Roughly a year and a half after advisors
But the broker-dealer industry's self-regulator wants to set a strict limit on what sorts of investors the newly allowed projections could be directed to. Under a
FINRA explains in its proposal that most qualified purchasers and institutional investors are already sophisticated enough to be running their own projections on these sorts of investments. Its new rule would merely give them a means of comparing their own data with forecasts compiled by other professionals.
Because existing rules now prevent brokers from providing their own independent projects, these investors cannot obtain a "potentially different and valuable perspective," according to FINRA's proposal.
The idea quickly elicited opposition from plaintiffs lawyers representing investors and other groups. Joe Peiffer, the president of the Public Investors Advocate Bar Association, noted that much of investment fraud uncovered in recent years has been in private placements and similar vehicles.
"With this new rule proposal, FINRA aims to make it easier for brokers to sell these risky investments by giving potential investors 'projections' about potential returns," Peiffer said in an email. "I promise you this will result in more fraud."
Stephen Hall, the legal director of investor advocacy group Better Markets, expressed similar concerns to
"Using projections is one of the easiest ways to mislead people," he told the newspaper. "It's easy for people to think the result is guaranteed."
Hall couldn't be reached for additional comments on Wednesday.
FINRA's proposal to allow brokers to send investment projects to certain select investors comes on the heels of similar leeway granted under
But that permission came with some strict guardrails. Any investment projections have to be backed up with data showing not only why the numbers being forecast are sound but also why they are suitable to present to a given client or group of clients. The SEC has since
FINRA likewise is seeking to set strict limits on what brokers can do with investment projections. They, for instance, have to make it clear that any likely future results they're touting are merely hypothetical in nature. And they have to furnish institutional investors and qualified purchasers with data showing not only support for their conclusions but also whether the foretold results take into account fees and expenses.
FINRA also notes that, new rule or not, brokers remain bound by the Regulation Best Interest conduct standard in all their dealings with clients. Reg BI, as the standard is known for short, generally calls on brokerage representatives to look out for investors' best interests and to disclose any conflicts of interest that can't be eliminated.
The SEC, for its part, has been quick to crack down on firms that it has found to be too cavalier with their use of investment projects in marketing materials. In August, the Wall Street regulator imposed a more than $1 million fine on the
FINRA said in its rule proposal that complying with its newly proposed rule will involve many of the same steps needed to stay in line with the SEC's marketing rule.
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FINRA already allows projections to be used in certain restricted circumstances. Brokers, for instance, can present investors with "savings calculators" meant to show how much money they'll be able to put away over a given period of time assuming rates of return, tax rates and other variables. Brokers can also use "investment analysis" systems that allow them to predict the likelihood of various outcomes if different portfolio strategies are pursued.
FINRA's latest proposed rule is subject to approval by the SEC. Any official decision will be preceded by a period for public comment, sometimes lasting as long as 90 days.
