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250 15 U.S.C. 78o–3(b)(6). 

251 15 U.S.C. 78s(b)(2). 

252 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Targeted 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. See Investment Advisers 

Act Release No. 5653 (December 22, 2020), 86 FR 

13024, 13081 n.699 (March 5, 2021) and 

accompanying text. 

4See FINRA Rule 2210(d)(1)(F). 5See FINRA Rule 2210(d)(1)(F)(i). 6On 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. 7See FINRA Rule 2210(d)(1)(F)(ii). 8See Notice to Members 04–86, supra note 6. 

where a participating member firm may 

pose a heightened risk of noncompliance but has not been otherwise 

excluded by the safeguards and 

limitations of the Pilot. For these 

reasons, proposed Rule 3110.18(j) and 

proposed Rule 3110.18(k) are 

reasonable. 

III. Conclusion 

For the reasons set forth above, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, promote just and equitable 

principles of trade, and, in general, 

protect investors and the public 

interest.250

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 251

that the proposed rule change (SR– 

FINRA–2023–007), as modified by 

Amendment No. 1, be, and hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.252

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–25886 Filed 11–22–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Release No. 34–98977; File No. SR– 

FINRA–2023–016] 

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) To Permit Projections 

of Performance of Investment 

Strategies or Single Securities in 

Institutional Communications 

November 17, 2023. 

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 November 

13, 2023, 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. 

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 3 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 or asset allocation or other 

investment strategy in an institutional 

communication or a communication 

distributed solely to qualified 

purchasers as defined in the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’) that promotes or 

recommends specified non-public 

offerings, subject to stringent 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 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

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 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. 

This general standard does not 

prohibit certain types of 

communications, 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

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 FINRA 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

An ‘‘investment analysis tool’’ is an 

interactive technological tool that 


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9See FINRA Rule 2214(b). 

10For a more detailed discussion of the 

differences between FINRA Rule 2214 and the 

proposal, see Comparison to Projections Permitted 

by FINRA Rule 2214, infra. 

11See FINRA Rule 2210(d)(1)(F)(iii). 

12See FINRA Rules 2215 (Communications with 

the Public Regarding Security Futures) and 2220 

(Options Communications). 

13See FINRA Rules 2215(b)(3) and 2220(d)(3). 

14Section 2(a)(51)(A) of the Investment Company 

Act defines the term ‘‘qualified purchaser’’ as (i) 

any natural person who owns not less than $5 

million in investments (as defined by the SEC); (ii) 

a family-owned company that owns not less than 

$5 million in investments; (iii) a trust not formed 

for the purpose of acquiring the securities offered, 

as to which each trustee or other person authorized 

to make decisions with respect to the trust, and 

each settlor or other person who has contributed 

assets to the trust, is a person described in clauses 

(i), (ii), or (iv); and (iv) any other person, acting for 

its own account or the account of other qualified 

purchasers, who in the aggregate owns and invests 

on a discretionary basis not less than $25 million 

in investments. See 15 U.S.C. 80a–2(a)(51)(A). 

15See, e.g., Privately Offered Investment 

Companies, Investment Company Act Release No. 

22597 (April 3, 1997), 62 FR 17512 (April 9, 1997) 

(adopting rules to implement a legislative exclusion 

from regulation under section 3(c)(7) of the 

Investment Company Act for privately offered 

investment companies ‘‘whose investors are all 

highly sophisticated investors, termed ‘qualified 

purchasers’’’). 

16See 17 CFR 240.15l–1 (‘‘Reg BI’’). 

17Rule 2210(a)(4) provides that ‘‘institutional 

investor’’ means any: 

(A) person described in Rule 4512(c), regardless 

of whether the person has an account with a 

member; 

(B) governmental entity or subdivision thereof; 

(C) employee benefit plan, or multiple employee 

benefit plans offered to employees of the same 

employer, that meet the requirements of Section 

403(b) or Section 457 of the Internal Revenue Code 

and in the aggregate have at least 100 participants, 

but does not include any participant of such plans; 

(D) qualified plan, as defined in Section 

3(a)(12)(C) of the Exchange Act, or multiple 

qualified plans offered to employees of the same 

employer, that in the aggregate have at least 100 

participants, but does not include any participant 

of such plans; 

(E) member or registered person of such a 

member; and 

(F) person acting solely on behalf of any such 

institutional investor. 

Rule 4512(c) defines ‘‘institutional account’’ to 

mean the account of: (1) a bank, savings and loan 

association, insurance company or registered 

investment company; (2) an investment adviser 

registered either with the SEC under Section 203 of 

the Advisers Act or with a state securities 

commission; or (3) any other person (whether a 

natural person, corporation, partnership, trust or 

otherwise) with total assets of at least $50 million. 

18See Rule 2210(a)(3). The definition of 

‘‘institutional investor’’ provides in part that no 

member may treat a communication as having been 

distributed to an institutional investor if the 

member has reason to believe that the 

communication or any excerpt thereof will be 

forwarded or made available to a retail investor. See 

FINRA Rule 2210(a)(4). Accordingly, if a member 

distributed or made available a communication 

containing projected performance or a targeted 

return to an institutional investor, and the member 

had reason to believe the institutional investor 

would forward or make available that 

Continued 

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 the assistance from a member and 

may receive written reports generated 

by the tool that include projected 

performance that is consistent with Rule 

2214’s requirements.10

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 disclosure 

concerning risks that may impede 

achievement of the price target.11

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

Need for an Additional Exception 

FINRA understands that some brokerdealer customers, in particular 

institutional investors, request other 

types of projected performance that the 

current rules do not allow. These 

customers 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 useful to 

institutional investors and qualified 

purchasers (‘‘QPs’’), as defined under 

the Investment Company Act,14 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 the 

Investment Company Act. 

In addition, projected performance 

may be useful for institutional investors 

and QPs that either have the financial 

expertise to evaluate investments and to 

understand the assumptions and 

limitations associated with such 

projections, or that 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 marketing 

communications distributed to 

institutional investors and QPs, these 

investors cannot obtain a member’s 

potentially different and valuable 

perspective. 

FINRA recognizes, however, that any 

proposed rule amendment that would 

allow projections of performance or 

targeted returns in specified 

communications must not increase the 

risk of potential harm to retail investors. 

As discussed below, the proposed rule 

change is narrowly tailored to address 

the need for projections or targeted 

returns by restricting their use only in 

specified scenarios involving 

institutional investors or QPs, wellestablished categories of persons that 

have been previously determined to be 

financially sophisticated or able to 

engage expertise for purposes of the 

securities laws.15 As a general matter, 

the proposed rule change would not 

alter the current prohibitions on 

including projections of performance or 

targeted returns in most types of retail 

communications. In addition, even in 

situations where a natural person 

qualifies as an institutional investor or 

QP, Exchange Act Regulation Best 

Interest 16 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. 

Proposed Amendments 

The proposed rule change would 

create a new, narrowly tailored, 

exception to the general prohibition of 

projections. First, the proposed rule 

change would permit institutional 

communications to include projections 

of performance or targeted returns. An 

institutional communication is any 

written (including electronic) 

communication that is distributed or 

made available only to institutional 

investors,17 but does not include a 

member’s internal communications.18


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communication to a retail investor, FINRA would 

not consider the communication to be an 

institutional communication for purposes of the 

proposed rule change’s requirements. 

19The proposed rule change would create a new 

exception from the prohibition on performance 

projections for communications that are distributed 

or made available only to QPs and that promote or 

recommend either a Member Private Offering that 

is exempt from the requirements of FINRA Rule 

5122 pursuant to Rule 5122(c)(1)(B), or a private 

placement exempt from the requirements of FINRA 

Rule 5123 pursuant to Rule 5123(b)(1)(B). Both Rule 

5122(c)(1)(B) and Rule 5123(b)(1)(B) exempt from 

those rules’ requirements private offerings sold 

solely to qualified purchasers, as defined in Section 

2(a)(51)(A) of the Investment Company Act. 

20 In most cases, an individual investor who has 

$5 million or more in investments, but who does 

not have at least $50 million in assets, will be both 

a qualified purchaser under the Investment 

Company Act and a retail investor for purposes of 

Rule 2210. Accordingly, some QP private placement 

communications will be either correspondence or 

retail communications under the rule. See FINRA 

Rule 2210(a)(2), (a)(5), and (a)(6). 

21FINRA recognizes that there are some 

differences between targeted returns and 

projections of performance. As discussed above, 

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 likely return. Thus, targeted returns may 

not involve all (or any) of the assumptions and 

criteria applied to generate a projection. However, 

FINRA does not believe that the difference between 

targeted returns and projections of performance is 

always readily apparent to the recipient of a 

communication. Accordingly, the presentation of 

both projections of performance and targeted 

returns would be subject to the same conditions, 

including that both must have a reasonable basis. 22FINRA 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. 

23Reg 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). 

24See 17 CFR 240.15l–1(a)(2)(iv). 

25See FINRA Rule 2210(d)(1)(F)(iii) and FINRA 

Rule 2241(c)(1)(B). 

26See 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). 

Second, the proposed rule change 

would permit projected performance 

and targeted returns in communications 

that are distributed or made available 

only to QPs and that promote or 

recommend a private placement that is 

sold solely to QPs (‘‘QP private 

placement communications’’).19

Recipients of QP private placement 

communications are referred to herein 

as ‘‘QP private placement investors.’’ 20

Institutional investors and QP private 

placement investors are referred to 

herein collectively as ‘‘ProjectionEligible Investors.’’ 

Even within these narrow 

circumstances, the proposed rule 

change would impose additional 

investor protection obligations. 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 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; 21 (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; 

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. 

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 

investor receiving the communication 

and to ensure compliance with all 

applicable requirements and 

obligations. In adopting written policies 

and procedures concerning the 

investor’s likely financial situation and 

investment objectives, members should 

consider including content that requires 

the member to consider the audience 

that receives a communication that 

presents projected performance or a 

targeted return. In particular, such a 

communication should only be 

distributed where the member 

reasonably believes the investors have 

access to resources to independently 

analyze this information or have the 

financial expertise to understand the 

risks and limitations of such 

presentations. If an investor does not 

have this financial expertise and 

receives a communication containing a 

projection or targeted return, FINRA 

would expect that the written policies 

and procedures be reasonably designed 

to ensure that the investor has the 

resources necessary to access financial 

professionals that possess this 

expertise.22

For example, members could meet the 

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 of the 

institutional communication or QP 

private placement communication by 

relying on its past experiences with 

particular types of institutional 

investors and QP private placement 

investors who seek this information. A 

firm 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. 

In addition, even in situations where 

an investor has the financial expertise or 

resources necessary to understand the 

risks and limitations of a projection or 

targeted return, if the member 

recommends a securities transaction or 

investment strategy involving securities 

to an investor who is a ‘‘retail customer’’ 

as defined in Reg BI,23 the member must 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to achieve compliance with 

Reg BI.24

Reasonable Basis Requirement 

The ‘‘reasonable basis’’ requirement 

follows well-established precedents. 

FINRA Rules 2210 and 2241 (Research 

Analysts and Research Reports) require 

a price target in a research report to 

have a reasonable basis.25 SEC rules also 

require performance projections 

contained in specified documents to be 

based on good faith and have a 

reasonable basis.26

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). Accordingly, 

FINRA is proposing to include a new 

Supplementary Material to Rule 2210 

that would list some, but not all, factors 


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27Some, but not all, of the proposed factors in the 

proposed Supplementary Material come from the 

CFA Institute’s discussion of Standard V in the 

Institute’s Standards of Practice Handbook. 

Standard V requires, 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.’’ 

See CFA Institute, Standards of Practice Handbook 

155–156 (11th ed. 2014). 

28See MassMutual Institutional Funds, 1995 SEC 

No-Act. LEXIS 747 (September 28, 1995) 

(permitting the use of open-end management 

investment company performance that included the 

performance of unregistered predecessor separate 

investment accounts (‘‘SIAs’’) whose assets were 

transferred to the investment company, based in 

part upon the representation that the predecessor 

SIAs were created for purposes entirely unrelated 

to the establishment of a performance record). 

FINRA would not consider an investment 

manager’s proprietary seed capital accounts that 

were created for purposes unrelated to the 

establishment of a performance record to be 

prohibited by proposed Supplementary Material 

2210.01(b)(ii). 

29 IRR is also known as money-weighted returns 

and reflects the percentage rate earned on each 

dollar invested for each period the dollar was 

invested. IRR is calculated as the discount rate that 

makes the net present value of all cash flows from 

an investment equal to zero. This can be contrasted 

to a time-weighted return, which is the 

compounded growth rate of $1 over the time period. 

Average annual total returns used by mutual funds 

pursuant to Securities Act Rule 482 are an example 

of time-weighted returns. Time-weighted returns 

ignore the size and timing of investment cash flows 

and, therefore, provide a measure of manager or 

strategy performance, while IRR measures how a 

specific portfolio performed in absolute terms. See 

Regulatory Notice 20–21 (July 2020). 

that members should consider in 

developing a reasonable basis. FINRA 

incorporated some of the relevant 

factors that members of the financial 

research and analysis industry use when 

considering the basis for a 

recommendation to a customer.27

Proposed Supplementary Material 

2210.01 would provide that, 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), with no one factor 

being determinative, members should 

consider multiple factors. Such factors 

may include, but are not limited to, the 

following: 

(1) Global, regional, and country 

macroeconomic conditions (for 

example, considering potential civil or 

political instability or weather 

conditions that may impact projected 

performance); 

(2) Documented fact-based 

assumptions concerning the future 

performance of capital markets; 

(3) In the case of a single security 

issued by an operating company, the 

issuing company’s operating and 

financial history; 

(4) The industry’s and sector’s current 

market conditions and the state of the 

business cycle (for example, including a 

consideration of any characteristics 

unique to the industry and sector, such 

as the effect of rising mortgage rates on 

the housing sector); 

(5) If available, reliable multi-factor 

financial models based on 

macroeconomic, fundamental, 

quantitative, or statistical inputs, taking 

into account the assumptions and 

potential limitations of such models, 

including the source and time horizon 

of data inputs; 

(6) The quality of the assets included 

in a securitization (taking into 

consideration, for example, the ability to 

assess the credit quality of underlying 

assets through available data and the 

performance of similar pools); 

(7) The appropriateness of selected 

peer-group comparisons (for example, 

the relative similarities or differences 

among the components of a selected 

peer group versus the subject issuer, the 

number of constituents in the peer 

group, and the reasonableness of the 

comparison); 

(8) The reliability of research sources 

(including, for example, whether there 

is a relationship between the issuer and 

the research source that could pose a 

conflict of interest; whether the research 

has been subject to peer review before 

publication; whether the research is 

based on reliable or verifiable factual 

information); 

(9) The historical performance and 

performance volatility of the same or 

similar asset classes; 

(10) For managed accounts or funds, 

the past performance of other accounts 

or funds managed by the same 

investment adviser or sub-adviser, 

provided such accounts or funds had 

substantially similar investment 

objectives, policies, and strategies as the 

account or fund for which the projected 

performance or targeted returns are 

shown; 

(11) For fixed income investments 

and holdings, the average weighted 

duration and maturity; 

(12) The impact of fees, costs, and 

taxes; and 

(13) Expected contribution and 

withdrawal rates by investors. 

Proposed Supplementary Material 

2210.01(b) also would provide that 

members may not base projected 

performance or a targeted return upon 

(i) hypothetical, back-tested 

performance or (ii) the prior 

performance of a portfolio or model that 

was created solely for the purpose of 

establishing a track record.28

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. Nor does FINRA 

expect a firm to disclose proprietary or 

confidential information regarding the 

firm’s methodology and criteria. Firms 

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. 

The proposed rule change also would 

require a member to provide sufficient 

information in the communication to 

enable a Projection-Eligible 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 differ from actual performance. 

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. 

For example, an institutional 

communication or QP private placement 

communication may need to disclose, as 

a reason why the projected performance 

or targeted return might differ from 

actual performance, that the projection 

does not reflect actual cash flows into 

and out of an investment portfolio. This 

is particularly true when a projection is 

expressed as an internal rate of return 

(‘‘IRR’’), since forward-looking IRR 

shows a return earned by investors over 

a particular period, calculated on the 

basis of future cash flows to and from 

investors.29 If the actual future cash 

flows differ from the assumptions, the 

actual IRR may differ from the projected 

IRR. 

General Standards and Supervision 

Under Rule 2210 

As with all communications with the 

public, institutional communications 

and QP private placement 

communications that contain projected 

performance or targeted returns must 

meet Rule 2210’s general standards, 

including the requirements that 

communications be fair and balanced, 


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30See FINRA Rule 2210(d)(1)(A) and (B). 

31See FINRA Rule 2210(b)(1) and (b)(3). 

32As discussed above, if a QP is an individual 

that has less than $50 million in assets, the QP 

generally will be a retail investor under Rule 2210 

since the QP does not fall within the definition of 

institutional investor. In such cases, if the QP 

private placement communication were distributed 

or made available to more than 25 QPs that fall 

within the definition of retail investor within a 30- 

day period, it would be a retail communication that 

a registered principal generally must approve prior 

to use. See FINRA Rule 2210(b)(1). 

33See Regulatory Notice 21–29 (August 2021). 

34See 17 CFR 240.15l–1. The definition of ‘‘retail 

customer’’ under Reg BI differs from the definition 

of ‘‘retail investor’’ under FINRA Rule 2210, which 

includes any person other than an institutional 

investor, regardless of whether the person has an 

account with a member. See FINRA Rule 2210(a)(6). 

Accordingly, a natural person could be a ‘‘retail 

customer’’ for purposes of Reg BI but an 

‘‘institutional investor’’ under Rule 2210 (e.g., a 

natural person with at least $50 million in total 

assets). See supra note 17 (definition of 

‘‘institutional investor’’ under FINRA Rule 

2210(a)(4)). 

35Monte 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 

https://www.cfainstitute.org/membership/ 

professional-development/refresher-readings/ 

common-probability-distributions. 

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.30

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. FINRA believes this constraint 

would prohibit a member from 

presenting a projection that purports to 

show, for example, longer term returns 

for an equity security offered shortly 

before or after the date of the 

communication, as it would be viewed 

as unwarranted and lacking a sound 

basis due to the difficulty in predicting 

future securities markets and economic 

conditions. 

Members currently must adopt 

appropriate procedures for the 

supervision and review of both 

institutional and retail 

communications.31 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 both 

institutional communications and QP 

private placement communications, 

including compliance with the 

proposed rule change’s specific 

conditions. In addition, members 

generally would be required to approve 

prior to use any QP private placement 

communication that falls within Rule 

2210’s definition of ‘‘retail 

communication.’’ 32

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.33 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. 

For example, the member would need 

to ensure that there is a reasonable basis 

for the criteria used and assumptions 

made in calculating the projected 

performance or targeted return 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.34

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, 

under the proposed rule change, there is 

no interactive element associated with 

the receipt of projections. Instead, firms 

could provide projections or targeted 

returns to Projection-Eligible 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.35 In 

contrast, the proposed rule change 

would not require communications to 

Projection-Eligible Investors that 

include performance projections or 

targeted returns to consider potential 

returns under various scenarios and the 

probability of success for each scenario. 

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: 

• Describe the criteria and 

methodology used, including the 

investment analysis tool’s limitations 

and key assumptions; 

• explain that results may vary with 

each use and over time; 

• 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 


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36See FINRA Rule 2214(c). 

37See proposed FINRA Rule 2210(d)(1)(F)(iv)d. 

38See proposed FINRA Rule 2210(d)(1)(F)(iv)e. 

39See FINRA Rule 2214(c) and (d). 

40See Investment Advisers Act Release No. 5653 

(December 22, 2020), 86 FR 13024 (March 5, 2021) 

(adoption of Advisers Act Rule 206(4)–1 

(Investment Adviser Marketing)) (‘‘IA Marketing 

Rule Release’’). 

41See 17 CFR 275.206(4)–1(e)(8). 

42See 17 CFR 275.206(4)–1(d)(6). An investment 

adviser presenting hypothetical performance is not 

required to comply with certain of the conditions 

in paragraph (d), such as the requirement to present 

performance for one-, five-, and ten-year periods. 

43 17 CFR 275.206(4)–1(a). 

44See IA Marketing Rule Release, supra note 40, 

86 FR 13024, 13083–85. 

45See proposed Supplementary Material 

2210.01(b). 

• 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.36

In contrast, the proposed rule change 

would require 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.37 In addition, a member 

would have to provide ‘‘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; 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.’’ 38

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 is more likely to 

apply to a projection or targeted return 

that is included in a communication 

promoting a single security or 

investment strategy distributed to 

Projection-Eligible Investors, and thus 

would impose different disclosure 

requirements relative to those scenarios. 

Fourth, Rule 2214 does not restrict the 

types of investors who may use an 

investment analysis tool or receive a 

report generated by the tool, as both 

institutional investors and retail 

investors may receive a projection of 

performance under Rule 2214. The 

reports also must include clear and 

prominent specified disclosures, such as 

a description of the criteria and 

methodology used, the tool’s limitations 

and key assumptions, and other risk and 

investor protection-related 

information.39 In contrast, the proposed 

rule change would limit receipt of 

projections or targeted returns to 

Projection-Eligible Investors as defined 

in the rule. 

Comparison to IA Marketing Rule’s 

Hypothetical Performance Standards 

The proposed changes are in many 

respects consistent with the 

Commission’s Investment Adviser 

Marketing rule (‘‘IA Marketing Rule’’).40

In this regard, the IA Marketing Rule 

permits investment advisers to present 

hypothetical performance, which 

includes ‘‘targeted or projected 

performance returns with respect to any 

portfolio or to the investment advisory 

services with regard to the securities 

offered’’ 41 in an advertisement if the 

investment adviser meets specified 

conditions and does not violate the IA 

Marketing Rule’s other requirements. In 

particular, an investment adviser must: 

• Adopt and implement 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; 

• Provide sufficient information to 

enable the intended audience to 

understand the criteria used and 

assumptions made in calculating such 

hypothetical performance; and 

• Provide (or, if the intended 

audience is an investor in a private fund 

provide or offer to provide promptly) 

sufficient information to enable the 

intended audience to understand the 

risks and limitations of using such 

hypothetical performance in making 

investment decisions.42

These requirements are similar to the 

proposed rule change’s requirements 

concerning investors that may receive a 

communication containing a projection 

or targeted return and its disclosure 

requirements. In addition, similar to 

Rule 2210, the IA Marketing Rule 

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.43

As discussed above, the proposed rule 

change includes other requirements that 

are not specifically included in the IA 

Marketing Rule. Nevertheless, 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.44

Contributions to Investor Protection 

FINRA believes that approval of the 

proposed rule change would contribute 

to investor protection by enabling 

Projection-Eligible Investors to access 

projections when considering specific 

investments or strategies. For example, 

under the current rule, ProjectionEligible 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, ProjectionEligible 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 and prohibition on using 

back-tested performance to create the 

projected performance or targeted 

return.45

FINRA believes the proposed rule 

change would also 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 

Projection-Eligible Investors are already 

able to receive projected or targeted 

returns in communications from parties 

other than registered broker-dealers, 


ddrumheller on DSK120RN23PROD with NOTICES1
82488 Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 

46For example, Congress recently amended the 

Exchange Act to create a new 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 of 2023, Public Law 117–328 

(2022) (codified at 15 U.S.C. 78o(b)(13)). 

47The majority of private offerings governed by 

Securities Act Regulation D (17 CFR 230.501 et seq.) 

are sold directly by issuers without any brokerdealer involvement. Approximately 20 percent of 

Regulation D offerings involve ‘‘intermediaries,’’ 

such as broker-dealers. See Capital Raising in the 

U.S.: An Analysis of the Market for Unregistered 

Securities Offerings 2009–2017, SEC Division of 

Economic and Risk Analysis (August 2018), https:// 

www.sec.gov/files/dera-white-paper_regulation-d_

082018.pdf. 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. 

48Under 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). 

49 15 U.S.C. 78o–3(b)(6). 

50See supra note 20. 

such as unregistered intermediaries 46 or 

the securities’ issuer.47

Accordingly, the current prohibition 

of registered broker-dealers including 

projected performance or targeted 

returns in institutional communications 

or QP private placement 

communications creates an incentive for 

issuers to avoid the registered brokerdealer channel to offer securities and 

instead either use an unregistered firm, 

or market securities directly to potential 

investors. The proposed rule change 

would allow members to provide the 

same or similar information regarding 

projected performance or targeted 

returns that investors are receiving from 

issuers or other unregistered 

intermediaries, but subject to substantial 

requirements that enhance investor 

protections. 

The proposed rule change also would 

allow Projection-Eligible 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.48 Approval of the proposed 

rule change would not level the 

regulatory playing field between 

members, unregistered firms, and 

issuers with respect to projected 

performance, but it would allow 

members to present projections and 

targeted returns to Projection-Eligible 

Investors subject to existing and 

proposed investor protections. 

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,49 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. 

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 not expand 

the very limited exceptions that allow 

specified types of projected performance 

or targeted returns in communications 

to retail investors, such as price targets 

contained in research reports or reports 

generated by interactive investment 

analysis tools, other than QP private 

placement investors that meet the 

definition of ‘‘retail investor’’ under 

Rule 2210.50

FINRA believes that the proposed rule 

change will provide additional sources 

of information for Projection-Eligible 

Investors in their investment decision 

making. As mentioned previously, 

Projection-Eligible Investors often 

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 Projection-Eligible Investors 

in these situations due to its restrictions 

on members’ communicating projected 

performance information. 

Even so, the proposed changes will 

provide safeguards for communications 

that contain projections of performance 

or targeted returns. The proposed 

changes would require 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 

Projection-Eligible Investor receiving 

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 ProjectionEligible Investor 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. 

As discussed above, the proposed 

changes recognize that ProjectionEligible Investors are already able to 

receive projected performance or 

targeted returns in communications 

from parties other than broker-dealers 

and more closely aligns the ability of 

broker-dealers to offer projections to 

such investors with the abilities of 

issuers and other non-member firms to 

offer projections. The proposed rule 

change also would allow ProjectionEligible Investors to receive and 

compare projections provided by 

members with projections from other 

entities, with appropriate safeguards 

designed to protect investors. 

FINRA believes that ProjectionEligible Investors would be better 

protected if issuers instead 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 brokerdealers for their securities offerings. In 

addition, Projections-Eligible 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. 


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51See 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 www.finra.org. 

Additionally, commenters on Regulatory Notice 17– 

06 (February 2017) urged FINRA to revise the 

proposal to permit projections of performance of 

single securities in communications to QPs. See 

infra notes 65–71 and accompanying text. 

52Based on Consolidated Audit Trail (CAT) data 

for 2021, there were 1,169 firms that conducted 

equity transactions for customers. Of those 1,169 

firms, 859 firms conducted equity transactions for 

institutional customers in 2021. It is not known 

how many firms conducted equity transactions for 

QPs. Also, it is not known how many firms 

conducted debt and OTC transactions for 

customers. However, based on Rule 5122/5123 

filings, it is known that about 360–380 firms were 

involved in private placement offerings to 

accredited investors in any given year between 2018 

and 2021. While not all accredited investors are 

QPs, the information from Rule 5122/5123 filings in 

2018–2021 indicates how many firms may have 

been in involved in private placement offerings to 

QP customers. 

53FINRA estimates that, as of December 31, 2021, 

approximately 480 member firms are dually 

registered as broker-dealers and investment 

advisers. FINRA further estimates that these dually 

registered firms have approximately 421,000 

registered representatives, and 241,000 (or about 57 

percent) of these individuals are dually registered 

as both investment adviser and broker-dealer 

representatives. FINRA estimates that 

approximately 160–170 of the dually registered 

firms have a total of 1,600–1,700 representatives 

that are solely registered as investment adviser 

representatives. FINRA notes that in addition to the 

dually registered representatives, these investment 

adviser representatives may also be communicating 

projections-related communications to their 

investment advisory clients. 

54FINRA estimates that, as of December 31, 2021, 

approximately 2,900 member firms are only 

registered as broker-dealers and these firms have 

approximately 267,000 registered representatives. 

FINRA further estimates that approximately 73,000 

of these individuals are 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 other firms. 

55See Exchange Act Rule 3a4–1, 17 CFR 240.3a4– 

1. 

56Similar benefits would apply to the proposed 

amendments that would allow members to 

communicate information to institutional investors 

regarding the projected performance of a particular 

asset allocation or other investment strategy. 

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, and in 

particular institutional investors and QP 

private placement investors, without 

providing them a concomitant benefit.51

The amendments in this proposed rule 

change are intended to improve the flow 

of information by allowing members to 

communicate to Projection-Eligible 

Investors, subject to conditions, 

information regarding the projected 

performance of an individual security 

and similar communications related to 

an asset allocation or other investment 

strategy. 

2. Economic Baseline 

The economic baseline used to 

evaluate the impact of the proposed 

amendments is the current regulatory 

framework. This baseline serves as the 

primary point of comparison for 

assessing economic impacts, including 

the incremental benefits and costs of the 

proposed rule change. 

FINRA believes that many members 

providing products and services to 

Projection-Eligible Investors would 

likely choose to rely on the proposed 

exception for projections. FINRA 

estimates that there are a significant 

number of such members.52

Some of these members may have 

Projection-Eligible Investor customers 

that already have access to or are 

receiving projections-related 

communications from a member that is 

dually registered, a member’s advisory 

affiliate, or an investment adviser 

owned by an associated person of the 

member, as part of the clients’ 

investment advisory relationship. For 

example, some dually registered 

members and dually registered 

representatives communicate 

information regarding projected 

performance to their investment 

advisory clients already.53 Similarly, 

members that are not registered as 

investment advisers may still have 

registered representatives that have 

customers with access to investment 

advisory services.54 Members and their 

registered representatives that are 

investment advisers that provide 

projections of performance of, among 

other things, individual securities (such 

as investments in private funds 

managed by the member of a related 

investment adviser) to their advisory 

clients may not be impacted by the 

proposal, since they are already able to 

provide this information in some 

circumstances when acting as an 

investment adviser. 

FINRA also notes that ProjectionEligible Investors may be solicited to 

purchase individual securities directly 

by an issuer without the involvement of 

a broker-dealer, and that issuers often 

use performance projections and 

targeted returns in their 

communications with ProjectionEligible Investors.55

3. Economic Impacts 

FINRA anticipates that the proposed 

rule change will impact primarily 

Projection-Eligible Investors and those 

broker-dealer firms that serve these 

customers. Retail investors could be 

impacted if an institutional investor 

receives a projection for an investment 

that the retail investor is also 

considering. In these situations, the 

retail investor may receive relatively 

less information regarding performance 

projections or targeted returns for the 

investment than their institutional 

counterparts. However, Reg BI is 

designed to mitigate this potential harm 

by requiring a broker-dealer to act in a 

retail customer’s best interest when 

recommending a securities transaction 

or investment strategy involving 

securities. 

Anticipated Benefits 

The proposed rule change would 

allow members to communicate, for 

example, information regarding the 

projected performance of an individual 

security to Projection-Eligible Investors. 

Such communications have the 

potential to better inform ProjectionEligible Investors about the individual 

security and the underlying 

assumptions upon which the 

recommendations are based.56 FINRA 

anticipates that these benefits primarily 

would accrue to customers that either 

do not make their own performance 

projections or wish to compare their 

own projections against projections 

furnished by their broker-dealer, and do 

not have an investment advisory 

relationship with the member, and thus 

are not already receiving 

communications related to anticipated 

returns. 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. Additionally, the proposed 

rule change would benefit dually 

registered firms by creating comparable 

investment adviser and broker-dealer 

standards for communications that 

include performance projections and 

targeted returns to customers who have 

both investment advisory and brokerage 

accounts with such firms. This would 


ddrumheller on DSK120RN23PROD with NOTICES1
82490 Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 

57See SR–FINRA–2023–016 (Form 19b–4, Exhibit 

2b) for a list of abbreviations assigned to 

commenters (available on FINRA’s website at 

http://www.finra.org). 58See EDA, Fidelity, FSI, ICI, IRI, IPA, M 

Holdings, Wellington, Wells Fargo. 59See FSI, IPA, M Holdings. 

60See MMI, SIFMA. 

eliminate confusion for customers that 

have both types of accounts and reduce 

the effort needed for dually registered 

firms to comply with two separate sets 

of requirements related to such 

communications. Finally, the proposed 

rule change would contribute to 

investor protection by reducing the 

incentive for issuers to use unregistered 

firms or to market securities directly to 

potential investors instead of using 

registered broker-dealers. 

Anticipated Costs 

The proposed rule change would 

impose costs on members that choose to 

rely on the exception and communicate 

performance projections or targeted 

returns for an individual security or 

asset allocation or other investment 

strategy to Projection-Eligible Investors. 

Hence, FINRA anticipates that only 

members expecting the benefits to 

exceed the implementation costs would 

choose to incur these costs. 

Members that would rely on the 

proposed exception to distribute 

communications to Projection-Eligible 

Investors that contain performance 

projections or targeted returns would 

incur costs associated with supervising 

these communications and complying 

with the proposed rule change’s 

conditions. However, the proposed rule 

change does not alter the existing core 

supervision requirements for the review 

and supervision of institutional 

communications and QP private 

placement communications, thereby 

allowing members to adopt procedures 

that are appropriate to their business. 

As discussed above, to the extent that 

performance projections are reliable and 

informative, allowing members to 

provide projected performance or 

targeted returns for an investment 

opportunity only to institutional 

investors may create an information 

imbalance as compared to retail 

investors who are considering the same 

investment opportunity. Because such 

retail investors will not be eligible to 

receive these communications, they may 

be at an informational disadvantage 

when making investment decisions. In 

developing the proposed changes, 

FINRA carefully considered the risks, 

and associated costs, of presenting 

targeted returns or performance 

projections to retail investors. FINRA 

believes that it is appropriate, through 

this proposed rule change, to permit 

members to provide communications 

containing performance projections and 

targeted returns to institutional 

investors and QP private placement 

investors. 

Competitive Effects 

Currently, members that are dually 

registered or that employ dually 

registered persons may provide 

customers with performance projections 

in their other registered capacity. Thus, 

the proposed rule change may improve 

the competitive position of members 

that are not dually registered or that do 

not employ dually registered persons 

since the amendments will allow them 

to provide a potentially valuable service 

to their Projection-Eligible Investor 

customers. 

4. Alternatives Considered 

In considering how to best meet its 

regulatory objectives, FINRA considered 

alternatives to certain aspects of this 

proposed rule change. 

In this regard, FINRA considered 

whether members should be permitted 

to provide projections of performance or 

targeted returns in all retail 

communications, including for asset 

allocation, other investment strategies or 

for single investment products, such as 

mutual funds and ETFs. FINRA 

carefully weighed the potential benefit 

of providing such a communication to 

persons other than Projection-Eligible 

Investors against the potential harm. 

FINRA has chosen to focus this 

proposed rule change on 

communications to Projection-Eligible 

Investors because they are more likely to 

have the sophistication and resources to 

evaluate any performance projections or 

targeted returns they receive in the 

context of other information they are 

evaluating when making an investment 

decision. 

FINRA also considered whether the 

proposed rule change should require 

members to provide a range of targets or 

projections, rather than a single 

projection, for investment planning 

illustrations. FINRA believes that, while 

a range of projections would be useful 

in particular situations, it is not 

necessary in all situations and can be 

confusing in certain situations. For 

these reasons, FINRA decided to give 

members the flexibility to determine 

whether a range of projections would be 

useful. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Background 

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 (the ‘‘Notice proposal’’). A 

copy of the Notice is available on 

FINRA’s website at http://

www.finra.org. 

The comment period expired on 

March 27, 2017. FINRA received 23 

comments in response to the Notice. 

Twenty One commenters supported the 

proposal and two commenters opposed 

the proposal. A list of the commenters 

in response to the Notice and copies of 

the comment letters received in 

response to the Notice are available on 

FINRA’s website.57 A summary of the 

comments and FINRA’s response is 

provided below. 

Comments on Proposal 

Comparison to Investment Adviser 

Advertising Standards 

Supporters noted that the rule change 

would lessen the regulatory 

inconsistencies regarding the use of 

performance projections between 

broker-dealers and stand-alone 

investment advisers and would 

eliminate the current opportunities for 

regulatory arbitrage.58 Commenters also 

observed that allowing dually registered 

representatives to use projections in 

investment planning illustrations with 

customers would remove the current 

compliance difficulty with such 

situations. This difficulty arises 

particularly when it is uncertain at the 

time of the illustration’s use whether the 

customer will open a fee-based or 

commission-based account.59

However, some commenters 

contended that, even with this proposed 

changes, the FINRA communications 

rules still would impose greater burdens 

on broker-dealers than communications 

standards governing other financial 

intermediaries, such as SEC guidance 

applicable to investment advisers or the 

CFTC rules governing commodity pool 

operators.60 WealthForge noted that 

FINRA’s prohibition on projections of 

performance puts broker-dealers that are 

offering private funds under Securities 

Act Regulation D at a disadvantage as 

compared to Regulation D offerings that 

are not made through a broker-dealer, 

since no express restrictions on 


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61See 17 CFR 275.206(4)–1(d); see also 17 CFR 

275.206(4)–1(a). 

62See IA Marketing Rule Release, supra note 40, 

86 FR 13024, 13078. 

63See supra note 62, 86 FR 13024, 13083. 

64 17 CFR 275.206(4)–1(a)(2) and (4). 

65See CAI, EDA, IRI, Monument, NYSBA 

Committee, 3PM, WealthForge. FINRA heard 

similar views from parties that commented on 

FINRA’s retrospective review of the 

communications rules. See Regulatory Notice 14–14 

(April 2014). The Financial Services Roundtable 

recommended that FINRA permit projections of 

performance, since in its view projections play an 

important role in educating investors and allowing 

them to compare products, and they provide an 

important insight into what an investment manager 

seeks to achieve. Similarly, the SIFMA observed 

that data about targeted returns are highly material 

to potential investors. 

66See ACA, Credit Suisse, EDA, IPA, MMI, 

Monument, SIFMA, 3PM, Wellington. 

67See ACA, Monument. 

68See MMI, 3PM. 

69See ACA, Monument. 

70See IPA, Monument, NYSBA Committee. 

projections on performance apply to an 

issuer’s communications. 

As discussed above, subsequent to 

FINRA’s publication of the Notice 

proposal for comment, the SEC adopted 

the IA Marketing Rule, which permits 

the presentation of performance, 

including hypothetical targeted or 

projected performance returns, in 

investment adviser advertisements, 

provided that the adviser meets 

specified conditions and does not 

violate the IA Marketing Rule’s other 

requirements.61

The proposed rule text incorporates 

much of the rule text in the IA 

Marketing Rule’s provisions permitting 

the presentation of hypothetical 

performance. A key difference is that 

the IA Marketing Rule does not 

expressly prohibit including 

hypothetical performance in retail 

investment adviser advertisements; 

instead, these provisions impose 

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.’’ 62 In 

contrast, the proposed rule change 

expressly would permit the presentation 

of projected or targeted returns only in 

institutional communications and QP 

private placement communications. 

Despite these differences, however, in 

practice both rules are intended to limit 

the use of projected or targeted returns 

to communications that are distributed 

to persons who have the resources or 

financial expertise to understand the 

risks and limitations associated with 

such performance. As noted above, the 

IA Marketing Rule is intended to ensure 

that advertisements containing 

hypothetical performance only be 

distributed to persons possessing the 

resources and expertise to understand 

such performance’s risks and 

limitations.63

The proposed rule change also would 

require members to have a reasonable 

basis for the criteria and assumptions 

used to calculate the projected or 

targeted returns, and the Supplementary 

Material would list factors, among 

others, that a member should consider 

in forming such a reasonable basis. 

While the IA Marketing Rule does not 

expressly require targeted or projected 

performance returns to have a 

reasonable basis, it requires 

performance presentations to be fair and 

balanced and not misleading, requires 

all investment adviser advertisement 

discussions of potential benefits to 

clients or investors also to provide fair 

and balanced treatment of material risks 

and limitations associated with the 

potential benefits, and requires that any 

material statement of fact have a 

reasonable basis that the adviser can 

substantiate upon SEC demand.64

In addition, investment adviser 

communications that include targeted or 

projected performance returns must 

provide sufficient information to enable 

the intended audience to understand the 

risks and limitations of relying on 

targeted or projected performance 

returns to make investment decisions, 

which likely would require similar 

disclosures regarding the hypothetical 

nature of such performance. 

Accordingly, FINRA believes that the 

proposed rule change generally would 

not impose substantially greater burdens 

on broker-dealers that present 

projections of performance or targeted 

returns as compared to investment 

advisers that present such performance. 

Projections of Single Security 

Performance 

The Notice proposal would have 

prohibited the projection of 

performance of a single security 

regardless of whether an illustration is 

used with a retail investor or an 

institutional investor. The Notice 

requested comment on whether the 

proposed rule change should permit the 

use of performance projections for 

single investment products that operate 

like an asset allocation or other 

investment strategy for which 

projections might be appropriate. A 

number of commenters responded that 

the proposal should allow projections 

for single investment products that 

operate similar to a diversified asset 

allocation model (such as ETFs, 

diversified mutual funds, unit 

investment trusts, variable annuities, 

and private equity and real estate 

funds).65

For the reasons discussed above, 

FINRA does not agree that the proposed 

rule change should be revised to permit 

members to distribute communications 

to retail investors that include 

performance projections for single 

securities whose returns depend on the 

performance of an underlying 

investment portfolio, such as an ETF, 

mutual fund, UIT, variable annuity, or 

private or real estate fund. 

Many commenters stated that FINRA 

should either amend the proposal, or 

issue a new proposal, to allow members 

to use performance projections in any 

type of communication with 

institutional investors, including sales 

literature concerning single securities.66

These commenters noted that a brokerdealer that is raising capital for a new 

private equity fund may not include 

projected performance returns for 

existing investments in the new fund’s 

pitch book and other marketing 

materials, due to FINRA rules.67 3PM 

noted that this approach would be 

consistent with the differentiation of 

institutional investors under FINRA’s 

suitability rule and FINRA’s interpretive 

letters permitting the use of related 

performance in institutional 

communications. 

Commenters stated that institutional 

investors often ask to see projected 

performance, and that the risk of 

investor harm from such use is 

diminished, since institutional investors 

either have investment sophistication or 

can hire someone who does.68 These 

commenters noted that PPMs often 

contain performance projections, so it 

would make sense to allow these 

projections in sales material.69 Multiple 

commenters requested that FINRA 

permit the use of projected performance 

of a single security in institutional 

communications since the rules 

governing capital acquisition brokers do 

not prohibit the use of projections of 

performance in private placement 

marketing materials, and the same 

justifications exist for permitting 

projections of performance in 

institutional communications.70

Several commenters further stated 

that FINRA should permit projections of 

performance in communications 


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82492 Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 

71See IPA, Monument, NYSBA Committee. 

72See Capital Acquisition Broker Rule 016(i)(6). 

73As discussed above, in addition to the 

requirement that the recipient be either an 

institutional investor or QP private placement 

investor, the proposed rule change would require 

members to have written policies and procedures 

reasonably designed to ensure that the 

communication containing the projection or 

targeted return is relevant to the likely financial 

situation and investment objectives of the investor 

receiving the communication. 

74Among other things, a CAB is permitted to act 

as a placement agent or finder on behalf of an issuer 

in connection with the sale of newly issued, 

unregistered securities to institutional investors. 

See CAB Rule 016(c)(1)(F)(i) (definition of ‘‘Capital 

Acquisition Broker’’). The term ‘‘institutional 

investor’’ includes persons meeting the definition of 

‘‘qualified purchaser’’ in section 2(a)(51) of the 

Investment Company Act. See CAB Rule 016(i)(6). 

Because CAB Rule 221 (Communications with the 

Public) does not prohibit CABs from including 

projections of performance in their communications 

with the public, QPs may already receive projected 

performance from a CAB in connection with the 

offer or sale of newly issued unregistered securities. 

75The proposed rule change would allow 

institutional communications to include 

hypothetical projections of performance of any 

single security, including stocks as well as 

registered investment companies. 

76See EDA, IRI, M Holdings. 

77See GSU, PIABA, 3PM. 

78See MMI, SIFMA. 

79See NASAA, PIABA. 

distributed to QPs.71 These commenters 

noted that capital acquisition brokers 

(‘‘CABs’’) already may distribute 

communications that include 

projections of performance to QPs, as 

CAB Rule 016(i) defines ‘‘institutional 

investor’’ to include qualified 

purchasers.72 NYSBA commented that 

‘‘[r]egular FINRA members should have 

the same freedom to provide projected 

performance information to Rule 016(i) 

institutional investors as CABs, not 

merely for reasons of competitive 

fairness and equal treatment, but 

because the same fundamental principle 

applies: institutional investors have 

sufficient sophistication to evaluate the 

projected performance and the weight to 

be given to it in the overall investment 

decision.’’ 

As discussed above, FINRA 

recognizes that projections of issuer 

performance or targeted returns are 

more common in offering documents, 

such as PPMs, for unregistered 

securities offerings. FINRA also believes 

that institutional investors, as defined in 

FINRA Rule 2210(a)(4), and QP private 

placement investors often either have 

the investment sophistication and 

experience, or are able to hire advisers 

with investment acumen, necessary to 

avoid the potential harm that may occur 

when single security performance 

projections or targeted returns are 

presented in retail communications.73

While FINRA does not necessarily agree 

that non-CAB members should have the 

same rules governing their 

communications as CABs, in this 

circumstance FINRA believes that there 

is no additional risk to investors for a 

non-CAB firm to distribute 

communications with projections of 

performance or targeted returns to QP 

private placement investors than for a 

CAB’s similar communication to QPs. In 

this regard, a CAB is already permitted 

to include projections of performance in 

its communications to QPs to whom it 

is seeking to sell newly issued 

unregistered securities.74

For these reasons, FINRA has 

amended the Notice proposal to create 

a new exception that permits 

institutional communications and QP 

private placement communications to 

project the performance or provide a 

targeted return of a single security,75 as 

well as the performance of an asset 

allocation or other investment strategy, 

subject to specified conditions. 

Requiring a Range of Outcomes 

The Notice also asked whether the 

proposal should require members to 

provide a range of projections in 

investment planning illustrations, rather 

than permitting a single projection of 

performance. Industry commenters 

noted that, while members should be 

allowed to provide a range of 

performance projections in illustrations 

rather than a single performance figure, 

FINRA should not require a range. 

Instead, these commenters 

recommended that FINRA allow 

members to have the flexibility to 

determine whether providing a range of 

performance projections makes sense in 

particular situations.76 Other 

commenters recommended that FINRA 

require projections to include a range of 

outcomes, including outcomes that 

assume a declining market.77

FINRA believes that it is not 

necessary to require in all cases that 

institutional communications and QP 

private placement communications that 

include projections of performance 

present a range of possible outcomes. 

FINRA believes that members should 

have the flexibility to determine 

whether a range of outcomes would be 

useful in particular situations. 

Reasonable Basis Standard 

M Holdings supported the reasonable 

basis standard because it provides 

members with flexibility given that 

investment strategies have different 

features and costs. However, many 

commenters requested that FINRA 

provide more clarity as to the 

‘‘reasonable basis’’ standard. In 

addition, commenters asked that FINRA 

allow a portfolio manager’s previous 

performance record with particular 

investments to be one factor of a 

reasonable basis for projecting future 

performance.78 Other commenters 

expressed concern that the proposal 

would allow too much leeway as to 

what is considered a reasonable basis, 

and that FINRA needs to provide 

specific guidance as to what would be 

permissible.79

3PM noted that the use of specific and 

relevant market indices, peer group 

comparisons, and other widely 

acceptable absolute and relative 

historical investment performance of a 

specific investment strategy should be 

considered as factors supporting a 

projection of performance. 3PM also 

noted that a fund manager may need to 

adjust its projected performance if a 

fund grows to a point where the 

manager will no longer be able to find 

enough appropriate investments that 

meet the fund’s investment criteria (i.e., 

the fund experiences ‘‘style drift’’). 

GSU urged FINRA to require the 

communication to unambiguously and 

specifically disclose all information 

used to generate the projection, 

including an explanation of the 

reasonable basis behind the projection. 

CAI requested that FINRA simply 

eliminate the requirement that 

projections have a reasonable basis on 

the ground that it is too subjective, and 

that the proposal’s required disclosures 

are sufficient to protect investors. 

FINRA disagrees that the proposed 

rule should not require performance 

projections to have a reasonable basis. 

As discussed above, both the SEC and 

FINRA already apply a reasonable basis 

standard in other contexts involving 

forecasts and projections. Additionally, 

FINRA would be concerned that, absent 

such a requirement, members could 

include wildly optimistic projections in 

communications solely for the purpose 

of promoting the sale of a security or an 

investment planning service, rather than 

providing useful information to an 

investor. 

As discussed above, FINRA agrees 

that many factors may provide a 

reasonable basis for a performance 

projection, which will vary depending 

on the context. The proposed rule 

change would include factors, among 

others, that a member should consider 

in forming such a reasonable basis. In 

addition, a reasonable basis might be 

established, for example, by reference to 

the historical performance and 

performance volatility of asset classes, 

the duration of fixed income 

investments, the effects of 


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Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 82493 

80See Fidelity, ICI, MMI. 

81See CAI, ICI, IRI. 

82See Comparison to Projections Permitted by 

FINRA Rule 2214, supra. 

83See Interpretive Letter to Dawn Bond, FSC 

Securities Corporation (July 30, 1998), https://

www.finra.org/rules-guidance/guidance/ 

interpretive-letters/dawn-bond-fsc-securitiescorporation and ‘‘Blended Fund Family 

Performance Concerns NASD Regulation,’’ NASD 

Regulatory & Compliance Alert, Vol. 10, No. 3 at p. 

10 (November 1996), https://www.finra.org/sites/ 

default/files/RCA/p524569.pdf. 

macroeconomic factors such as inflation 

and changes in currency valuation, the 

impact of fees, costs and taxes, and 

expected contribution and withdrawal 

rates by the customer. A more detailed 

discussion of the factors a member 

should use in forming a reasonable basis 

can be found above in the Purpose 

section of this proposed rule change. 

Customized Illustrations 

The Notice proposal would have 

permitted ‘‘a customized hypothetical 

investment planning illustration that 

projects performance of an asset 

allocation or other investment strategy 

and not an individual security,’’ subject 

to specified conditions. Multiple 

commenters asked that the proposal be 

amended not to require that illustrations 

be ‘‘customized,’’ or that FINRA provide 

more clarity as to what ‘‘customized’’ 

means. These commenters stated that 

many investors may fit the same 

investment profile, and thus arguably a 

member should be able to present these 

investors with the same projections of 

performance.80 They also noted that 

performance projections for particular 

asset classes are often based on 

generally accepted investment theory 

and are not customized for individual 

accounts. Fidelity suggested using 

language from FINRA Rule 

2211(b)(5)(B), which permits the use of 

a personalized hypothetical variable 

product illustration ‘‘which reflects 

factors relating to an individual 

customer’s circumstances.’’ 

Wells Fargo recommended that 

FINRA expand the rule to allow 

members to provide customers with 

non-customized asset allocation 

projections based on ‘‘firm capital 

market assumptions.’’ Wells Fargo 

stated that forward-looking illustrations 

of an asset allocation strategy’s 

projected growth rate, volatility 

measures, yield and downside risk 

would be vital information to help 

investors understand their portfolios. 

As discussed above, FINRA has 

determined not to proceed with 

amendments that would permit the use 

of ‘‘a customized hypothetical 

investment planning illustration’’ with 

retail investors. Instead, FINRA has 

determined to amend the Notice 

proposal to permit institutional 

communications and QP private 

placement communications to project 

performance or provide a targeted 

return, subject to specified conditions. 

Accordingly, the comments on the 

meaning of ‘‘customized’’ in the 

proposed amendments are now 

irrelevant to this proposed rule change. 

Interplay With Other Projections 

Exceptions 

Fidelity recommended that FINRA 

amend both FINRA Rule 2210(d)(1)(F)(i) 

(permitting hypothetical illustrations of 

mathematical principles) and proposed 

Rule 2210(d)(1)(F)(iv) to refer to a 

‘‘specific investment’’ rather than 

‘‘investment’’ or ‘‘specific security,’’ 

respectively, and to delete the reference 

to ‘‘investment strategy’’ in paragraph 

(d)(1)(F)(i) so that there is no conflict 

with the language in proposed 

paragraph (d)(1)(F)(iv). 

Commenters also asked that FINRA 

clarify how this rule change would 

impact communications that rely on 

other provisions that permit 

performance projections, such as reports 

generated by investment analysis tools 

pursuant to FINRA Rule 2214, or 

hypothetical illustrations of 

mathematical principles, or 

hypothetical illustrations concerning 

variable insurance products.81 In 

particular, IRI requested clarification on 

whether an investment analysis tool 

report generated pursuant to Rule 2214 

may project the performance of a single 

security, and whether projections of an 

asset allocation strategy’s performance 

in a personalized illustration may also 

show the performance of specific 

securities. The ICI requested 

clarification as to whether Rule 2214 

would apply to illustrations of different 

asset allocations and different 

withdrawal rates in retirement in 

educational material. 

FINRA does not intend to modify the 

requirements of other exceptions to the 

prohibition on projections contained in 

Rule 2210(d)(1)(F) as part of creating a 

new exception for projected 

performance and targeted returns in 

institutional communications and QP 

private placement communications. 

Accordingly, FINRA does not believe it 

is necessary or appropriate to modify 

the current language contained in these 

exceptions. A communication that 

qualifies under another exception to the 

prohibition on performance projections 

would not need to be modified to meet 

the requirements for including 

performance projections or targeted 

returns in institutional communications 

or QP private placement 

communications pursuant to proposed 

Rule 2210(d)(1)(F)(iv). FINRA has 

included in the Purpose section above a 

detailed discussion of the differences 

between the proposal and Rule 2214.82

To the extent that members need further 

guidance regarding Rule 2214, FINRA 

believes that such guidance should be 

provided separately from this rule filing. 

CAI inquired how the proposal would 

impact existing FINRA staff guidance on 

communications with the public, such 

as a 1998 letter interpreting the 

application of FINRA communications 

rules to communications of members 

that are dually registered as brokerdealers and investment advisers, and 

guidance that permitted the use of 

blended fund performance in specified 

asset allocation illustrations.83 CAI 

suggested that FINRA withdraw or 

modify the 1998 interpretive letter to 

clarify that member communications 

promoting investment advisory services 

are not subject to FINRA’s 

communications rules. 

FINRA does not intend for the 

proposed rule change to impact prior 

guidance on the application of Rule 

2210 to communications made by 

dually registered members or the use of 

blended performance. Accordingly, 

FINRA does not believe it is necessary 

to withdraw the 1998 interpretive letter 

or provide additional guidance about 

the presentation of blended 

performance. 

Supervision of Communications With 

Projections 

CAI opposed the proposed 

requirement that a registered principal 

either approve each investment 

planning illustration that includes 

projected performance or a template on 

which such projections are based. 

Instead, it suggested that members 

should be able to supervise all 

illustrations, including those not based 

on a template, in the same manner as 

correspondence. In contrast, 3PM 

recommended that FINRA require a 

registered principal to approve any 

performance projections prior to use 

based on whether there is a reasonable 

basis to rely on the methodology, 

assumptions and limitations provided 

with the projected performance. Wells 

Fargo asked for clarification as to 

whether the proposed rule change 

would alter how a member is required 

to supervise electronic communications 

that include a performance projection 

under FINRA Rule 3110. 

As discussed above, FINRA has 

determined not to proceed with a new 

exception from the prohibitions on 


ddrumheller on DSK120RN23PROD with NOTICES1
82494 Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 

84See proposed Rule 2210(d)(1)(F)(iv)b. and c. 

85See GSU, NASAA. 86See FINRA Rule 2210(d)(1)(A). 

87See GSU, NASAA. 

88See Clover Capital Management, Inc., 1986 SEC 

No-Act. LEXIS 2883 (October 28, 1986). 

89See GSU, NASAA, PIABA. 

projecting performance in non-QP retail 

communications; however, a QP private 

placement communication that includes 

a projection or targeted return may fall 

within the definition of retail 

communication to the extent that it is 

distributed or made available to more 

than 25 QP private placement investors 

that are not institutional investors under 

Rule 2210 within a 30-day period. 

Accordingly, to the extent that a 

member distributes such a retail 

communication to QP private placement 

investors, a registered principal will be 

required to review and approve the 

communication prior to use. In 

addition, members must adopt written 

policies and procedures reasonably 

designed to ensure compliance with all 

applicable requirements and 

obligations, including the obligation for 

the member to have a reasonable basis 

for the criteria used and assumptions 

made in calculating the projected 

performance or targeted return.84

The proposed rule change would not 

alter the standards for review of 

electronic communications. Thus, the 

proposed rule change’s review 

standards would apply equally to paper 

and electronic personalized illustrations 

that include performance projections. 

Required Disclosures 

Two commenters stated that, if FINRA 

moves forward with the proposal, 

FINRA should clarify with specificity 

the required disclosures that must be 

given to investors, and provide guidance 

on how members may calculate and 

present projections.85 For example, 

NASAA noted that FINRA should state 

how members calculate fees, costs or 

commissions in relation to hypothetical 

performance, how members must 

compose an asset allocation or 

investment strategy, and how a 

projection would have a reasonable 

basis where it was inconsistent with the 

historical performance of the asset 

allocation. NASAA also recommended 

that FINRA require disclosure of the 

underlying securities that make up the 

customized hypothetical illustration, 

and if applicable, that the brokerdealer’s past projections proved to be 

inaccurate. 

PIABA expressed concern that retail 

investors will regard projections of 

performance of asset classes as forecasts 

or predictions of how their investments 

will perform going forward, and that 

boilerplate disclaimers are insufficient 

to avoid investor confusion. 3PM 

recommended that FINRA require, in 

addition to the proposal’s disclosure 

standards, a statement that the brokerdealer believes there is a reasonable 

basis to believe the projected 

performance is representative of the 

security or fund it represents, a 

description of the methodology used to 

develop the projected performance, and 

an explanation as to why the 

methodology used is a good predictor of 

the projected performance. 

As discussed above, FINRA no longer 

proposes to permit projections of 

performance of an asset allocation or 

other investment strategy in non-QP 

retail communications beyond what is 

currently permitted under Rule 

2210(d)(1)(F). Nevertheless, FINRA has 

modified the disclosure requirements in 

the proposed rule with respect to 

institutional communications and QP 

private placement communications. In 

this regard, institutional 

communications and QP private 

placement communications that include 

projections of performance or targeted 

returns would have to prominently 

disclose 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. Members 

also would have to provide sufficient 

information to enable the ProjectionEligible Investor to understand the 

criteria used and assumptions made in 

calculating the projected performance or 

targeted return, and to understand the 

risks and limitations in using projected 

performance or targeted returns in 

making investment decisions. FINRA 

believes that these required disclosures 

strike an appropriate balance of alerting 

Projection-Eligible Investors to the 

hypothetical nature and uncertainty of 

such a projection without providing so 

much disclosure that its effectiveness is 

diminished. 

FINRA does not believe it is either 

appropriate or feasible to create more 

detailed requirements on how members 

should calculate performance 

projections or targeted returns. Because 

these projections or targeted returns 

may occur in a variety of contexts, 

FINRA believes it is better to allow 

members to create their own standards 

provided that they have a reasonable 

basis. As discussed above, members still 

would be required to make all 

presentations consistent with Rule 

2210’s fair and balanced standard,86 and 

FINRA believes that it is better to 

consider these communications on a 

case-by-case basis. 

Other Comments 

Several commenters contended that 

an investment adviser’s fiduciary duty 

under the Advisers Act provides greater 

investor protections than the suitability 

standard applicable to broker-dealers 

under FINRA rules, and that this higher 

standard mitigates the potential risks of 

advisers using projections.87 NASAA 

stated that past SEC no-action letters to 

investment advisers, such as Clover 

Capital,88 provide more ‘‘regulatory 

rigor’’ than the FINRA rule proposal 

with regard to hypothetical 

performance. NASAA also stated that, 

despite FINRA’s statement that backtested performance typically is not a 

reasonable basis for a projection, it is 

‘‘virtually inevitable’’ that back-testing 

would be used. Several commenters 

recommended that FINRA keep its 

current prohibitions on projections to 

avoid potential manipulations or bias by 

brokers, at least until broker-dealers are 

subject to a fiduciary duty.89

While FINRA disagrees that the 

Notice proposal lacked regulatory rigor 

as compared to standards under the 

Advisers Act, as discussed above, the 

revised proposal incorporates many of 

the same requirements for the 

presentation of targeted or projected 

performance returns that are contained 

in the IA Marketing Rule, which has 

supplanted past SEC no-action letters 

concerning the presentation of 

performance in investment adviser 

advertisements. In addition, the 

proposed rule change includes specific 

disclosure and reasonableness 

requirements that members must meet 

to use this exception to the prohibition 

on performance projections. As 

discussed above, FINRA does not 

propose to allow members to use backtested performance as one of the bases 

for creating a performance projection. 

GSU recommended that all 

projections-related communications, 

and the means by which they are 

generated, must be subject to stringent 

document retention guidelines, and that 

these communications be presumptively 

discoverable in case of a dispute and 

explicitly included in FINRA’s 

Discovery List 1. IPA urged FINRA to 

adopt the proposal because it appeared 

that the Department of Labor’s (‘‘DOL’’) 

Fiduciary Rule proposal will require 

members to include projections of 

performance in retirement plan 

statements. 

Members that distribute institutional 

communications and QP private 


ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 88, No. 225 / Friday, November 24, 2023 / Notices 82495 

90The SECURE Act was enacted as Division O of 

the Further Consolidated Appropriations Act, 2020, 

Public Law 116–94 (2019). 

91See Department of Labor, ‘‘Pension Benefit 

Statements—Lifetime Income Illustrations,’’ 85 FR 

59132 (September 18, 2020). 

92See, e.g., Regulatory Notice 12–02 (January 

2012). 93 17 CFR 200.30–3(a)(12). 

placement communications that include 

projections of performance or targeted 

returns will be required to retain records 

related to their activities in this area as 

required by Exchange Act Rules 17a–3 

and 17a–4. FINRA does not believe that 

the proposed rule change should 

address discovery rules used in 

arbitration, as they are beyond its scope. 

FINRA notes that, subsequent to the 

publication of the Notice, Congress 

passed the Setting Every Community Up 

for Retirement Enhancement Act of 

2019 (‘‘SECURE Act’’).90 Among other 

things, the SECURE Act amended the 

Employee Retirement Income Security 

Act (‘‘ERISA’’) to require an annual 

lifetime income disclosure in statements 

sent to participants in benefit plans 

governed by ERISA. Pursuant to the 

SECURE Act, the DOL adopted an 

interim final rule that specifies the 

requirements for such lifetime income 

stream disclosures.91 The proposed 

amendments to Rule 2210 would not 

impact members that are required to 

provide such disclosures in plan benefit 

statements. In this regard, FINRA 

historically has interpreted Rule 2210’s 

filing and content standards as not 

applying to communications that are 

required by other regulatory agencies, 

including communications required by 

DOL rules.92

Credit Suisse requested a number of 

new rules and guidance addressing the 

use of performance information in 

communications, including: (1) 

allowing institutional communications 

to show both actual and related 

performance on a gross basis; (2) 

clarifying that targeted returns 

contained in fund promotional material 

are not projections of performance, or 

permit the use of targeted returns in 

institutional communications; (3) 

confirming that estimated returns about 

underlying fund investments are not 

subject to the prohibitions on 

projections of performance; and (4) 

clarifying that model returns and backtested performance can provide a 

reasonable basis for projected 

performance and targeted returns in 

institutional communications. Fidelity 

urged FINRA to focus on harmonizing 

its rules governing related performance 

with SEC staff interpretations under the 

Advisers Act, and to focus on 

principles-based disclosure solutions 

across all forms of communications, 

including social media and mobile 

devices. 

While FINRA appreciates these 

suggestions, it believes that some of 

these recommendations (such as those 

concerning related or back-tested 

performance) extend beyond the scope 

of the proposal’s intent, and thus are not 

germane to this proposed rule filing. 

FINRA believes that it has addressed the 

other comments, such as those 

concerning targeted returns. 

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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2023–016 on the subject line. 

Paper Comments 

• 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–2023–016. 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 (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also 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–2023–016 and 

should be submitted on or before 

December 15, 2023. 

For the Commission, by the Division 

of Trading and Markets, pursuant to 

delegated authority.93

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–25881 Filed 11–22–23; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF STATE 

[Public Notice: 12269] 

U.S. Advisory Commission on Public 

Diplomacy; Meeting 

ACTION: Notice of meeting. 

SUMMARY: The U.S. Advisory 

Commission on Public Diplomacy 

(ACPD) will hold an in-person public 

meeting with online (Zoom) access. The 

meeting will focus on the integration of 

diversity, equity, inclusion, and 

accessibility (DEIA) principles into U.S. 

government public diplomacy 

programming abroad, based on a 

forthcoming ACPD special report titled 

‘‘Public Diplomacy and DEIA 

Promotion: Telling America’s Story to 

the World.’’ A panel of experts will 

discuss the opportunities and 

challenges associated with engaging 

global audiences on these important 

issues. This meeting is open to the 

public, including the media and 

members and staff of governmental and 

non-governmental organizations. 

DATES: Tuesday, December 12, 2023, 12 

p.m. until 1:15 p.m. 


ddrumheller on DSK120RN23PROD with NOTICES1