Financial Times, November 19, 2023, article: "Wall Street watchdog ﬂoats plan to let brokers promise future results" [Regulatory assumption that sophisticated investors are sophisticated]

Brokers would be able to market some investments with projections of future performance and promise targeted returns when they are working with institutional and wealthy individuals, under a rule proposed by an industry self-regulatory body.

The rule change floated by Finra would mark a departure from a general ban on brokers promising specific outcomes when they sell securities. That has raised concerns among some investor advocates.

In the proposal, Finra said the change would pertain to brokers’ sales to institutions and investors with more than $5mn in assets. “A member’s views regarding the projected performance of an investment strategy or single security may be useful,” the authority said in the proposal.

But Stephen Hall, legal director of Better Markets, which lobbies for investor protection, said: “Using projections is one of the easiest ways to mislead people. It’s easy for people to think the result is guaranteed. [Finra] are really opening a can of worms.”

Finra submitted its proposal to the US Securities and Exchange Commission on Monday. It then will be released for public comment before the SEC, which must approve the measure, decides whether to ask for changes and whether to greenlight it. The process can take more than eight months.

The proposal will have the most far-reaching effect on the marketing of private funds, a rapidly growing sector that carries higher fees. Investors have been piling into these funds in search of better returns than they can get from public markets.

“This is a big change. It is good for fund managers who want to use this [information] in marketing through brokers,” said Lance Dial, a partner at the K&L Gates law firm.

Finra noted in its 210-page filing that the changes would bring the rules for brokers closer to the SEC regulations for fund managers and registered investment advisers, who are allowed to use projections in some marketing material for sophisticated investors.

However, securities law experts said brokers and investment advisers have slightly different obligations to their clients. Advisers have a fiduciary duty to put client interests first at all times. Brokers must recommend products that are in a client’s best interest, but they do not have ongoing responsibilities.

The SEC has zealously guarded against allowing money managers to make promises about the future to ordinary people. In September the SEC fined nine asset managers a total of

$850,000 for putting hypothetical results on websites that were available to the general public.

Finra’s proposal includes some investor safeguards. Brokers would be required to have a reasonable basis for their estimates and to make sure that investors “have access to resources to independently analyse this information or have the financial expertise to understand the risks and limitations”.

But critics are worried the safeguards are inadequate. The proposal “is ill-considered and could open the door to lots of mischief. Even sophisticated investors can be duped,” Hall said.

The SEC, Finra and the Sifma, the industry lobby group for brokers, declined to comment.

This Forum program was open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the purpose of this public Forum's program was to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant was expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants. It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated in 2012 in collaboration with The Conference Board and with Thomson Reuters support of communication technologies to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices. The website is being maintained to provide continuing reports of the issues addressed in the program, as summarized in the January 5, 2015 Forum Report of Conclusions.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.