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Finra Proposes Easing Client Communication Rules for Broker Dealers

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  • Posted on: Mar 20 2017

The Financial Industry Regulatory Authority, Inc. (“FINRA”) has proposed a rule change that will allow broker-dealers to project the performance of investment strategies or asset allocations, but not specific stocks, in communications with clients. If approved, the new rule would put brokers on an equal footing with registered investment advisers that are currently allowed to use these projections in their communications.

The self-regulatory organization (“SRO”) is currently accepting comments on the proposed rule. The objective of the rule is to allow firms that are not dually registered, or those that do not employ dually-registered persons, to compete more effectively by providing this service to clients.

“FINRA anticipates that these benefits would largely accrue to clients that do not have investment advisory accounts and, as a result, are not already receiving projections-related communications,” the SRO wrote in its proposal.

Under the proposed rule change, brokers would need a “reasonable basis” for all assumptions, conclusions and recommendations made in investment planning illustrations that are designed for clients. Moreover, the illustration must clearly and prominently disclose that the projection is hypothetical and that there is no guarantee that a projected performance or event will occur. All material assumptions and applicable limitations would also have to be disclosed.

There are a number of ways to establish a reasonable basis, such as referring to the historical performance and volatility of asset classes, the duration of fixed income investments, anticipated contribution and withdrawal rates by clients, and the impact of a variety of other factors.

Nonetheless, “hypothetical back-tested performance” or reliance on a particular asset manager’s performance would not be permitted. Lastly, the projections would need to be approved by a principal of the firm or supported by a reliable software package.

The proposed rule change stems from a recent self-assessment of current disclosure rules, and it has the support of brokers and industry groups. Ultimately, industry observers believe the rule change will harmonize FINRA’s oversight of brokers with the standards that govern investment advisers. FINRA has requested comment about the proposed rule change, particularly concerning its potential impact on member firms, and whether there are alternative approaches that should be considered.

Whether the amendment will be approved remains to be seen, but any member firm that needs advice and counsel on FINRA rules or that may be involved in a dispute should speak with a FINRA arbitration attorney.

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