The Financial Industry Regulatory Authority twice this month has taken steps aimed at reducing brokers and their firms’ regulatory obligations when sending communications to clients and prospects.
On July 2, the Securities and Exchange Commission published a notice of a proposed amendment to Finra’s Rule 2210 that further relaxes an earlier proposal allowing brokers and their firms to project the returns of investment products and strategies to clients and prospects. The SEC must approve any rule change made by the industry self-regulator.
If the additional change takes effect, Finra would eliminate the requirement that firms have a “reasonable basis” for such projections and maintain written records supporting those assumptions.
Firms could also market performance projections without factoring in the cost of fees and commissions, according to the amendment, which was earlier reported by industry news site Financial Advisor IQ.
Joseph P. Savage, a Finra vice president and associate general counsel, told the SEC in a June 30 letter that the “reasonable basis” requirement was unnecessary. Existing Finra rules require brokers’ public communications to be based on “principles of fair dealing and good faith” and rely on a “sound basis for evaluating the facts” regarding a security or service, Savage wrote.
In a second step, Finra posted on July 9 a regulatory notice proposing additional amendments to its Rule 2210 and asked industry stakeholders to suggest even more possible changes, setting a September 11 deadline for such comments.
“This proposal reflects evolving communication practices and technologies, including changes in social media use and advances in generative (Gen) artificial intelligence (AI),” Finra wrote in the regulatory notice.
If that amendment takes effect, it will remove an existing requirement that firm principals seek Finra’s approval for brokers’ retail communications, which are defined as “a written communication to more than 25 retail customers within 30 days.”
Instead of submitting communications for Finra review, firms could rely on internal systems and personnel to comply with Finra’s rules for members’ retail communications.
Finra’s revision to the rule proposal governing investment products and strategies’ projections comes after industry representatives flagged the regulator’s initial proposal as too stringent during a comment period for the initial filing in February.
Finra officials have repeatedly said that they want to update brokers’ marketing rules to conform to the SEC’s updated marketing rules for registered investment advisors.
In May, Finra Board Chair Scott Curtis pointed to the proposal to relax the rules governing projections as in line with the agency’s ambitions to close that gap between what is required of brokerages versus RIAs.
The SEC’s marketing rule requires RIAs to adopt and implement policies “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.”
The RIAs also cannot advertise a “gross performance” figure without also presenting a “net performance” number that shows the effect of fees, according to the SEC’s marketing rule.
Finra’s push to relax marketing restrictions comes as the industry’s self-regulator has embarked on a broader review of its rulebook, enforcement practices and arbitration procedures. In line with a deregulatory agenda under the Trump Administration, Finra in late June published a report suggesting an overhaul of its approach to disciplining firms.
In its July 9 posting, Finra stressed that it wasn’t losing sight of its obligations to protect investors: “Under the proposal, the substantive content standards would not change, and members would remain fully responsible for ensuring that communications are fair and balanced, not misleading and otherwise consistent with those standards.”
“Members would be required to establish written procedures for the review of retail communications by an appropriately qualified principal but would have flexibility in determining which communications require pre-use approval based on risk factors,” Finra added.