)(1)(F).
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This general prohibition has some exceptions, however. First, Rule
2210 allows a hypothetical illustration of mathematical principles,
provided it does not predict or project the performance of an
investment or investment strategy.\5\ The ``hypothetical illustration
of mathematical principles'' exception to the prohibition of
projections applies to tools that serve the function of a calculator
that computes the mathematical outcome of certain assumed variables
without predicting the likelihood of either the assumed variables or
the outcome. For example, this exception applies to a calculator that
computes a net amount of savings that an investor would earn over an
assumed period of time with assumed variables of rates of returns,
frequency of compounding, and tax rates.\6\
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\5\ See Rule 2210(d)(1)(F)(i).
\6\ On the other hand, this exception would not apply to a
calculator that predicted the likelihood of achieving these assumed
variables and outcomes. See Notice to Members 04-86 (November 2004),
n.3.
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Second, the general prohibition on projections does not preclude a
member from employing an investment analysis tool, or a written report
produced by an investment analysis tool, that includes projections of
performance provided it meets the requirements of Rule 2214
(Requirements for the Use of Investment Analysis Tools).\7\ FINRA
adopted the predecessor to Rule 2214 in 2004 to allow members to offer
or employ technological tools that use a mathematical formula to
calculate the probability that investment outcomes (such as reaching a
financial goal) would occur.\8\
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\7\ See Rule 2210(d)(1)(F)(ii).
\8\ See Notice to Members 04-86, supra note 6.
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An ``investment analysis tool'' is an interactive technological
tool that produces simulations and statistical analyses that present
the likelihood of various investment outcomes if certain investments
are made or certain investment strategies or styles are undertaken,
thereby serving as an additional resource to investors in the
evaluation of the potential risks and returns of investment choices.\9\
Investors may use an investment analysis tool either independently or
with assistance from a member, and investors may receive written
reports generated by the tool that include projected performance that
is consistent with Rule 2214's requirements.\10\
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\9\ See Rule 2214(b).
\10\ For a more detailed discussion of the differences between
Rule 2214 and the proposal, see Comparison to Projections Permitted
by Rule 2214, infra.
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Third, members may include a price target in a research report on
debt or equity securities, provided that the price target has a
reasonable basis, the report discloses the valuation methods used to
determine the price target, and the price target is accompanied by a
disclosure concerning risks that may impede achievement of the price
target.\11\
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\11\ See Rule 2210(d)(1)(F)(iii).
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In addition, a communication with the public regarding security
futures or options may contain projected performance figures (including
projected annualized rates of return), provided that the communication
meets specified requirements.\12\ Among other things, the communication
must be accompanied or preceded by a standardized risk disclosure
statement, the communication may not suggest certainty of the projected
performance, parameters relating to such performance figures must be
clearly established, and the projections must disclose and reflect all
relevant costs, commissions, fees, and interest charges (as
applicable).\13\
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\12\ See Rules 2215 (Communications with the Public Regarding
Security Futures) and 2220 (Options Communications).
\13\ See Rules 2215(b)(3) and 2220(d)(3).
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[[Page 9309]]
Need for an Additional Exception
Based on feedback received during a retrospective rule review from
members and FINRA's advisory committees, comments on a prior proposed
rule change that would have allowed projections of performance and
targeted returns,\14\ and FINRA's experience with the rules, FINRA
determined that an additional exception to the general prohibitions on
projections in member communications is warranted. FINRA understands
that some broker-dealer customers, including institutional and other
sophisticated investors, request other types of projected performance
that the current rules do not allow.\15\ These customers, in
particular, may request information that includes projections of
performance or targeted returns concerning investment opportunities to
help them make informed investment decisions but are unable to receive
this information from members due to the prohibition on projections.
For example, a member's views regarding the projected performance of an
investment strategy or single security may be particularly useful to
investors who are eligible to invest in certain non-public offerings
that are relying on exceptions from registration under the Securities
Act of 1933 (``Securities Act'') and, with respect to private funds,
exclusions from the definition of ``investment company'' under the
Investment Company Act of 1940 (``ICA'').
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\14\ See discussion of previous proposals, infra; see also infra
note 29 (comparison of projections to targeted returns).
\15\ See Regulatory Notice 14-14 (April 2014); see also
Retrospective Rule Review Report: Communications with the Public
(December 9, 2014), <a href="https://www.finra.org/rules-guidance/guidance/reports/communications-public">https://www.finra.org/rules-guidance/guidance/reports/communications-public</a>.
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In addition, projected performance may be useful when investors
either have the financial expertise to evaluate investments and to
understand the assumptions and limitations associated with such
projections or have resources that provide them with access to
financial professionals who possess this expertise. Such investors
often test their own opinions against performance projections they
receive from other sources, including issuers and investment advisers.
Because Rule 2210 generally precludes a member from providing projected
performance or targeted returns in communications, these investors
cannot obtain a member's potentially different and valuable
perspective. Moreover, because registered investment advisers
(``RIAs'') are permitted to provide investors with this type of
performance information, subject to the conditions in the SEC's rule
governing investment adviser marketing \16\ (``IA Marketing Rule'')
under the Investment Advisers Act of 1940 (``Advisers Act''),\17\ Rule
2210's prohibition on projections can lead to investor confusion, as it
results in investors receiving different information about the same
investments depending on the financial professional with whom they
engage.
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\16\ See Investment Advisers Act Release No. 5653 (December 22,
2020), 86 FR 13024 (March 5, 2021) (adoption of Investment Advisers
Act of 1940 Rule 206(4)-1 (Investment Adviser Marketing)) (``IA
Marketing Rule Release'').
\17\ See 15 U.S.C. 80b-1 et seq.
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Previous Proposals
FINRA has previously pursued rulemaking to address the regulatory
need for an exception to the general prohibition on members projecting
performance in their communications. In February 2017, FINRA published
Regulatory Notice 17-06 (the ``Notice''), requesting comment on
proposed amendments that would have created an exception to the rule's
prohibition on projecting performance to permit members to distribute
customized hypothetical investment planning illustrations that include
the projected performance of an asset allocation or other investment
strategy, but not an individual security, subject to specified
conditions.\18\ Among other things, commenters responding to the Notice
urged FINRA to revise the proposal to permit projections of performance
of single securities, particularly for communications to sophisticated
investors, including qualified purchasers.\19\
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\18\ See Regulatory Notice 17-06 (February 2017).
\19\ FINRA received 23 comments in response to Regulatory Notice
17-06. Twenty-one commenters supported the proposal, and two
commenters opposed the proposal. For a full discussion addressing
the comments to Regulatory Notice 17-06, see Securities Exchange Act
Release No. 98977 (November 17, 2023), 88 FR 82482 (November 24,
2023) (Notice of Filing of File No. SR-FINRA-2023-016).
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In response to comments to that Notice, FINRA's experience with the
rule, and in light of the Commission's adoption of the IA Marketing
Rule, FINRA shifted its approach and filed a proposed rule change with
the Commission on November 13, 2023 (the ``November 2023 rule
change'').\20\ The November 2023 rule change, as amended,\21\ would
have created an exception from Rule 2210's general prohibition on
performance projections to allow a member, when conditions were met, to
project the performance or provide a targeted return with respect to a
security or asset allocation or other investment strategy in
communications to specified sophisticated investors. A member would
have been permitted to provide performance projections or targeted
returns only in: (1) an institutional communication; or (2) a
communication that is distributed or made available only to: (a)
persons meeting the definition of ``qualified purchaser'' under the ICA
and that promotes or recommends a Member Private Offering that is
exempt from the requirements of Rule 5122 pursuant to Rule
5122(c)(1)(B); or (b) persons meeting the definition of ``qualified
purchaser'' under the ICA or ``knowledgeable employee'' under ICA Rule
3c-5 and that promotes or recommends a private placement that is exempt
from the requirements of Rule 5123 pursuant to Rules 5123(b)(1)(B) or
5123(b)(1)(H).
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\20\ See Securities Exchange Act Release No. 98977 (November 17,
2023), 88 FR 82482 (November 24, 2023) (Notice of Filing of File No.
SR-FINRA-2023-016).
\21\ See Securities Exchange Act Release No. 99588 (February 22,
2024), 89 FR 14728 (February 28, 2024) (Notice of Filing Amendment
No. 1 and Order Instituting Proceedings To Determine Whether To
Approve or Disapprove File No. SR-FINRA-2023-016)).
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In addition to this general limitation on the types of investors
who would have been eligible to receive communications with projections
or targeted returns, the November 2023 rule change also would have
imposed specified conditions on members that choose to provide such
communications. The exception to the general prohibition on the use of
projections would have been conditioned on: (1) the member adopting and
implementing written policies and procedures reasonably designed to
ensure that the communication is relevant to the likely financial
situation and investment objectives of the investor receiving the
communication and to ensure compliance with all applicable requirements
and obligations; (2) the member having a reasonable basis for the
criteria used and assumptions made in calculating the projected
performance or targeted return, and retaining written records
supporting the basis for these criteria and assumptions; (3) the
communication prominently disclosing 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;
and (4) the member providing sufficient information to enable the
investor 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;
[[Page 9310]]
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.
During the rulemaking process, many commenters urged FINRA to align
the rule more closely with the IA Marketing Rule, including by
eliminating the threshold limitation on investors who could receive
projections from broker-dealers and allowing projections and targeted
returns for a wider range of investors.\22\ FINRA responded to comments
to the November 2023 rule change and, at that time, determined not to
significantly broaden the scope of the investors who could receive
projections under that rule change.\23\
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\22\ For a full discussion of the comments received to the
November 2023 rule change and FINRA's response, see Letter from
Meredith Cordisco, Associate General Counsel, FINRA, to Vanessa
Countryman, Secretary, SEC, dated February 22, 2024 (summarizing and
responding to comments to File No. SR-FINRA-2023-016).
\23\ See supra note 22.
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On February 22, 2024, the Commission instituted proceedings under
Section 19(b)(2)(B) of the Exchange Act to determine whether to approve
or disapprove the November 2023 rule change.\24\ On July 19, 2024, the
Division of Trading and Markets, for the Commission pursuant to
delegated authority,\25\ approved the November 2023 rule change, as
modified by Partial Amendment No. 1.\26\ On July 26, 2024, the Deputy
Secretary of the Commission notified FINRA that, pursuant to Rule 431
of the Commission's Rules of Practice,\27\ the Commission would review
the Delegated Order and that the Delegated Order was stayed until the
Commission ordered otherwise.\28\
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\24\ See supra note 21.
\25\ 17 CFR 200.30-3(a)(12).
\26\ See Securities Exchange Act Release No. 100561 (July 19,
2024), 89 FR 60461 (July 25, 2024) (Order Approving File No. SR-
FINRA-2023-016) (``Delegated Order'').
\27\ 17 CFR 201.431.
\28\ See Letter from J. Matthew DeLesDernier, Deputy Secretary,
SEC, to Meredith Cordisco, Associate General Counsel, FINRA, dated
July 26, 2024, <a href="https://www.sec.gov/files/rules/sro/finra/2024/letter-regarding-sr-finra-2023-016.pdf">https://www.sec.gov/files/rules/sro/finra/2024/letter-regarding-sr-finra-2023-016.pdf</a>.
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FINRA has had the opportunity to further consider the need for an
exception to the general prohibition on projections of performance in
member communications, as well as the comments in response to the
November 2023 rule change. FINRA has determined that further alignment
with the IA Marketing Rule's provisions governing hypothetical
performance will help investors, including by reducing investor
confusion and enabling them to receive additional information when
making investment decisions, and increase regulatory harmonization
while maintaining investor protection safeguards. If the Commission
approves the proposed rule change, FINRA intends to withdraw the stayed
November 2023 rule change.
Proposed Amendments
The proposed rule change would create a new, narrowly tailored,
exception to the general prohibition of projections for a communication
that projects performance or provides a targeted return with respect to
a security, a securities portfolio, or an asset allocation or other
investment strategy when members meet specified conditions. The
exception would be conditioned on: (1) the member adopting and
implementing 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 of the
communication; (2) the member having a reasonable basis for the
criteria used and assumptions made in calculating the projected
performance or targeted return, and retaining written records
supporting the basis for such criteria and assumptions; \29\ and (3)
the member providing 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.\30\
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\29\ FINRA recognizes that there may be some differences between
targeted returns and projections of performance, depending on the
circumstances. Targeted returns are aspirational and may be used as
a benchmark or to describe an investment strategy or objective to
measure the success of a strategy. Projections of performance, on
the other hand, use historical data and assumptions to predict a
potential return. Thus, targeted returns may not involve all (or
any) of the assumptions and criteria applied to generate a
projection. Because the intended audience of a communication may not
always understand or appreciate the differences between targeted
returns and projections of performance, both would be subject to the
same conditions, including that they must have a reasonable basis.
\30\ See proposed Rule 2210(d)(1)(F)(iv).
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Written Policies and Procedures
The proposed rule change would require a member to 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 of the
communication.\31\ The proposed rule change does not prescribe the ways
in which a member may satisfy the policies and procedures requirement,
including how the member will establish that the policies and
procedures are reasonably designed to ensure that the communication is
relevant to the likely financial situation and investment objectives of
the intended audience of the communication. Instead, this condition is
intended to provide members with the flexibility to develop policies
and procedures that best suit their investor base and the business in
which they engage. A member could meet the proposed rule change's
requirement to adopt and implement policies and procedures reasonably
designed to ensure that the projected performance or targeted returns
are relevant to the likely financial situation and intended audience
by, for example, adopting and implementing written policies and
procedures that are based in part on the member's past experiences with
particular types of investors who seek this information. A member may
wish to further tailor its intended audience for such a communication
to persons or entities that have expressed interest in particular types
of securities, or who have invested in similar securities in the past.
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\31\ See proposed Rule 2210(d)(1)(F)(iv)a.
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Reasonably designed policies and procedures need not address each
recipient's particular circumstances; rather, a member's policies and
procedures may account for the grouping of investors into categories or
types based on the member's reasonable judgment as to the likely
investment objectives and financial situation of that investor category
that is the intended audience of a communication.
A communication that contains projections of performance or
targeted returns should only be distributed, however, where the member
reasonably believes the investors for whom that communication is
intended have the financial expertise and resources to understand the
risks and limitations of such presentations.\32\ Under the proposed
rule change, members generally would not be able to include projections
of performance or targeted
[[Page 9311]]
returns in communications directed to a mass audience or intended for
general circulation, including to a general retail investor audience.
In the case of communications available to mass audiences, a member
generally could not form any expectation that the communication is
relevant to the likely financial situation and investment objectives of
the intended audience.
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\32\ FINRA would not view the mere fact that an investor would
be interested in high returns as satisfying the requirement that the
projected performance or targeted return is relevant to the likely
financial situation and investment objectives of the intended
audience.
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To the extent that a member makes this determination with respect
to particular retail investors to whom it is recommending a securities
transaction or investment strategy involving securities, the Exchange
Act's Regulation Best Interest (``Reg BI'') \33\ would further protect
retail investors, as it requires a broker-dealer to act in a retail
customer's best interest when making such recommendations \34\ and to
establish, maintain, and enforce written policies and procedures
reasonably designed to achieve compliance with Reg BI.\35\
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\33\ 17 CFR 240.15l-1.
\34\ See 17 CFR 240.15l-1(a)(1).
\35\ See 17 CFR 240.15l-1(a)(2)(iv). Reg BI defines ``retail
customer'' to mean a natural person, or the legal representative of
such natural person, who (i) receives a recommendation of any
securities transaction or investment strategy involving securities
from a broker, dealer, or natural person who is an associated person
of a broker or dealer, and (ii) uses the recommendation primarily
for personal, family, or household purposes. See 17 CFR 240.15l-
1(b)(1).
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This condition in the proposed rule change is substantially similar
to a condition governing RIAs' use of hypothetical performance in the
IA Marketing rule.\36\ Specifically, the IA Marketing Rule conditions
RIAs' use of hypothetical performance in investment adviser
advertisements on, among other conditions, the investment adviser
adopting and implementing 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
of the advertisement. FINRA anticipates that it would interpret
requirements in the proposed rule change that align with similar
requirements in the IA Marketing Rule's condition consistently with how
the Commission has interpreted those IA Marketing Rule
requirements.\37\
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\36\ See 17 CFR 275.206(4)-1(d)(6)(i).
\37\ Neither FINRA's November 2023 rule change nor the current
proposed rule change interprets the Commission's IA Marketing Rule,
and nothing in this proposed rule change should be construed as
impacting the application or interpretation of the SEC's rule.
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Reasonable Basis Requirement
In order to include projections of performance and targeted returns
in a communication, a member must have a reasonable basis for the
criteria used and assumptions made in calculating the projected
performance or targeted return and retain written records supporting
the basis for such criteria and assumptions.\38\ The reasonable basis
requirement is foundational and follows well-established precedents.
For example, Rules 2210 and 2241 (Research Analysts and Research
Reports) require a price target in a research report to have a
reasonable basis.\39\ SEC rules also require performance projections
contained in specified documents to be based on good faith and have a
reasonable basis.\40\
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\38\ See proposed Rule 2210(d)(1)(F)(iv)b.
\39\ See Rule 2210(d)(1)(F)(iii) and Rule 2241(c)(1)(B).
\40\ See Securities Act Regulation S-K, 17 CFR 229.10(b)
(providing in part that the use in documents specified in Securities
Act Rule 175 and Exchange Act Rule 3b-6 of management's projections
of future economic performance have a reasonable basis and reflect
its good faith assessment of a registrant's future performance).
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FINRA notes that the proposed rule change does not prescribe the
manner in which the member forms its reasonable basis, nor does it
require members, or third parties whose projections or targeted returns
appear in member communications, to adopt a prescribed methodology in
creating these projections. Like in other contexts where a broker-
dealer must form a reasonable basis, the factors a member considers
when forming its reasonable basis for the criteria used and assumptions
made in calculating projected performance or targeted returns would
depend on the facts and circumstances.\41\
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\41\ See, e.g., Regulation Best Interest, Securities Exchange
Act Release No. 86031 (June 5, 2019), 84 FR 33318, 33378 (July 12,
2019) (discussing that the relevance of factors to consider when
forming a reasonable basis under the Reg BI Care Obligation will
depend on the facts and circumstances); IA Marketing Rule Release,
86 FR 13024, 13053 (noting that what would constitute a reasonable
basis for an investment adviser's belief that a testimonial or
endorsement in investment adviser advertisements complies with the
requirements of the IA Marketing Rule would depend upon the facts
and circumstances).
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Nevertheless, FINRA believes that it is important for members to
consider appropriate factors in forming a reasonable basis for the
criteria used and assumptions made in calculating projected performance
or a targeted return pursuant to proposed Rule 2210(d)(1)(F)(iv). These
factors may include, for example, such considerations as: global,
regional, and country macroeconomic conditions; in the case of a single
security issued by an operating company, the issuing company's
operating and financial history; the industry's and sector's current
conditions and the stage of the business cycle; the quality of the
assets included in a securitization; and the appropriateness of
selected peer-group comparisons.\42\ While these examples may be
relevant, this list is not meant to be prescriptive or exhaustive.
Additional or different factors could be pertinent depending on the
particular security and the anticipated use of projected performance or
targeted returns.
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\42\ See, e.g., CFA Institute, Standards of Practice Handbook
(12th ed. 2024), at page 129-30 (requiring, among other things, that
CFA Institute Members and Candidates ``[h]ave a reasonable and
adequate basis, supported by appropriate research and investigation,
for any investment analysis, recommendation, or action.'').
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In addition, FINRA expects members to establish and maintain a
supervisory system to achieve compliance with the reasonable basis
standard.\43\ Before presenting projected performance or a targeted
return, a member should determine whether its existing written
supervisory procedures are reasonably designed to ensure that the
criteria used and assumptions made in calculating the projected
performance or targeted return have a reasonable basis.
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\43\ See FINRA Rule 3110(a).
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Disclosure Requirements
The requirement to provide sufficient information in the
communication to enable the intended audience to understand the
criteria used and assumptions made in calculating the projected
performance or targeted return is not intended to prescribe any
particular methodology or calculation of such performance.\44\ Nor does
FINRA expect a firm to disclose proprietary or confidential information
regarding the firm's methodology and criteria. Members would be
expected, however, to provide a general description of the methodology
used sufficient to enable the investors to understand the basis of the
methodology, as well as the assumptions underlying the projection or
targeted return. Without this basic information, particularly regarding
assumptions about future events, it is more likely that a projection or
targeted return would mislead a potential investor.
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\44\ See proposed Rule 2210(d)(1)(F)(iv)c.(i).
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The proposed rule change also would require a member to provide
sufficient information in the communication to enable an investor to
understand 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
[[Page 9312]]
differ from actual performance.\45\ This requirement is intended to
help ensure that such investors do not unreasonably rely on a
projection or targeted return given its uncertainty and risks.
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\45\ See proposed Rule 2210(d)(1)(F)(iv)c.(ii).
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General Standards and Supervision Under Rule 2210
As with all communications with the public, member communications
that contain projected performance or targeted returns must meet Rule
2210's general standards, including the requirements that
communications be fair and balanced, provide a sound basis for
evaluating the facts in regard to any particular security or type of
security, and not contain false, exaggerated, unwarranted, promissory
or misleading content.\46\ Accordingly, in addition to the reasonable
basis standard, any communication containing a projection or targeted
return would be prohibited from presenting exaggerated or unwarranted
projections or targeted returns.
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\46\ See Rule 2210(d)(1)(A) and (B).
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Members currently must adopt appropriate procedures for the
supervision and review of both institutional and retail
communications.\47\ If the proposed rule change is adopted, these
supervisory procedures would need to include the review of projections
of performance or targeted returns used in communications, including
compliance with the proposed rule change's specific conditions. In
addition, members generally would be required to approve, prior to use
or filing, any communication that falls within Rule 2210's definition
of ``retail communication.'' \48\
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\47\ See Rule 2210(b)(1) and (b)(3).
\48\ See Rule 2210(b)(1).
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Members that use third-party vendors to perform core business or
regulatory oversight functions must establish and maintain a
supervisory system, including written supervisory procedures, for any
activities or functions performed by third-party vendors that are
reasonably designed to ensure compliance with applicable securities
laws and regulations and with applicable FINRA rules.\49\ Accordingly,
if a member relies on third-party models or software to create a
projection or targeted return, the member 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 are used consistently with the proposed rule change's
requirements.
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\49\ See Regulatory Notice 21-29 (August 2021).
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For example, the member would need to obtain enough information to
form a reasonable basis as to the third-party's assumptions and the
underlying criteria and would need to retain written records supporting
the basis for such criteria and assumptions. Members should make
reasonable efforts to determine whether the model or software is sound
and should make reasonable inquiries into the source and accuracy of
the data used to create the projection or targeted return. If the
member has reason to suspect that the third-party model or software
lacks a sound basis, the member should investigate the matter and, if
it cannot be reasonably assured that the model or software is sound,
must not use it. Among factors that a member may wish to employ to
evaluate the third-party model or software are the assumptions used to
create the projection or target, the rigor of its analysis, the date
and timeliness of any research used to create the model or software,
and the objectivity and independence of the entity that created the
model or software.
As discussed above, members also must keep in mind that if they use
a projection of performance or targeted return in connection with a
recommendation of a securities transaction or investment strategy
involving securities to a retail customer, the recommendation must meet
the requirements of Reg BI.
Comparison to Projections Permitted by FINRA Rule 2214
There are several key differences between the types of projections
that Rule 2214 permits as compared to those that the proposed rule
change would allow. First, Rule 2214 differs from the proposed rule
change in terms of how a projection may be communicated. Rule 2214
allows a projection of performance that is created by an investment
analysis tool that any retail customer uses on a one-on-one interactive
basis, either independently or with a member's assistance, and that
provides individualized results to each user. In contrast, unlike Rule
2214, the proposed rule change does not mandate an interactive element
associated with the delivery of projections. Instead, firms could
provide projections or targeted returns to investors using any form of
communication that otherwise complies with the proposed rule change,
applicable requirements of FINRA rules, and the federal securities
laws.
Second, Rule 2214 requires the tool to produce simulations and
statistical analyses that present the likelihood of various investment
outcomes if certain investments are made or certain investment
strategies are undertaken. Although the rule does not expressly require
the use of a particular type of statistical analysis, in many cases
firms (or their vendors) use Monte Carlo simulations for this
process.\50\ In contrast, the proposed rule change would not require
communications to investors that include performance projections or
targeted returns to consider potential returns under various scenarios
and the probability of success for each scenario.
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\50\ Monte Carlo simulation involves the use of a computer to
represent the operations of a complex financial system. A
characteristic feature of Monte Carlo simulation is the generation
of a large number of random samples from specified probability
distributions to represent the operation of the system. Monte Carlo
simulation is used in planning in financial risk management and in
valuing complex securities. Monte Carlo simulation is a complement
to analytical methods but provides only statistical estimates, not
exact results. See CFA Institute, Common Probability Distributions
(CFA Program Level I, 2023 Curriculum), available at <a href="https://www.cfainstitute.org/membership/professional-development/refresher-readings/common-probability-distributions">https://www.cfainstitute.org/membership/professional-development/refresher-readings/common-probability-distributions</a>.
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Third, Rule 2214's disclosure requirements differ somewhat from
those under the proposed rule change. Rule 2214 requires an investment
analysis tool, a written report generated by the tool, or a related
retail communication to:
<bullet> Describe the criteria and methodology used, including the
investment analysis tool's limitations and key assumptions;
<bullet> explain that results may vary with each use and over time;
<bullet> if applicable, describe the universe of investments
considered in the analysis, explain how the tool determines which
securities to select, disclose if the tool favors certain securities
and, if so, explain the reason for the selectivity, and state that
other investments not considered may have characteristics similar or
superior to those being analyzed; and
<bullet> display a prescribed disclosure concerning the
hypothetical nature of the projections, that they do not reflect actual
investment results, and that they are not guarantees of future
results.\51\
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\51\ See Rule 2214(c).
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In contrast, the proposed rule change would require a member to
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
[[Page 9313]]
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.''
\52\
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\52\ See proposed Rule 2210(d)(1)(F)(iv)c.
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While the proposed rule change's methodology disclosure requirement
resembles the methodology disclosure requirements in Rule 2214, they
are worded differently to reflect different types of communications to
which the proposed rule change and Rule 2214 apply. For example, an
investment analysis tool permitted by Rule 2214 may recommend that an
investor consider an alternative account portfolio to improve the range
of its potential returns but limit the securities that may populate the
portfolio. This limitation is important information to investors when
considering whether to change their investments. In contrast, the
proposed rule change may be more likely to apply to a projection or
targeted return that is included in a communication promoting a single
security or investment strategy and thus would impose different
disclosure requirements relative to those scenarios.
Comparison to IA Marketing Rule's Hypothetical Performance Standards
As discussed above, the proposed rule change is generally
consistent with the IA Marketing Rule, which permits investment
advisers to present hypothetical performance in an advertisement if the
investment adviser meets specified conditions and does not violate the
IA Marketing Rule's other requirements.\53\
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\53\ See 17 CFR 275.206(4)-1(d)(6).
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The requirements of the IA Marketing Rule in many ways overlap with
the proposed rule change's requirements, and FINRA anticipates that it
would interpret requirements in the proposed rule change that align
with similar requirements in the IA Marketing Rule consistently with
how the Commission has interpreted those IA Marketing Rule
requirements. Thus, member firms should be able to comply with these
proposed requirements in a manner similar to how investment advisers
must comply with similar requirements applicable to the use of
hypothetical performance under the IA Marketing Rule.\54\
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\54\ See IA Marketing Rule Release, 86 FR 13024, 13083-85.
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In addition, similar to Rule 2210, the IA Marketing Rule generally
requires advertisements to be fair and balanced and prohibits any
advertisement that includes any untrue statement of a material fact or
omits to state a material fact necessary to make the statement made
under the circumstances not misleading.\55\
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\55\ See 17 CFR 275.206(4)-1(a).
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While FINRA has endeavored to align, where appropriate, the
conditions the SEC applies to hypothetical performance under its IA
Marketing Rule, there are some differences. First, the scope of the
type of performance covered in the proposed rule change is narrower
than the relevant IA Marketing Rule provisions. In this regard, the
relevant provision of the IA Marketing Rule addresses ``hypothetical
performance,'' which includes performance derived from model
portfolios; performance that is back-tested by the application of a
strategy to data from prior time periods when the strategy was not
actually used during those time periods; and targeted or projected
performance returns with respect to any portfolio or to the investment
advisory services with regard to the securities offered.\56\ The
proposed rule change is intentionally narrower in that it includes only
projections of performance and targeted returns. Targeted returns
reflect the aspirational performance goals for an investment or
investment strategy. Projections of performance reflect an estimate of
the future performance of an investment or investment strategy, which
is often based on historical data and assumptions. Projections of
performance are commonly established through mathematical modeling.\57\
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\56\ See 17 CFR 275.206(4)-1(e)(8).
\57\ See IA Marketing Rule Release, 86 FR 13024, 13081 n.699 and
accompanying text.
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Second, as noted above, the proposed rule change expressly requires
a member to have a reasonable basis for the criteria used and
assumptions made in calculating the projected performance or targeted
return and requires that the member retains written records supporting
the basis for such criteria and assumptions. FINRA views this
requirement as foundational; without forming a reasonable basis, a
member's projections of performance and targeted returns could be based
on guesswork, invalid presumptions, and misleading reasoning. Requiring
a reasonable basis ensures that the member acts with reasonable
diligence and good faith. While the SEC's IA Marketing Rule does not
contain an express reasonable basis requirement in its provision
governing hypothetical performance, the rule requires all RIA
advertising to be fair and balanced and to meet other hypothetical
performance standards.\58\
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\58\ See 17 CFR 275.206(4)-1(a)(1) through (a)(7).
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Third, the proposed rule requires a member to disclose, as part of
a projection's or targeted return's risks and limitations, the reasons
why the projected performance or targeted return might differ from
actual performance. By contrast, the IA Marketing Rule requires an RIA
to provide sufficient information to enable the intended audience to
understand the criteria used and assumptions made in calculating the
hypothetical performance and the risks and limitations of using such
hypothetical performance in making investment decisions. FINRA believes
it is important for investors to understand that projections and
targeted returns may not accurately reflect how a product actually
performs, including the reasons why this outcome may occur.
Comparison to November 2023 Rule Change
The current proposed rule change differs from the November 2023
rule change in several material ways. First, the current proposed rule
change would better align with the IA Marketing Rule by eliminating the
November 2023 rule change's threshold restriction on the categories of
investors who would be eligible to receive projections and targeted
return information in member communications. As noted above, the
November 2023 rule change would have allowed members to use projections
and targeted returns only in communications to specified sophisticated
investors. The IA Marketing Rule has no such threshold limitation on
the audience for these communications.\59\ Instead, the IA Marketing
Rule conditions the use of hypothetical performance on, among other
conditions, the adviser adopting and implementing 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. The proposed rule
change, like the IA Marketing Rule, will have substantially similar
conditions, which will ensure that projections of performance and
targeted returns are only made available
[[Page 9314]]
to investors who have the financial expertise and resources to
understand the risks and limitations of these types of presentations.
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\59\ The IA Marketing Rule imposes conditions based on the
``intended audience'' of an investment adviser advertisement. In
this regard, the IA Marketing Rule Release states that ``[w]e intend
for advertisements including hypothetical performance information to
only be distributed to investors who have access to resources to
independently analyze this information and who have the financial
expertise to understand the risks and limitations of these types of
presentations.'' See IA Marketing Rule Release, 86 FR 13024, 13078.
---------------------------------------------------------------------------
Second, the November 2023 rule change required a communication to
prominently disclose that the projected performance or targeted return
is hypothetical in nature and that there is no guarantee that the
projection of performance or targeted return will be achieved. Upon
further reflection, FINRA believes that this disclosure requirement is
unnecessary and potentially duplicative to the proposed rule change's
requirement to provide sufficient information to enable the intended
audience to understand the 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. Accordingly, the proposed rule
change, like the IA Marketing Rule's provisions, would not require this
affirmative disclosure.
Third, the November 2023 rule change proposed, as Supplementary
Material to the proposed rule text, factors that a member should
consider when forming its reasonable basis.\60\ While FINRA intended
that information to be guidance, several commenters raised questioned
about these factors or their utility. In response, FINRA emphasized
that members have flexibility when forming their reasonable basis for
projections and targeted returns. The factors listed in the previously
proposed Supplementary Material were intended to be helpful guidance,
not prescriptive requirements or a check-the-box exercise.\61\ To avoid
confusion, however, FINRA has removed the Supplementary Material,
including its factors, from the current proposed rule text.
Nevertheless, members would be free to consider those, as well as other
factors, when making their reasonable basis determinations.
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\60\ See Delegated Order, 89 FR 60461, 60464-65.
\61\ See Letter from Meredith Cordisco, Associate General
Counsel, FINRA, to Vanessa Countryman, Secretary, SEC, dated
February 22, 2024 (discussing comments regarding proposed
Supplementary Material to November 2023 rule change, File No. SR-
FINRA-2023-016).
---------------------------------------------------------------------------
Fourth, the November 2023 rule proposal specifically prohibited
members from basing projected performance or a targeted return upon
hypothetical, back-tested performance or the prior performance of a
portfolio or model that was created solely for the purpose of
establishing a track record. The current proposed rule change does not
contain these express prohibitions. While the proposed rule change
would no longer expressly prohibit members from using back-tested
performance as a factor in determining projected performance or a
targeted return, members should keep in mind that the criteria used and
assumptions made in calculating projected performance and targeted
returns must have a reasonable basis, the communication must include
appropriate disclosures, and the presentation of such performance must
be fair and balanced.\62\
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\62\ At least one study has shown that back-tested index
performance data is not a reliable indicator of how an exchange-
traded fund linked to the index will perform after it is launched.
See Institutional Investor, Study Finds Many ETF Indexes Misleading,
(August 29, 2012), <a href="https://www.institutionalinvestor.com/article/2bsvknn823v5h6qgbq9z4/portfolio/study-finds-many-etf-indexes-misleading">https://www.institutionalinvestor.com/article/2bsvknn823v5h6qgbq9z4/portfolio/study-finds-many-etf-indexes-misleading</a>. For further analysis concerning the reliability of using
back-tested performance to predict future performance, see David H.
Bailey, Jonathan M. Borwein, Marcos Lopez de Prado & Qiji Jim Zhu,
Pseudo-Mathematics and Financial Charlatanism: The Effects of
Backtest Overfitting on Out-of-Sample Performance, 61(5) Notices of
the American Mathematical Society 458-471 (2014).
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Contributions to Investor Protection
FINRA believes that approval of the proposed rule change would
contribute to investor protection by enabling investors to access
projections when considering specific investments or strategies, when
the rule's safeguarding conditions are met. For example, under the
current rule, investors are not permitted to receive projections from
broker-dealers, despite the fact that such projections may assist them
in evaluating potential securities purchases or sales, choosing
appropriate investment strategies, or creating strategic plans for
their business operations. Under the proposed rule change, investors
would have access to projected performance or targeted returns that
must comply with Rule 2210's existing prohibition of false or
misleading statements or claims and the proposed rule change's
disclosure requirements. In addition, the proposed rule change would
reduce confusion for investors who currently may receive differing
information depending on the regulated nature of their intermediary
(such as RIAs) or are prohibited from receiving information that could
be useful to their investment decision-making process.
FINRA believes the proposed rule change also would contribute to
investor protection by encouraging issuers of publicly offered or
privately placed securities to select members that are subject to
appropriate regulation and oversight for participation in securities
offerings. FINRA recognizes that investors are already able to receive
projected or targeted returns in communications from parties other than
registered broker-dealers, such as unregistered intermediaries \63\ or
the securities' issuer.\64\
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\63\ For example, Congress amended the Exchange Act in 2022 to
create a registration exemption for certain mergers and acquisition
brokers (``M&A Brokers''). M&A Brokers are not subject to any
federal or self-regulatory organization rules governing their
communications (other than general anti-fraud provisions), including
any prohibitions on including projections or targeted returns in
their communications. See Consolidated Appropriations Act, Public
Law 117-328 (2023) (codified at 15 U.S.C. 78o(b)(13)).
\64\ The majority of private offerings governed by Securities
Act Regulation D (17 CFR 230.501 et seq.) are sold directly by
issuers without any broker-dealer involvement. Between 2013 and
2022, among a sample of 279,985 Regulation D offerings, broker-
dealers participated in only 5-10% of these offerings each year. See
Minwen Li, Tanakorn Makaew & Lori Walsh, FINRA Office of Chief
Economist, The Roles of Broker-Dealers in Regulation D Offerings,
2013-2022 (January 24, 2025), <a href="https://www.finra.org/sites/default/files/2025-07/Role-of-Broker-Dealers-in-Regulation-D-Market-FINRA-White-Paper.pdf">https://www.finra.org/sites/default/files/2025-07/Role-of-Broker-Dealers-in-Regulation-D-Market-FINRA-White-Paper.pdf</a>. Thus, only a small percentage of investors in
private placements are afforded the protections of FINRA rules and
other relevant broker-dealer regulations that apply when a
Regulation D offering involves a FINRA member firm.
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Accordingly, the current prohibition of registered broker-dealers
including projected performance or targeted returns in many types of
communications creates an incentive for issuers to avoid the registered
broker-dealer channel to offer securities and instead use an RIA, an
unregistered firm, or market securities directly to potential
investors.
The proposed rule change also would allow investors to receive and
compare projections provided by members with projections from other
entities, with appropriate safeguards. For example, it is very common
for issuers to offer their securities directly to investors using
performance projections in their marketing communications or offering
documents.\65\ It is also very common for RIAs to use projections of
performance when marketing private funds that they manage. Approval of
the proposed rule change would not level the regulatory playing field
entirely between members,
[[Page 9315]]
RIAs, unregistered firms, and issuers with respect to projected
performance, but it would more closely align the regulatory treatment
and allow members to present projections and targeted returns to
investors subject to existing and proposed investor protections.
---------------------------------------------------------------------------
\65\ Under FINRA rules, offering materials are considered
communications with the public for purposes of Rule 2210 if a member
was involved in preparing the materials. If a private placement
memorandum (``PPM'') or other marketing document presents
information that is not fair and balanced or that is misleading,
then the member that assisted in its preparation may be found to
have violated Rule 2210. Moreover, sales literature concerning
securities offerings that a member distributes generally constitutes
a communication by that member to the public, regardless of whether
the member assisted in its preparation. See Regulatory Notice 23-08
(May 2023) at page 11; see also Regulatory Notice 10-22 (April 2010)
and Regulatory Notice 20-21 (July 2020).
---------------------------------------------------------------------------
If the Commission approves the proposed rule change, FINRA will
announce the implementation date of the rule change in a Regulatory
Notice.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\66\ which requires, among
other things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\66\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA believes that the proposed rule change strikes the right
balance between protecting investors and allowing more investment
information to be communicated to an appropriate audience. As discussed
above, the proposed rule change would require that the member adopt
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 of the communication.
With this condition, members generally would not be able to include
projections of performance or targeted returns in communications
directed to a mass audience or intended for general circulation,
including to a general retail investor audience because a member could
not form any expectations about their financial situation or investment
objectives. In addition, in situations where the member has satisfied
itself that a retail investor or group of retail investors meets this
standard, Reg BI would require members to act in the investor's best
interest when making a recommendation of a securities transaction or
investment strategy involving securities, regardless of whether a
projection is used as a basis for the recommendation.
FINRA believes that the proposed rule change would provide
additional sources of information for investors in their investment
decision making. As mentioned previously, some investors, particularly
institutional and other sophisticated investors, develop their own
opinions regarding the future performance of an investment based on the
multiple sources of information at their disposal. They test these
opinions against the views and data provided by other sources, which
often summarize their conclusions in terms of a projection of
performance of the investment. This is particularly true in the
offering of securities by issuers, including hedge funds and other
investment vehicles. Rule 2210(d)(1)(F) currently does not permit
members to share their views on projection-related data with investors
in these situations due to its restrictions on members communicating
projected performance information.
Even so, the proposed changes would provide safeguards for
communications that contain projections of performance or targeted
returns, including requiring members to adopt and implement policies
and procedures reasonably designed to ensure that the communication is
relevant to the likely financial situation and investment objectives of
the intended audience of the communication. They would mandate that
members have a reasonable basis for the criteria used and assumptions
made in calculating the projections of performance or targeted returns.
The proposed changes also would require a member to provide
sufficient information to enable the intended audience to understand
the criteria used and assumptions made in calculating the projected
performance or targeted return, and to understand the risks and
limitations of using projected performance or targeted returns in
making investment decisions.
The proposed rule change also would reduce investor confusion, as
currently investors may receive different information about the same
investments, depending on the financial professional. As discussed
above, the proposed changes recognize that investors are already able
to receive projected performance or targeted returns in communications
from parties other than broker-dealers and, to address this
discrepancy, the changes more closely align the ability of broker-
dealers to offer projections to investors with the ability of issuers
and other non-member firms, including RIAs consistent with the IA
Marketing Rule, to offer projections. The proposed rule change would
allow investors to receive and compare projections provided by members
with projections from other entities, with appropriate safeguards
designed to protect investors.
FINRA believes that investors would be better protected if issuers
offered their securities through broker-dealers, which are subject to a
much more rigorous set of rules governing communications than issuers,
and that are subject to regulatory oversight from the Commission, FINRA
and state securities regulators. The proposed rule change may enable
more issuers to use broker-dealers for their securities offerings. In
addition, investors who are retail customers under Reg BI will receive
the additional protections of that rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the regulatory need for the proposed rulemaking, its
potential economic impacts, including anticipated costs and benefits,
and the alternatives FINRA considered in assessing how to best meet its
regulatory objectives.
1. Regulatory Need
Among other things, commenters during the retrospective review of
rules governing communications with the public expressed concerns that
the current prohibition on projections of performance imposes undue
restrictions on broker-dealer customers.\67\ The amendments in this
proposed rule change are intended to better align the treatment of
projections of performance and targeted returns in broker-dealer
communications under FINRA Rule 2210 with the treatment of hypothetical
performance information in investment adviser communications under the
IA Marketing Rule. FINRA believes that such further alignment will help
investors, including by reducing investor confusion and enabling them
to receive additional information when making investment decisions and
by increasing regulatory harmonization while maintaining investor
protection safeguards.
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\67\ See letters responding to Regulatory Notice 14-14 (April
2014) from the Financial Services Roundtable (May 22, 2014) and the
Securities Industry and Financial Markets Association (May 23,
2104), both available at <a href="http://www.finra.org">www.finra.org</a>.
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2. Economic Baseline
The economic baseline used to evaluate the impact of the proposed
rule change is the current regulatory framework. This baseline serves
as the primary point of comparison for assessing economic impacts,
including
[[Page 9316]]
the incremental benefits and costs of the proposed rule change.\68\
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\68\ Thus, the economic baseline used here does not include the
rule amendments that were part of SR-FINRA-2023-016.
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Currently, absent an applicable exception \69\ from the general
prohibition on members projecting performance in their communications,
members and their representatives may not present investors with
performance projections or targeted returns regarding various
investment opportunities. However, some of these members may have
customers that already have access to or already receive projections-
related communications from other sources, such as a member that is
dually registered as an investment adviser and acting in an advisory
capacity, a member's investment adviser affiliate, or an unaffiliated
third-party investment adviser. For example, some dually registered
members and dually registered representatives already communicate
information regarding projected performance to their advisory
clients.\70\ Similarly, members that are not registered as investment
advisers may have registered representatives that are dually registered
and work for both the broker-dealer member and a third-party investment
adviser.\71\ Members and their registered representatives that are also
investment advisers may not be impacted by the proposed rule change,
since they are already able to provide this information when acting in
an advisory capacity.
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\69\ See supra notes 5-13 and accompanying text.
\70\ FINRA estimates that, as of December 31, 2024,
approximately 410 member firms are dually registered as broker-
dealers and investment advisers. FINRA further estimates that these
dually registered firms have approximately 416,000 registered
representatives, and 247,000 (or about 59 percent) of these
individuals are dually registered both as investment adviser and
broker-dealer representatives. FINRA estimates that approximately
130 of the dually registered firms have a total of 1800 individuals
that are solely registered as investment adviser representatives.
FINRA notes that in addition to the dually registered
representatives, investment adviser-only representatives may also be
providing projections-related communications to their advisory
clients. Individuals who are registered with more than one member
firm are counted more than once in the above statistics.
\71\ FINRA estimates that, as of December 31, 2024,
approximately 2,800 member firms are only registered as broker-
dealers and these firms have approximately 278,000 registered
representatives. FINRA further estimates that approximately 83,000
of these individuals are dually registered both as investment
adviser and broker-dealer representatives. These dually registered
representatives may have customers with access to projections-
related communications through their investment advisory
relationships with third-party investment advisers. Individuals that
are registered with more than one member firm are counted more than
once in the above statistics.
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FINRA also notes that investors may be solicited to purchase
individual securities directly by an issuer without the involvement of
a broker-dealer, and issuers often use performance projections and
targeted returns in their communications.
3. Economic Impacts
FINRA anticipates that the proposed rule change will potentially
impact all investors who currently do not have access to projections-
related communications but could under the proposed rule change, and
those members that serve these investors. In practice, however, FINRA
expects that the proposed rule change will primarily impact
institutional and other sophisticated investors and those members that
serve them. The proposed rule change require, as discussed earlier in
Item II.A.1, that ``the member [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 of the communication.'' \72\ Thus, FINRA expects
that projections-related communications will only be distributed to
investors who have the financial expertise and resources to evaluate
investments and to understand the assumptions and limitations
associated with such projections. To the extent that a member makes
this determination with respect to recommendations of securities
transactions or investment strategies involving securities to
particular retail customers, Reg BI would further protect the retail
customers, as it requires a broker-dealer to act in a retail customer's
best interest when recommending a securities transaction or investment
strategy involving securities.
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\72\ See proposed Rule 2210(d)(1)(F)(iv)a.
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The impact of the proposed rule change likely will be most
pronounced for products such as private placements and services such as
providing investors with customized investment strategies where there
exists little publicly available information, and where the member or
its representatives have access to relevant non-public information and
expertise. In such instances, projections-related communications
provided by the member may be especially valuable to investors given
the dearth of other available information. At the same time, such
instances may also represent situations with elevated risks to
investors, as projections in these instances may be harder to validate.
However, the obligation for members to have a reasonable basis for
projections and targeted returns would mitigate this risk.
Anticipated Benefits
The proposed rule change would allow members to better inform
investors about an individual security, asset allocation, or other
investment strategy and the underlying assumptions upon which related
recommendations are based. FINRA anticipates that these benefits
primarily would accrue to investors who would now be eligible to
receive projections of performance and who currently do not have enough
information about the specific investment or strategy to make their own
projections. The proposed rule change may also potentially benefit
investors who make their own projections and can now compare them to
projections furnished by their broker-dealer or can compare the broker-
dealer's projections against those from other sources. These sources
may include, for example, investment advisers, the securities' issuer,
or some other intermediary who also provides projections.
For these benefits to accrue, the performance projections or
targeted returns must be objectively informative, and the magnitude of
benefit depends on the extent to which customers value these
communications and find them informative. In addition, the proposed
rule change would reduce the effort needed for dually registered firms
to comply with two sets of regulatory standards for communications
containing projections or targeted returns and would eliminate
confusion for investors that currently receive different information
about the same investments from different sources. The same would apply
to issuers that sell their products through both investment adviser and
broker-dealer channels.
Anticipated Costs
Members that choose to communicate performance projections or
targeted returns, as allowed by the proposed rule change, would also
incur costs associated with supervising these communications and
complying with the proposed rule change's conditions. Such efforts
would include adopting and implementing written policies and procedures
that are reasonably designed to ensure compliance with the proposed
rule change's requirements and monitoring the effectiveness of those
policies and procedures. In addition, the proposed rule change may
impose costs on both members and investors where an investor
misunderstands or misuses a projection that they would not
[[Page 9317]]
otherwise receive to make an investment choice that is inconsistent
with their investment objectives. If, as a result, investors suffer
investment losses, they may seek recourse. This may result in expenses,
including legal expenses, for such investors. Since members are not
required to provide projections to investors, some members may consider
doing so only if they anticipate that the benefits of providing
projections exceeds the expected risks and costs.
Competitive Effects
Currently, members that are not also registered as investment
advisers are unable to provide projections or targeted returns to their
customers except as permitted under Rule 2210(d)(1)(F). At the same
time, members that are dually registered or that employ dually
registered persons may already provide some customers with performance
projections beyond those allowed under Rule 2210 in their capacities as
RIAs or investment adviser representatives. The proposed rule change
would create comparable investment adviser and broker-dealer standards
for communications related to performance projections and targeted
returns, thus more closely aligning the regulatory treatment among
broker-dealers, investment advisers, and issuers with respect to such
communications.
4. Alternatives Considered
In considering how to best meet its regulatory objectives, FINRA
considered alternatives to certain aspects of this proposed rule
change.
In particular, as described in detail in Item II.A.1, subsections
``Previous Proposals'' and ``Comparison to November 2023 Rule Change,''
FINRA previously filed with the Commission the November 2023 rule
change, which would have created a narrower exception to Rule 2210's
general prohibition on performance projections. The narrower exception
included a threshold limitation on which investors could receive
projections or targeted returns from broker-dealers.\73\
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\73\ As discussed above, the November 2023 rule change would
have permitted projections of performance and targeted returns only
in (i) institutional communications and (ii) communications to
qualified purchasers as defined under the ICA and knowledgeable
employees as defined in ICA Rule 3c-5 in connection with specified
exempt private offerings that are excluded from filing under FINRA
Rules 5122 and 5123. See supra notes 20-28 and accompanying text.
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When compared to the November 2023 rule change, FINRA believes that
the elimination of such a threshold limitation, among other aspects of
the proposed rule change, will be more effective in reducing investor
confusion, better serve investors by enabling them to receive
additional information when making investment decisions, and increase
regulatory harmonization while maintaining investor protection
safeguards.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received on this
proposed rule change. However, as noted above, FINRA has solicited
comment on previous rulemaking initiatives relating to members' ability
to project performance. Specifically, in February 2017, FINRA published
Regulatory Notice 17-06, requesting comment on proposed amendments that
would have created an exception to the rule's prohibition on projecting
performance to permit members to distribute customized hypothetical
investment planning illustrations that include the projected
performance of an asset allocation or other investment strategy, but
not an individual security, subject to specified conditions. As noted
above, FINRA received 23 comment letters, 21 commenters of which
supported the proposal, and two commenters opposed the proposal.\74\
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\74\ See supra note 19 and accompanying text. Because the
current proposed rule change represents a significant shift from the
approach set forth in Regulatory Notice 17-06, both in terms of the
scope of the proposed exception from the general prohibition, as
well as the proposed conditions, a comprehensive discussion of the
comments to Regulatory Notice 17-06 is not relevant here. For a full
discussion addressing the comments to Regulatory Notice 17-06, see
Securities Exchange Act Release No. 98977 (November 17, 2023), 88 FR
82482 (November 24, 2023) (Notice of Filing of File No. SR-FINRA-
2023-016).
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In response to the SEC's adoption of the IA Marketing Rule, SEC
staff comments, and industry comments, including comments to Regulatory
Notice 17-06 that focused on the ability to provide projections on
single securities for institutional and other sophisticated investors,
FINRA revised its approach. As discussed above, FINRA filed with the
Commission the November 2023 rule change, which would have allowed a
member to include projections of performance and targeted returns in
specified communications to institutional investors. The SEC received
10 comments in response to the initial rule filing, and four additional
comments after instituting proceedings.\75\ A full discussion of those
comments, and FINRA's responses, are available in letters FINRA
submitted to the Commission in that rulemaking. In general, FINRA
believes that the current proposed rule change addresses comments that
supported the overall intent of the November 2023 rule change and the
ability for members to use projections and targeted returns in some
circumstances, but that advocated for further regulatory harmonization.
As discussed above, as compared to the November 2023 rule change, the
proposed rule change more closely aligns the treatment of projections
of performance and targeted returns for broker-dealers with similar
requirements for investment advisers under the IA Marketing Rule, while
also maintaining investor protection safeguards. Accordingly, the
proposed rule change would lessen the regulatory inconsistencies
regarding the use of performance projections between broker-dealers and
stand-alone investment advisers and would minimize the current
opportunities for regulatory arbitrage.
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\75\ See Securities Exchange Act Release No. 98977 (November 17,
2023), 88 FR 82482 (November 24, 2023) (Notice of Filing of File No.
SR-FINRA-2023-016) and Letter from Meredith Cordisco, Associate
General Counsel, FINRA, to Vanessa Countryman, Secretary, SEC, dated
February 22, 2024 (``Initial Response to Comments'') (including, as
Attachment A, an Alphabetical List of Commenters to File No. SR-
FINRA-2023-016); see also Letter from Meredith Cordisco, Associate
General Counsel, FINRA, to Vanessa Countryman, Secretary, SEC, dated
July 17, 2024 (discussing and rebutting comments the Commission
received in response to its notice and order in the Federal Register
soliciting comments on the Partial Amendment SR-FINRA-2023-016 and
instituting proceedings pursuant to Section 19(b)(2)(B) of the
Exchange Act).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act.
[[Page 9318]]
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f183849d94dc929e9c9c949f8582b1829492df969e87"><span class="__cf_email__" data-cfemail="2b595e474e06484446464e455f586b584e48054c445d">[email protected]</span></a>. Please include
File Number SR-FINRA-2026-004 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2026-004. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the filing will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-FINRA-2026-004 and should be submitted on or
before March 18, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
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\76\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-03705 Filed 2-24-26; 8:45 am]
BILLING CODE 8011-01-P
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