[Federal Register Volume 89, Number 143 (Thursday, July 25, 2024)]
[Notices]
[Pages 60461-60474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-16304]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100561; File No. SR-FINRA-2023-016]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by 
Amendment No. 1, To Amend FINRA Rule 2210 (Communications with the 
Public) To Permit Projections of Performance in Institutional 
Communications and Specified Communications to Qualified Purchasers and 
Knowledgeable Employees

July 19, 2024.

I. Introduction

    On November 13, 2023, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 2210 
(Communications with the Public) (hereinafter, the ``proposed rule 
change'' unless otherwise specified). The proposed rule change, as 
subsequently amended by Amendment No. 1, would allow a member firm to 
project performance \3\ or provide a targeted return \4\ with respect 
to a security, asset allocation, or other investment strategy in 
limited circumstances and subject to certain conditions. Specifically, 
the proposed rule change would permit a member firm to project 
performance or provide a targeted return in: (1) an institutional 
communication; \5\ or (2) a communication that is distributed or made 
available only to: (A) persons meeting the definition of ``qualified 
purchaser'' (``QP'') under the Investment Company Act of 1940 
(``Investment Company Act''),\6\ and is a communication that promotes 
or recommends a member firm's own unregistered securities or those of a 
control entity that is exempt from the requirements of FINRA Rule 5122 
(Private Placements of Securities Issued by Members) pursuant to FINRA 
Rule 5122(c)(1)(B) (``Member Private

[[Page 60462]]

Offerings''); \7\ or (B) QPs or persons meeting the definition of 
``knowledgeable employee'' under Investment Company Act Rule 3c-5 (a 
``knowledgeable employee''),\8\ and is a communication that promotes or 
recommends a private placement that is exempt from the requirements of 
FINRA Rule 5123 (Private Placements of Securities) pursuant to FINRA 
Rule 5123(b)(1)(B) or FINRA Rule 5123(b)(1)(H), respectively 
(``Exempted Private Placement'').\9\ The investors who would be 
eligible to receive communications that include such performance 
projections or targeted returns under the proposed rule change are 
hereinafter collectively referred to as ``Projection-Eligible 
Investors.'' The proposed rule change also would impose conditions to 
help ensure that such performance projections or targeted returns have 
a reasonable basis, are accompanied by certain disclosures, and that 
member firms communicating such information have written policies and 
procedures reasonably designed to ensure that the communication is 
relevant to the likely financial situation and investment objectives of 
their audience.\10\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ ``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 Exchange Act Release No. 98977 (Nov. 17, 2023), 88 
FR 82482, 82482 n.3 (Nov. 24, 2023), File No. SR-FINRA-2023-016 
(``Notice''), https://www.govinfo.gov/content/pkg/FR-2023-11-24/pdf/2023-25881.pdf.
    \4\ ``Targeted returns reflect the aspirational performance 
goals for an investment or investment strategy.'' Notice at 82482 
n.3.
    \5\ An ``institutional communication'' means ``any written 
(including electronic) communication that is distributed or made 
available only to institutional investors[ ] but does not include a 
member's internal communications.'' FINRA Rule 2210(a)(3). An 
``institutional investor'' means any: ``(A) person described in 
[FINRA] 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.'' FINRA Rule 2210(a)(4). FINRA Rule 
4512(c) states that for purposes of Rule 4512, the term 
``institutional account'' shall 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 Investment Advisers Act or with a 
state securities commission (or any agency or office performing like 
functions); or (3) any other person (whether a natural person, 
corporation, partnership, trust or otherwise) with total assets of 
at least $50 million.''
    \6\ Section 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 QPs, 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).
    \7\ A ``member private offering'' means ``a private placement of 
unregistered securities issued by a member or a control entity.'' 
FINRA Rule 5122(a)(1). FINRA Rule 5122 (Private Placements of 
Securities Issued by Members) governs, among other things, the 
disclosure and filing requirements applicable to member private 
offerings. FINRA Rule 5122(c)(1)(B) states that member private 
offerings sold solely to QPs, as defined in Section 2(a)(51)(A) of 
the Investment Company Act, are exempt from the requirements of 
FINRA Rule 5122.
    \8\ For purposes of the proposed rule change, a ``knowledgeable 
employee'' includes any natural person who is an executive officer, 
director, trustee, general partner, advisory board member, or person 
serving in similar capacity of the fund excluded from the definition 
of ``investment company'' pursuant to Investment Company Act Section 
3(c)(7) or certain of its affiliates, and other employees, under 
certain conditions, who participate in the investment activities of 
the fund or certain of the fund's affiliates. See Exchange Act 
Release No. 99588 (Feb. 22, 2024), 89 FR 14728, 14729 n.26 (Feb. 28, 
2024), File No. SR-FINRA-2023-016, https://www.govinfo.gov/content/pkg/FR-2024-02-28/pdf/2024-04072.pdf (citing Investment Company Act 
Rule 3c-5 (17 CFR 270.3c-5(a)(2), (4)) (``OIP'').
    \9\ See Notice; OIP. FINRA Rule 5123 governs, among other 
things, the filing requirements applicable to members that sell a 
security in a non-public offering in reliance on an available 
exemption from registration under the Securities Act (``private 
placement''). FINRA Rule 5123(b)(1)(B) exempts private placements 
sold solely to QPs from the requirements of FINRA Rule 5123. FINRA 
Rule 5123(b)(1)(H) exempts private placements sold solely to 
knowledgeable employees from the requirements of FINRA Rule 5123.
    \10\ See Notice; OIP.
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    The proposed rule change was published for public comment in the 
Federal Register on November 24, 2023.\11\ The comment period closed on 
December 15, 2023. The Commission received comment letters in response 
to the Notice.\12\ On January 5, 2024, FINRA consented to an extension 
of the time period in which the Commission must approve the proposed 
rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change to February 22, 2024.\13\ On February 22, 2024, FINRA 
responded to the comment letters received in response to the Notice and 
filed an amendment to modify the proposed rule change (``Amendment No. 
1'').\14\ Also on February 22, 2024, the Commission published a notice 
of filing of Amendment No. 1 and an order instituting proceedings to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 1.\15\ The Commission received additional 
comment letters in response to the OIP.\16\ On May 17, 2024, FINRA 
consented to an extension of the time period in which the Commission 
must approve or disapprove the proposed rule change to July 21, 
2024.\17\ On July 17, 2024, FINRA responded to the comment letters 
received in response to the OIP.\18\ This order approves the proposed 
rule change, as modified by Amendment No. 1.
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    \11\ See Notice.
    \12\ The comment letters received in response to the Notice are 
available at https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016.htm.
    \13\ See letter from Meredith Cordisco, Associate General 
Counsel, Office of General Counsel, FINRA, to Craig Slivka, Division 
of Trading and Markets, Commission, dated Jan. 5, 2024, https://www.finra.org/sites/default/files/2024-01/SR-FINRA-2023-016-extension1.pdf.
    \14\ See letter from Meredith Cordisco, Associate General 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated Feb. 22, 2024, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-433139-1075042.pdf 
(``FINRA Response Letter I''); Amendment No. 1.
    \15\ See OIP.
    \16\ The comment letters received in response to the OIP are 
available at https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016.htm.
    \17\ See letter from Meredith Cordisco, Associate General 
Counsel, Office of General Counsel, FINRA, to Craig Slivka, Division 
of Trading and Markets, Commission, dated May 17, 2024, https://www.finra.org/sites/default/files/2024-05/FINRA-2023-016-Extension-2.pdf.
    \18\ See letter from Meredith Cordisco, Associate General 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated July 17, 2024 (``FINRA Response Letter 
II''), https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016.htm.
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II. Description of the Proposed Rule Change

    FINRA Rule 2210 generally prohibits a member firm's communications 
from predicting or projecting performance, implying that past 
performance will recur, or making any exaggerated or unwarranted claim, 
opinion, or forecast.\19\ As discussed below, there are three 
exceptions to this general prohibition; the proposed rule change would 
create a fourth exception to permit the communication of projected 
performance or targeted returns in certain narrowly-defined 
circumstances.\20\ After summarizing the current regulatory framework, 
the Commission describes the proposed rule change.
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    \19\ FINRA Rule 2210(d)(1)(F); see Notice at 82482.
    \20\ Notice at 82483.
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A. Background

1. FINRA Rule 2210 (Communications With the Public)
    FINRA Rule 2210 imposes obligations related to, among other things, 
the approval, review, recordkeeping, filing, and content of member 
firms' communications with the public.\21\ FINRA Rule 2210(d)(1) 
imposes six general standards for the content of a member firm's 
communications with the public.\22\ For example, member firms' 
communications must ``be based on principles of fair dealing and good 
faith, . . . be fair and balanced, and . . . provide a sound basis for 
evaluating the facts in regard to any particular security or type of 
security, industry, or service.'' \23\ Member firms may not ``omit any 
material fact or qualification if the omission, in light of the context 
of the material presented, would cause the communications to be 
misleading.'' \24\ The standards prohibit ``any false, exaggerated, 
unwarranted, promissory[,] or misleading statement or claim in any 
communication.'' \25\ Member firms also must consider ``the nature of 
the audience to which the communication will be directed'' and provide 
``details and explanations appropriate to the audience.'' \26\
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    \21\ See FINRA Rule 2210.
    \22\ FINRA Rule 2210(d)(1).
    \23\ FINRA Rule 2210(d)(1)(A).
    \24\ Id.
    \25\ FINRA Rule 2210(d)(1)(B) (``No member may publish, 
circulate or distribute any communication that the member knows or 
has reason to know contains any untrue statement of a material fact 
or is otherwise false or misleading.'').
    \26\ FINRA Rule 2210(d)(1)(E).
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    These standards also include a general prohibition on 
``predict[ing] or project[ing] performance, imply[ing] that past 
performance will recur[,] or mak[ing] any exaggerated or unwarranted 
claim, opinion[,] or forecast.'' \27\ This general prohibition does not 
apply to three types of communications: hypothetical illustrations of 
mathematical

[[Page 60463]]

principles; \28\ investment analysis tools; \29\ and price targets in 
research reports on debt or equity securities.\30\ Unless one of these 
three exceptions applies, member communications may not predict or 
project performance.\31\
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    \27\ FINRA Rule 2210(d)(1)(F).
    \28\ A member firm may communicate a ``hypothetical illustration 
of mathematical principles, provided that it does not predict or 
project the performance of an investment or investment strategy.'' 
FINRA Rule 2210(d)(1)(F)(i). This exception ``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.'' Notice at 82482.
    \29\ A member firm may publish ``[a]n 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)].'' FINRA Rule 2210(d)(1)(F)(ii). An 
``investment analysis tool'' is ``an interactive technological tool 
that 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.'' Notice at 82482-83 (citing FINRA Rule 2214(b)).
    \30\ A member firm may communicate ``[a] price target contained 
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 the risks that may 
impede achievement of the price target.'' FINRA Rule 
2210(d)(1)(F)(iii).
    \31\ See FINRA Rule 2210(d)(1)(F).
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2. FINRA's Stated Reasons for the Proposed Rule Change
    As stated above, the proposed rule change would permit the 
presentation of projected performance or targeted returns in 
institutional communications about a security, asset allocation, or 
other investment strategy or in communications to QPs and knowledgeable 
employees about certain private placements. The proposed rule change 
also would impose conditions to help ensure that such performance 
projections or targeted returns have a reasonable basis, are 
accompanied by certain disclosures, and require member firms 
communicating such information have written policies and procedures 
reasonably designed to ensure that the communication is relevant to the 
likely financial situation and investment objectives of their audience.
    FINRA stated that some of its member firms' customers, especially 
institutional investors, request projected performance or targeted 
returns concerning investment opportunities to help them make informed 
investment decisions.\32\ FINRA explained that institutional investors 
and QPs ``often test their own opinions against performance projections 
they receive from other sources, including issuers and investment 
advisers.'' \33\ FINRA stated that for this reason projected 
performance information ``may be useful for [investors] 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.'' \34\ However, because FINRA 
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.'' \35\
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    \32\ See Notice at 82483.
    \33\ Id.
    \34\ Id.
    \35\ Id.
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    Under these circumstances, FINRA stated that FINRA Rule 2210's 
general prohibition ``creates an incentive for issuers to avoid the 
registered broker-dealer channel to offer securities and instead either 
use an unregistered firm[ ] or market securities directly to potential 
investors.'' \36\ FINRA explained that 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 would impose on 
the member firm ``substantial requirements that enhance investor 
protections.'' \37\ FINRA also stated that member firms dually 
registered as investment advisers or those that employ dually 
registered persons already may provide performance projections to their 
customers.\38\
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    \36\ Id. at 82488.
    \37\ Id.
    \38\ See id. at 82489 (``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.'').
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    FINRA stated that any proposal to permit the use of projected 
performance or targeted returns in member firms' communications ``must 
not increase the risk of potential harm to retail investors.'' \39\ For 
that reason, according to FINRA, the proposed rule change would 
``create a new, narrowly tailored[ ] exception'' to FINRA Rule 2210's 
general prohibition applicable only to institutional communications and 
to communications to QPs and knowledgeable employees about certain 
private placements.\40\ FINRA explained that, in its experience with 
broker-dealer communications, institutional investors, QPs, and 
knowledgeable employees are more likely to understand the risks and 
limitations of projections or targeted returns.\41\ Indeed, according 
to FINRA, the proposed rule change ``would not alter the current 
prohibitions on including projections of performance or targeted 
returns in most types of retail communications.'' \42\ In addition, 
FINRA stated 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.'' \43\
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    \39\ Id. at 82483.
    \40\ Id.; OIP at 14729.
    \41\ FINRA Response Letter I at 5-6.
    \42\ Notice at 82483.
    \43\ Id. at 82483 n.18 (citing FINRA Rule 2210(a)(4)).
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    FINRA also stated that the proposed rule change is ``in many 
respects consistent with'' the Commission's Investment Adviser 
Marketing Rule \44\ (``IA Marketing Rule'').\45\ That rule makes it 
unlawful for any SEC-registered investment adviser to disseminate any 
advertisement \46\ that violates the rule's specified general 
prohibitions.\47\ The IA Marketing Rule's provisions address, among 
other things, the inclusion of performance in an

[[Page 60464]]

advertisement, including a general prohibition on the presentation of 
hypothetical performance information unless certain conditions are 
met.\48\ These conditions are ``designed to address the potential for 
hypothetical performance to mislead investors.'' \49\ These conditions 
require investment advisers to: (1) adopt policies and procedures 
reasonably designed to ensure the hypothetical performance is relevant 
to the likely financial situation and investment objectives of the 
intended audience; (2) provide sufficient information to enable the 
investor to understand the criteria and assumptions made in calculating 
such hypothetical performance; and (3) provide (or, if the intended 
audience is an investor in a private fund, provides, or offers 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.\50\
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    \44\ See Investment Advisers Act Release No. 5653 (Dec. 22, 
2020), 86 FR 13024 (Mar. 5, 2021) (hereinafter; ``IA Marketing Rule 
Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2021-03-05/pdf/2020-28868.pdf; SEC Staff, Investment Adviser Marketing: A 
Small Entity Compliance Guide, https://www.sec.gov/investment/investment-adviser-marketing.
    \45\ Notice at 82487, 82490.
    \46\ For purposes of the IA Marketing Rule, an ``advertisement'' 
includes ``[a]ny direct or indirect communication an investment 
adviser makes to more than one person, or to one or more persons if 
the communication includes hypothetical performance, that offers the 
investment adviser's investment advisory services with regard to 
securities to prospective clients or investors in a private fund 
advised by the investment adviser or offers new investment advisory 
services with regard to securities to current clients or investors 
in a private fund advised by the investment adviser.'' 17 CFR 
275.206(4)-l(e)(1)(i). This general definition is subject to three 
exceptions, 17 CFR 275.206(4)-1(e)(i)(A)-(C), and ``advertisement'' 
also includes certain endorsements and testimonials, 17 CFR 
275.206(4)-1(e)(1)(ii).
    \47\ 17 CFR 275.206(4)-1.
    \48\ 17 CFR 275.206(4)-l(d)(6). For purposes of the IA Marketing 
Rule, ``hypothetical performance'' means ``performance results that 
were not actually achieved by any portfolio of the investment 
adviser.'' 17 CFR 275.206(4)-l(e)(8). It includes, but is not 
limited to, performance derived from model portfolios, performance 
that is backtested by the application of a strategy to data from 
prior time periods when the strategy was not actually used during 
those time periods, and targeted or projected performance returns 
with respect to any portfolio or to the investment advisory services 
with regard to securities offered in the advertisement. 17 CFR 
275.206(4)-l(e)(8)(i). However, ``hypothetical performance'' does 
not include certain interactive analysis tools or predecessor 
performance. 17 CFR 275.206(4)-l(e)(8)(ii).
    \49\ IA Marketing Rule Adopting Release at 13083.
    \50\ 17 CFR 275.206(4)-l(d)(6). Collectively, these conditions 
help to ensure that: (1) advertisements with hypothetical 
performance information are distributed only to ``investors who have 
access to the resources to independently analyze this information 
and who have the financial expertise to understand the risk and 
limitations of these types of presentations;'' and (2) the intended 
audience receives ``tailored'' information that is sufficient for 
the intended audience ``to understand the criteria, assumptions, 
risks, and limitations'' of the hypothetical performance 
information. IA Marketing Rule Adopting Release at 13078.
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B. The Proposed Rule Change

    The proposed rule change would create a fourth exception to FINRA 
Rule 2210's general prohibition on the communication of projected 
performance or targeted returns. As stated above, this proposed 
exception would permit the presentation of such information in: (1) 
institutional communications; and (2) communications to QPs and 
knowledgeable employees about certain private placements.\51\ This 
exception would be available for these communications so long as the 
member firm: (1) adopts and implements written policies and procedures 
reasonably designed to ensure that the communication is relevant to the 
likely financial situation and investment objectives of the audience; 
(2) has a reasonable basis for the criteria used and assumptions made 
in calculating the projected performance or targeted return; and (3) 
provides certain disclosures.\52\ The Commission describes each aspect 
of the proposed rule change in turn.
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    \51\ Proposed Rule 2210(d)(1)(F)(iv).
    \52\ Id.; see Notice at 82483.
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1. Scope Limited to Institutional and Certain Private-Placement 
Communications
    The proposed rule change, as modified by Amendment No. 1, would 
permit a member firm to project performance or provide a targeted 
return with respect to a security, asset allocation, or other 
investment strategy in: (1) an institutional communication; or (2) a 
communication that is distributed or made available only to (A) QPs and 
is a communication that promotes or recommends a Member Private 
Offering, or (B) QPs or knowledgeable employees and is a communication 
that promotes or recommends an Exempted Private Placement.\53\
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    \53\ Proposed Rule 2210(d)(1)(F)(iv)(a).
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    FINRA explained that the proposed rule change ``must not increase 
the risk of potential harm to retail investors,'' so it limited 
Projection-Eligible Investors to those who it believes are more likely 
to have the expertise or resources to understand the risks and 
limitations of projected performance or targeted returns.\54\ FINRA 
stated that Projection-Eligible Investors are ``well-established 
categories of persons that have been previously determined to be 
financially sophisticated or able to engage expertise for purposes of 
the securities laws.'' \55\ These categories of investors, FINRA 
stated, ``are more likely to understand the risks and limitations of 
projections or targeted returns.'' \56\
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    \54\ See Notice at 82483; see also FINRA Response Letter I at 6.
    \55\ Notice at 82483; see Amendment No. 1 at 5 (``FINRA believes 
that knowledgeable employees typically have intimate knowledge of 
the operations of private funds, and thus are less likely not to 
understand the risks and limitations of projections or targeted 
returns associated with such funds.'').
    \56\ OIP at 14729.
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2. Written Policies and Procedures
    The proposed rule change would require any member firm that 
communicates projected performance or targeted returns to Projection-
Eligible Investors 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.'' \57\ To meet this 
obligation, FINRA urged member firms to consider including in their 
written policies and procedures ``content that requires the member to 
consider the audience that receives a communication presenting 
projected performance or a targeted return.\58\ FINRA stated that 
communications pursuant to this proposed rule change ``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.'' \59\
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    \57\ Proposed Rule 2210(d)(1)(F)(iv)(b).
    \58\ Notice at 82484.
    \59\ Id.
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    FINRA explained that these written policies and procedures could 
permit a member firm to ``rely[ ] on its past experiences with 
particular types'' of investors and consider whether particular 
investors have previously expressed interest or invested in similar 
securities.\60\ However, FINRA stated that ``the mere fact that an 
investor would be interested in high returns'' would not--standing 
alone--mean that the projected performance or targeted returns ``is 
relevant to the likely financial situation and investment objectives of 
the intended audience.'' \61\
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    \60\ Id.
    \61\ Id. at 82484 n.22.
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3. Reasonable Basis Requirement
    The proposed rule change would require any member firm that 
communicates projected performance or targeted returns pursuant to this 
exception to have ``a reasonable basis for the criteria used and 
assumptions made in calculating the projected performance or targeted 
return, and retain[ ] written records supporting the basis for such 
criteria and assumptions.'' \62\ FINRA stated that this

[[Page 60465]]

proposed obligation ``follows well-established precedents.'' \63\ 
Specifically, FINRA stated that FINRA Rules 2210 and 2241 (Research 
Analysts and Research Reports) require a price target in a research 
report to have a ``reasonable basis,'' \64\ and SEC rules require 
certain projections of future economic performance ``to be based on 
good faith and have a reasonable basis.'' \65\
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    \62\ Proposed Rule 2210(d)(1)(F)(iv)(c). Because ``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,'' FINRA acknowledged that they ``may not involve all 
(or any) of the assumptions and criteria applied to generate a 
projection.'' Notice at 82484 n.21. 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,'' so ``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.'' 
Notice at 82484 n.21.
    \63\ Id. at 82484.
    \64\ Id. (citing FINRA Rules 2210(d)(1)(F)(iii), 2241(c)(1)(B)).
    \65\ Id. (citing Securities Act Regulation S-K, 17 CFR 
229.10(b)).
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    FINRA stated that it ``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 targeted returns.'' \66\ Accordingly, to help guide member firms' 
reasonable basis determination, the proposed rule change also would 
include a non-exhaustive list of factors that ``members should 
consider'' when meeting this obligation.\67\ These factors--no one of 
which is determinative--include: (1) global, regional, and country 
macroeconomic conditions; (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; 
(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; (7) the appropriateness of 
selected peer-group comparisons; (8) the reliability of research 
sources; (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.\68\ FINRA explained that these factors ``incorporate[ ] 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.'' \69\
---------------------------------------------------------------------------

    \66\ Id.
    \67\ Proposed Rule 2210.01(a).
    \68\ Id.
    \69\ Notice at 82485 (citing CFA Institute, Standards of 
Practice Handbook, 155-56 (11th ed. 2014)).
---------------------------------------------------------------------------

    The proposed rule change also would prohibit member firms from 
basing projected performance or targeted returns upon: (1) 
``hypothetical, back-tested performance;'' or (2) ``the prior 
performance of a portfolio or model that was created solely for the 
purpose of establishing a track record.'' \70\ FINRA explained that 
``back[-]tested performance may pose an increased risk for misleading 
investors, as it allows hypothetical investment decisions to be 
optimized by hindsight.'' \71\
---------------------------------------------------------------------------

    \70\ Proposed Rule 2210.01(b).
    \71\ FINRA Response Letter I at 14.
---------------------------------------------------------------------------

4. Disclosure Requirements
    The proposed rule change would impose three disclosure requirements 
on member firms that communicate projected performance or targeted 
returns pursuant to this exception. First, any communication of 
projected performance or targeted returns to a Projection-Eligible 
Investor must ``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.'' \72\
---------------------------------------------------------------------------

    \72\ Proposed Rule 2210(d)(1)(F)(iv)(d).
---------------------------------------------------------------------------

    Second, the proposed rule change would require any member firm 
communicating projected performance or targeted returns to a 
Projection-Eligible Investor to ``provide[ ] sufficient information to 
enable the investor to understand . . . 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.'' \73\ FINRA explained that 
this requirement ``is not intended to prescribe any particular 
methodology or calculation of such performance,'' and it does not 
``expect a firm to disclose proprietary or confidential information 
regarding the firm's methodology and criteria.'' \74\ FINRA stated, 
however, that firms ``would be expected . . . 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.'' \75\ Absent these 
required disclosures, FINRA explained, ``it is more likely that a 
projection or targeted return would mislead a potential investor.'' 
\76\
---------------------------------------------------------------------------

    \73\ Proposed Rule 2210(d)(1)(F)(iv)(e).
    \74\ Notice at 82485.
    \75\ Id.
    \76\ Id.
---------------------------------------------------------------------------

    Third, the proposed rule change would require any member firm 
communicating projected performance or targeted returns to a 
Projection-Eligible Investor to ``provide[ ] sufficient information to 
enable the 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.'' \77\ FINRA explained 
that 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.'' \78\
---------------------------------------------------------------------------

    \77\ Proposed Rule 2210(d)(1)(F)(iv)(e).
    \78\ Notice at 82485.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's response to the comments, the Commission finds 
that the proposed rule change, as modified by Amendment No. 1, is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder that are applicable to a national securities 
association.\79\ Specifically, 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, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest.\80\
---------------------------------------------------------------------------

    \79\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \80\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    Specifically, the proposed rule change would create a reasonably 
tailored exception from FINRA Rule 2210's general prohibition on the 
dissemination of performance projections or targeted returns in a 
member firm's communications. The proposed rule change would allow 
member firms to provide the same or similar information regarding 
projected

[[Page 60466]]

performance or targeted returns that are provided to investors by 
issuers and other intermediaries, subject to requirements reasonably 
designed to protect investors and the public interest. It would limit 
the scope of the permissible audience to certain categories of 
investors that FINRA believes have the expertise or resources necessary 
to understand the risks and limitations of projected performance or 
targeted returns. It also would permit communication of projected 
performance or targeted returns only where the member firm complies 
with certain conditions reasonably designed to protect investors. In 
particular, the proposed rule change would require member firms to: (1) 
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 audience; (2) have a 
reasonable basis for the criteria used and assumptions made in 
calculating the projected performance or targeted return; and (3) 
provide certain disclosures. Accordingly, and as explained in more 
detail below, the Commission finds that the proposed rule change is 
consistent with Section 15A(b)(6) of the Exchange Act. The Commission 
addresses the proposed rule change's specific provisions, and any 
related comments, in turn.

A. Scope of the Exception

    As originally proposed in the Notice, the proposed rule change 
would have permitted a member firm to project performance or provide a 
targeted return with respect to a security, asset allocation, or other 
investment strategy in: (1) an institutional communication; or (2) a 
communication that is distributed or made available only to QPs, and is 
a communication that promotes or recommends a Member Private Offering 
or a private placement that is exempt from the requirements of FINRA 
Rule 5123 pursuant to FINRA Rule 5123(b)(1)(B).\81\ In response to 
commenters, and as discussed below, Amendment No. 1 would also permit 
knowledgeable employees to receive performance projections or targeted 
returns about Exempted Private Placements (that is, specified private 
placements that are sold solely to QPs and knowledgeable 
employees).\82\
---------------------------------------------------------------------------

    \81\ Notice at 82483-84; proposed Rule 2210(d)(1)(F)(iv)(a).
    \82\ Proposed Rule 2210(d)(1)(F)(iv)(a).
---------------------------------------------------------------------------

    Multiple commenters asked that FINRA expand the scope of the 
proposed rule change to include a broader set of investors, a broader 
set of investments, and a broader set of performance information.\83\ 
One commenter took no position on the proposed rule change but urged 
caution in the implementation and enforcement of the proposed rule 
change.\84\ Another commenter, on the other hand, opposed the provision 
of projected performance or targeted returns to any investor.\85\ The 
Commission addresses each of these issues in turn.
---------------------------------------------------------------------------

    \83\ See, e.g., letters from Bernard Canepa, Managing Director 
and Associate General Counsel, Securities Industry and Financial 
Markets Association, dated Dec. 15, 2023, at 2-3, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-314759-820242.pdf (``SIFMA Letter''); Dorothy Donohue, Deputy General 
Counsel, and Matthew Thornton, Associate General Counsel, Investment 
Company Institute, dated Dec. 15, 2023, at 5-7, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-314280-819322.pdf (``ICI 
Letter I''); Anya Coverman, President and CEO, Institute for 
Portfolio Alternatives, dated Dec. 15, 2023, at 5, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-314439-819782.pdf (``IPA Letter''); Jack O'Brien, Morgan, Lewis & Bockius 
LLP, dated Mar. 25, 2024, at 3, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-450559-1152522.pdf (``Morgan Lewis 
Letter''); Dechert LLP, dated Dec. 15, 2023, at 2-8, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-314499-819902.pdf (``Dechert Letter''); Jay Knight, Federal Regulation of 
Securities Committee, ABA Business Law Section, dated Jan. 8, 2024, 
at 3, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-368259-893862.pdf (``ABA Letter''); Molly Diggins, Partner & General 
Counsel, Monument Group, Inc., dated Jan. 31, 2024, at 3, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-418839-996922.pdf (``Monument Group Letter II '').
    \84\ See letter from Joseph Peiffer, President, Public Investors 
Advocate Bar Associations, dated Dec. 15, 2023, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-313899-818504.pdf (``PIABA 
Letter'').
    \85\ See letter from the Center for American Progress, dated 
Apr. 12, 2024, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-458213-1173034.pdf (``CAP Letter'').
---------------------------------------------------------------------------

1. Scope of Permissible Investors
    Many commenters requested that the proposed rule change be expanded 
to permit the communication of projected performance to: all investors; 
\86\ accredited investors; \87\ or knowledgeable employees.\88\ One 
commenter opposed the communication of projected performance or 
targeted returns altogether.\89\
---------------------------------------------------------------------------

    \86\ See SIFMA Letter at 2; ICI Letter I at 5-6.
    \87\ See SIFMA Letter at 2-3; IPA Letter at 5; Morgan Lewis 
Letter at 3.
    \88\ See, e.g., SIFMA Letter at 2-3; Dechert Letter at 8.
    \89\ CAP Letter.
---------------------------------------------------------------------------

    With respect to expanding the scope of the exclusion to all 
investors, and not just a subset of investors, one commenter stated 
that broker-dealers should be permitted to communicate projected 
performance and targeted returns equally to all investors, ``subject to 
the same conditions as the IA Marketing Rule, which requires investment 
advisers to consider the intended audience for the communications.'' 
\90\ A second commenter stated that the protections provided by 
Regulation Best Interest and FINRA Rule 2210's general content 
standards justify the extension of the proposed rule change's scope to 
retail communications.\91\ This commenter stated that, in lieu of 
limitations on the scope of Projection-Eligible Investors, FINRA could 
protect retail investors by publishing guidance, similar to that 
provided by the Commission in the IA Marketing Rule release, that it 
``intend[s] for advertisements including hypothetical performance 
information to only be distributed to investors who have access to the 
resources to independently analyze this information and who have the 
financial expertise to understand the risks and limitations of these 
types of presentations.'' \92\
---------------------------------------------------------------------------

    \90\ SIFMA Letter at 2.
    \91\ See ICI Letter I at 5-6.
    \92\ ICI Letter I at 6. Indicating that the IA Marketing Rule 
does not restrict the scope of investors eligible to receive 
hypothetical performance, a third commenter stated that FINRA should 
eliminate any such restrictions from the proposed rule change. 
Morgan Lewis Letter at 2-3. This commenter explained that this 
asymmetry would result in a lack of ``any meaningful harmonization 
between the [IA] Marketing Rule and FINRA Rule 2210 with respect to 
hypothetical performance and will only enhance information 
asymmetries that already exist in the market.'' Id. at 2.
---------------------------------------------------------------------------

    With respect to expanding to accredited investors, one commenter 
stated that accredited investors ``are also likely to have the 
sophistication and resources to assess performance projections and 
targeted returns properly.'' \93\ A second commenter requested that the 
proposed rule change extend to accredited investors under Regulation D 
where the broker-dealer recommends (and does not merely promote) 
private placements offered only to accredited investors, in light of 
the obligations that apply under Regulation Best Interest, the 
regulatory filing and review procedures of FINRA Rules 5122 and 
5123,\94\ and the due diligence requirements of Regulation D.\95\ A 
third commenter, however, urged caution about extending the 
communication of projected

[[Page 60467]]

performance and targeted returns to accredited investors, explaining 
that the number of accredited investors has substantially increased 
since the Commission first established the category in 1982 and 
expressing concern that it ``contains an increasing amount of investors 
[who] do not have the sophistication or financial wherewithal to 
adequately ascertain the risks'' associated with projected performance 
and targeted returns.\96\
---------------------------------------------------------------------------

    \93\ SIFMA Letter at 2-3; see Morgan Lewis Letter at 3 
(asserting that FINRA should expand the scope of Projection-Eligible 
Investors to include accredited investors if FINRA insisted on 
limiting the scope to certain investors).
    \94\ This commenter explained that FINRA's Corporate Financing 
Department reviews private placement memoranda and retail 
communications under FINRA Rules 5122 and 5123 and considers 
``whether the member [firm] appears to have conducted a reasonable 
investigation of the issuer.'' IPA Letter at 5-6.
    \95\ See IPA Letter at 5-6.
    \96\ PIABA Letter at 2. PIABA indicated that the number of 
investors who qualified as ``accredited'' rose from approximately 
1.8% of U.S. households in 1983 to approximately 9.9% of U.S. 
households in 2013. Id. (citing Commissioner Luis Aguilar, Statement 
on Revisiting ``Accredited Investor'' Definition to Better Protect 
Investors, n.3 (Dec. 17, 2014), https://www.sec.gov/news/statement/spch121714laa (figures not adjusted for inflation)).
---------------------------------------------------------------------------

    With respect to expanding to knowledgeable employees, one commenter 
requested that the proposed rule change extend to knowledgeable 
employees of private funds that are excluded from the definition of 
investment company pursuant to Investment Company Act Section 3(c)(1) 
and 3(c)(7) (referred to as Section 3(c)(1) or Section 3(c)(7) funds, 
respectively),\97\ explaining that such employees ``are also likely to 
have the sophistication and resources to assess performance projections 
and targeted returns properly.'' \98\ A second commenter requested that 
the proposed rule change extend to knowledgeable employees of Section 
3(c)(7) funds because Section 3(c)(7) permits the sale of those funds' 
securities to both QPs and knowledgeable employees who are not QPs.\99\ 
This commenter explained that ``executive officers and investment 
professionals with intimate knowledge of the operations of private 
funds marketed in member communications to the public'' are not the 
intended beneficiaries of the proposed rule change's investor-
protection conditions.\100\
---------------------------------------------------------------------------

    \97\ Investment Company Act Rule 3c-5 generally defines a 
``knowledgeable employee'' as certain persons associated with 
private funds that would be investment companies but for the 
exclusions provided in Section 3(c)(1) or (c)(7) funds. See 
Investment Company Act Rule 3c-5 (17 CFR 270.3c-5(a)(2), (a)(4)-
(6)). Investment Company Act Section 3(c)(1) generally excludes from 
the definition of ``investment company'' ``[a]ny issuer whose 
outstanding securities . . . are beneficially owned by not more than 
one hundred persons . . . and which is not making and does not 
presently propose to make a public offering of its securities,'' and 
Section 3(c)(7) generally excludes ``[a]ny issuer, the outstanding 
securities of which are owned exclusively by persons who, at the 
time of acquisition of such securities, are [QPs], and which is not 
making and does not at that time propose to make a public offering 
of such securities.'' 15 U.S.C. 80a-3(c)(1) and (c)(7).
    \98\ SIFMA Letter at 2-3.
    \99\ Dechert Letter at 8.
    \100\ Id.
---------------------------------------------------------------------------

    Another commenter, however, urged the Commission to disapprove the 
proposed rule change.\101\ This commenter stated that FINRA Rule 2210 
provides the only ``meaningful protection'' to investors--regardless of 
their expertise and resources--in securities exempted from registration 
and the public disclosure framework.\102\ Without registration and 
public disclosures, the commenter stated, it is difficult to reliably 
project performance or provide targeted returns for these 
investments.\103\
---------------------------------------------------------------------------

    \101\ See CAP Letter; see also PIABA Letter at 2 (urging FINRA 
to ``be mindful of the challenges accompanying this proposal and 
devote adequate resources to policing all communications,'' keeping 
in mind that any weakening of communication standards ``will only 
serve to harm individual investors.''). CAP stated that--as a 
general matter--FINRA has failed to articulate the basis for the 
proposed rule change. See CAP Letter at 3, 6. FINRA disagreed, 
explaining that its stakeholder engagement led to repeated requests 
for more permissive use of projected performance and targeted 
returns and greater regulatory harmonization with the IA Marketing 
Rule. FINRA Response Letter II at 11-14. Through this engagement, 
FINRA also learned that institutional investors often request this 
information from broker-dealers and that ``institutional investors 
and QPs often test their own opinions against performance 
projections they receive from other sources, including from issuers 
and investment advisers.'' Id. at 13-14. As discussed in this order, 
FINRA reasonably articulated a basis for approval of the proposed 
rule change consistent with the Exchange Act. The proposed rule 
change would permit the communication of projected performance or 
targeted returns only in narrow circumstances and when certain 
conditions reasonably designed to protect investors are met.
    \102\ CAP Letter at 3-4 (explaining that investors of any level 
may be ``misled by cherry-picked or inaccurate information and 
dubious projections or predictions'').
    \103\ See id. (citing Tyler Gellasch et al., ``How Exemptions 
From Securities Laws Put Investors and the Economy at Risk,'' Center 
for American Progress (Mar. 22, 2023), https://www.americanprogress.org/article/how-exemptions-from-securities-laws-put-investors-and-the-economy-at-risk/). CAP also stated that 
the proposed rule change would be inconsistent with the Commission's 
recently finalized Private Fund Advisers rule's ``express purpose'' 
to promote the standardization of information disclosures. CAP 
Letter at 6 (citing Investment Advisers Act Release No. 6383 (Aug. 
23, 2023), 88 FR 63206 (Sep. 14, 2023)). In early June 2024, the 
Fifth Circuit issued a ruling that vacated the Private Fund Advisers 
rules. See Nat'l Ass'n of Priv. Fund Managers v. SEC, No. 23-60471, 
2024 U.S. App. LEXIS 13645 (5th Cir. June 5, 2024). In any event, as 
FINRA explained, the proposed rule change serves a different purpose 
from and is not inconsistent with the Private Fund Advisers rules. 
See FINRA Response Letter II at 16.
---------------------------------------------------------------------------

    FINRA disagreed with the commenter opposing the proposed rule 
change, stating that the proposed rule change ``will benefit investors 
without sacrificing investor protection, similar to the benefits that 
the Commission outlined in its adoption of the IA Marketing Rule 
related to investment advisers' presentation of hypothetical 
performance.'' \104\ Further, FINRA reiterated that ``broker-dealers 
are generally prohibited from using projections of performance and 
targeted returns in their communications'' and that the proposed rule 
change would allow such projections and targeted returns ``under narrow 
circumstances and only when the safeguarding conditions are met.'' 
\105\ Importantly, FINRA stated that one such condition is the 
requirement that the member firm have a reasonable basis for the 
criteria used and assumptions made in calculating the projected 
performance or targeted return.\106\ What is more, FINRA stated that 
FINRA Rule 2210's general content standards would continue to apply, 
and projected performance and targeted returns that are ``misleading or 
lack a sound basis will continue to be prohibited'' under the proposed 
rule change.\107\
---------------------------------------------------------------------------

    \104\ FINRA Response Letter II at 11. FINRA explained that 
investors may benefit from projected performance and targeted 
returns ``when presented in a context that helps investors to better 
understand the information.'' Id. Toward this end, FINRA noted that 
the proposed rule change imposes multiple disclosure-related 
obligations. Id.
    \105\ Id.
    \106\ Id. at 15.
    \107\ Id. at 14-15.
---------------------------------------------------------------------------

    FINRA also disagreed with the commenter's assertion that the 
absence of public disclosure obligations makes it practically 
impossible to reliably project performance for private placements.\108\ 
FINRA stated that even without public disclosure obligations, private 
placements are subject to antifraud provisions of the federal 
securities laws, they typically do provide disclosures,\109\ and there 
are generally accepted methods to assess private company valuation 
\110\ and forecasts.\111\ In any event, FINRA stated that the proposed 
rule change would prohibit the communication of projected performance 
or targeted returns where the member firm ``is not satisfied that it 
can form a reasonable basis [for such information] because of what it 
perceives as unreliable or unsubstantiated information on the issuer.'' 
\112\
---------------------------------------------------------------------------

    \108\ Id. at 15-16.
    \109\ Id. (citing Andrew N. Vollmer, Evidence of the Use of 
Disclosure Documents in Private Securities Offerings to Accredited 
Investors, Mercatus Working Paper, Mercatus Center at George Mason 
University (Oct. 2020)).
    \110\ Id. at 16 (citing CFA Institute, Private Company 
Valuation, https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/private-company-valuation).
    \111\ Id. (citing CFA Institute, Company Analysis, Forecasting, 
https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/Company-Analysis-Forecasting).
    \112\ Id. at 15.

---------------------------------------------------------------------------

[[Page 60468]]

    FINRA acknowledged that the proposed rule change would impose 
restrictions not present in the IA Marketing Rule, but it stated that 
the proposed rule change was an incremental amendment that ``would 
nevertheless be beneficial in furthering regulatory harmonization.'' 
\113\ With this in mind, FINRA also declined to amend the proposed rule 
change to permit the use of projected performance or targeted returns 
in communications with any investor or more narrowly to accredited 
investors, as requested by some commenters.\114\ FINRA stated that 
FINRA Rule 2210's 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.'' \115\ FINRA stated that it is 
appropriate to limit the scope of Projection-Eligible Investors to 
``specified, well-established categories of persons that have been 
previously determined to be financially sophisticated or able to engage 
expertise for purposes of the securities laws'' because they ``are most 
capable to understand the risks and limitations of using projected 
performance.'' \116\ More specifically, with respect to accredited 
investors, FINRA stated that the percentage of U.S. households that 
qualified as ``accredited investors'' has increased from approximately 
1.8% in 1983 to approximately 18.5% in 2022.\117\ Unlike the 
Projection-Eligible Investors covered by the proposed rule change, 
FINRA stated that accredited investors--as a class--``may not possess 
the same level of financial expertise to evaluate investments and to 
understand the assumptions and limitations associated with such 
projections and targeted returns (or have resources that provide them 
with access to financial professionals who possess this expertise).'' 
\118\ FINRA further stated that it ``anticipates monitoring how 
projections of performance and targeted returns are used for the 
limited categories of investors, as well as the SEC's experience with 
hypothetical performance in its recently adopted IA Marketing Rule, in 
considering whether to further expand the use of projections and 
targeted returns in the future.'' \119\
---------------------------------------------------------------------------

    \113\ Id. at 12.
    \114\ FINRA Response Letter I at 5-7.
    \115\ Id. at 5-6.
    \116\ Id. at 5.
    \117\ Id. at 7 n.28 (citing SEC Staff, Review of the 
``Accredited Investor'' Definition (Dec. 14, 2023), https://www.sec.gov/files/review-definition-accredited-investor-2023.pdf).
    \118\ Id. at 7.
    \119\ Id. at 8.
---------------------------------------------------------------------------

    However, in response to comments requesting expansion to include 
knowledgeable employees, FINRA expanded the proposed rule change to 
permit the communication of projected performance or targeted returns 
about Exempted Private Placements to knowledgeable employees.\120\ 
FINRA explained that knowledgeable employees, such as executive 
officers, directors, trustees, general partners, and advisory board 
members, ``typically have intimate knowledge of the operations of 
private funds, and thus are less likely not to understand the risks and 
limitations of projections or targeted returns associated with such 
funds.'' \121\ FINRA also concluded that this amendment would 
appropriately align the scope of Projection-Eligible Investors with the 
scope of investors permitted to invest in Section 3(c)(7) funds: both 
QPs and knowledgeable employees who are not QPs.\122\ FINRA explained 
that the proposed rule change's limitation to Projection-Eligible 
Investors would render it ``highly unlikely'' that a knowledgeable 
employee of a Section 3(c)(1) or 3(c)(5) fund would be eligible to 
receive projected performance or targeted returns.\123\ Although ``it 
is theoretically possible'' that a member firm could sell shares of a 
Section 3(c)(1) or 3(c)(5) fund only to QPs or knowledgeable employees, 
FINRA reasoned that such a circumstance would be unlikely because those 
funds are structured ``to allow sales to a wider range of investors.'' 
\124\ In limiting the use of projected performance or targeted returns 
to QPs and knowledgeable employees in communications that relate to 
offerings that are sold solely to these types of sophisticated 
investors, FINRA stated that it ``may be limiting the risk that 
communications that contain projections or targeted returns would be 
provided erroneously to less sophisticated investors, including retail 
investors, in contravention of the rule.'' \125\
---------------------------------------------------------------------------

    \120\ Id. at 6; see proposed Rule 2210(d)(1)(F)(iv)(a).
    \121\ FINRA Response Letter I at 6.
    \122\ See id. Section 3(c)(7) of the Investment Company Act 
excludes from the definition of ``investment company'' any issuer 
whose outstanding securities ``are owned exclusively by persons who, 
at the time of acquisition of such securities, are qualified 
purchasers.'' 15 U.S.C. 80a-3(c)(7)(A). For purposes of determining 
its eligibility for the exclusion provided by Section 3(c)(7), a 
private fund need not consider any securities beneficially owned by 
a knowledgeable employee. Investment Company Act Rule 3c-5 (17 CFR 
270.3c-5(b)). Notwithstanding this eligibility rule, the proposed 
rule change--as originally proposed--would not have permitted 
communications of projected performance or targeted returns to QPs 
about a Section 3(c)(7) fund if that fund was sold to both QPs and 
knowledgeable employees.
    \123\ FINRA Response Letter II at 6 n.17 (citing FINRA Response 
Letter I at n.30). Section 3(c)(5) of the Investment Company Act 
excludes from the definition of investment company ``[a]ny person 
who is not engaged in the business of issuing redeemable securities, 
face-amount certificates of the installment type or periodic payment 
plan certificates, and who is primarily engaged in one or more of 
the following businesses: (A) Purchasing or otherwise acquiring 
notes, drafts, acceptances, open accounts receivable, and other 
obligations representing part or all of the sales price of 
merchandise, insurance, and services; (B) making loans to 
manufacturers, wholesalers, and retailers of, and to prospective 
purchasers of, specified merchandise, insurance, and services; and 
(C) purchasing or otherwise acquiring mortgages and other liens on 
and interest in real estate.'' 15 U.S.C. 80a-3(c)(5). Unlike 
securities offerings made pursuant to Sections 3(c)(1) and 3(c)(7) 
which are required to be made privately, offerings pursuant to 
Section 3(c)(5) may be made either publicly (either listed on an 
exchange or unlisted) or privately.
    \124\ FINRA Response Letter II at 6 n.17 (citing FINRA Response 
Letter I at n.30).
    \125\ Id. at 7.
---------------------------------------------------------------------------

    One commenter offered ``no objection'' to Partial Amendment No. 
1.\126\
---------------------------------------------------------------------------

    \126\ Letter from Dorothy Donohue, Deputy General Counsel, and 
Matthew Thornton, Associate General Counsel, Investment Company 
Institute, dated Mar. 15, 2024, at 2, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-447019-1142723.pdf (``ICI Letter 
II'').
---------------------------------------------------------------------------

    The scope of the proposed rule change is reasonably limited to 
communications with Projection-Eligible Investors.\127\ Because FINRA 
Rule 2210's general prohibition of projected performance is designed to 
protect investors who may lack the expertise or resources to understand 
its risks and limitations, it is reasonable for FINRA to limit the 
proposed rule change to certain categories of investors. Moreover, the 
purpose of the proposed rule change is not furthering regulatory 
harmonization, but incrementally expanding FINRA Rule 2210's exceptions 
to the general prohibition against member firms' communicating 
projected performance or targeted returns.\128\
---------------------------------------------------------------------------

    \127\ FINRA Response Letter I at 8.
    \128\ FINRA Response Letter II at 7, 12.
---------------------------------------------------------------------------

    FINRA further reasonably determined to decline requests to extend 
the scope of the proposed rule change to include any accredited 
investor. A person may qualify as an accredited investor by falling 
within one of 13 separate qualification categories.\129\ These 
categories include a broader range of investors than QPs, including 
``[a]ny natural person whose individual net worth, or joint net worth 
with that person's spouse or spousal equivalent, exceeds $1,000,000'' 
\130\ and ``[a]ny natural person who had an individual income in excess 
of $200,000 in each of the two most recent years or joint

[[Page 60469]]

income with that person's spouse or spousal equivalent in excess of 
$300,000 in each of those years and has a reasonable expectation of 
reaching the same income level in the current year.'' \131\ SEC Staff 
indicated in 2023 that ``[l]imited information is available on the 
financial sophistication of accredited investors, which makes it 
challenging to assess the effectiveness of the definition's financial 
thresholds as a proxy for such sophistication.'' \132\ For these 
reasons, it is reasonable for FINRA to decline requests to extend the 
scope of the proposed rule change to include any accredited investor.
---------------------------------------------------------------------------

    \129\ 17 CFR 230.501(a).
    \130\ 17 CFR 230.501(a)(5).
    \131\ 17 CFR 230.501(a)(6); see also FINRA Response Letter I at 
7 n.25 (noting these categories of accredited investors).
    \132\ Review of the ``Accredited Investor'' Definition at 35, 
supra note 117. This is a report by the staff of the U.S. Securities 
and Exchange Commission. The Commission has expressed no view 
regarding the analysis, findings, or recommendations contained 
herein.
---------------------------------------------------------------------------

    The potential application of Regulation Best Interest does not 
justify an extension of the proposed rule change to accredited 
investors or, more broadly, to all investors. Regulation Best Interest 
would provide additional protections to retail customers where a member 
firm's communication of projected performance or targeted returns 
involves a recommendation. The proposed rule change, however, would 
permit the communication of projected performance or targeted returns 
to Projection-Eligible Investors in communications that do not involve 
recommendations (and thus do not trigger Regulation Best Interest's 
protections).\133\ Moreover, Regulation Best Interest and the proposed 
rule change serve different ends--Regulation Best Interest regulates 
the conduct of member firms and their associated persons in making 
recommendations to retail customers,\134\ whereas the proposed rule 
change is designed, among other things, to help equip Projection-
Eligible Investors with the information necessary to understand the 
risks and limitations of projected performance and targeted 
returns.\135\
---------------------------------------------------------------------------

    \133\ See FINRA Response Letter I at 12 (``FINRA Rule 2210 is 
broader and governs any communications that a member distributes or 
makes available to investors, regardless of whether the 
communications contain a recommendation that would also trigger Rule 
2111 or Regulation Best Interest.'' (emphasis in original)).
    \134\ See 17 CFR 240.15l-1.
    \135\ See Notice at 82488.
---------------------------------------------------------------------------

    For these same reasons, the proposed rule change reasonably expands 
the scope of Projection-Eligible Investors to cover knowledgeable 
employees receiving projected performance or targeted returns about 
Exempted Private Placements. As stated above, FINRA originally limited 
the proposed rule change to institutional communications and 
communications promoting Member Private Offerings and Exempted Private 
Placements that are sold only to QPs.\136\ However, so-called 
``knowledgeable employees,'' such as executive officers, directors, 
trustees, general partners, and advisory board members of private 
funds, should have--because of their positions--knowledge that would 
equip them to understand the risks and limitations of projected 
performance or targeted returns.\137\ Indeed, FINRA recognized that 
``knowledgeable employees typically have intimate knowledge of the 
operations of private funds, and thus are less likely'' to 
misunderstand ``the risk and limitations of projections or targeted 
returns associated with such funds.'' \138\ Based on the nature of 
knowledgeable employees' positions, Amendment No. 1's extension of 
Projection-Eligible Investors to include such knowledgeable employees 
is reasonable and may also limit the risk of inadvertent disclosure of 
projections or targeted returns to investors who may lack the resources 
to understand the risks limitations of such projection information.
---------------------------------------------------------------------------

    \136\ FINRA Response Letter I at 5-6.
    \137\ See Notice at 82483; FINRA Response Letter I at 7; 
Amendment No. 1 at 5 (``FINRA believes that knowledgeable employees 
typically have intimate knowledge of the operations of private 
funds, and thus are less likely not to understand the risks and 
limitations of projections or targeted returns associated with such 
funds.'').
    \138\ FINRA Response Letter I at 6.
---------------------------------------------------------------------------

2. Scope of Permissible Investments
    The proposed rule change would permit the communication of 
projected performance and targeted returns to QPs so long as the 
communication promotes or recommends a Member Private Offering or an 
Exempted Private Placement.\139\ The proposed rule change also would 
permit the communication of projected performance and targeted returns 
to knowledgeable employees so long as the communication promotes or 
recommends an Exempted Private Placement.\140\ Member Private Offerings 
are private placements sold solely to QPs,\141\ and Exempted Private 
Placements are private placements sold solely to QPs or knowledgeable 
employees.\142\
---------------------------------------------------------------------------

    \139\ Proposed Rule 2210(d)(1)(F)(iv)(a). As noted above, as 
originally proposed, the proposed rule change would have permitted 
the communication of projected performance and targeted returns to 
QPs so long as the communication promotes or recommends a Member 
Private Offering or a private placement that is exempt from the 
requirements of FINRA Rule 5123 pursuant to Rule 5123(b)(1)(B) (that 
is, a private placement sold solely to QPs). As a result of 
Amendment No. 1, the proposed rule change would permit such 
communications to QPs so long as the communication promotes or 
recommends: (1) a Member Private Offering; or (2) a private 
placement that is exempt from the requirements of FINRA Rule 5123 
pursuant to FINRA Rules 5123(b)(1)(B) or 5123(b)(1)(H) (as noted, 
referred to herein as an ``Exempted Private Placement'').
    \140\ Proposed Rule 2210(d)(1)(F)(iv)(a).
    \141\ Id. (``that promotes or recommends a Member Private 
Offering that is exempt from the requirements of Rule 5122 pursuant 
to Rule 5122(c)(1)(B)''); FINRA Rule 5122(c)(1)(B) (exempting 
private placements ``sold solely to . . . qualified purchasers'').
    \142\ Proposed Rule 2210(d)(1)(F)(iv)(a) (``that promotes or 
recommends a private placement that is exempt from the requirements 
of Rule 5123 pursuant to Rule 5123(b)(1)(B) or Rule 5123(b)(1)(H), 
respectively.''); FINRA Rule 5123(b)(1)(B) (exempting ``offerings 
sold by the member or person associated with the member solely to . 
. . qualified purchasers''); 5123(b)(1)(H) (exempting ``offerings 
sold by the member or person associated with the member solely to . 
. . knowledgeable employees'').
---------------------------------------------------------------------------

    Three commenters stated that the proposed rule change should permit 
the communication of projected performance and targeted returns to QPs, 
regardless of the type of investment.\143\ For example, one of these 
commenters asked that the proposed rule change be ``product agnostic,'' 
allowing QPs to receive projected performance and targeted returns for 
private funds that are exempt from the definition of investment company 
under Investment Company Act Sections 3(c)(1) and 3(c)(5) (and other 
non-3(c)(7) funds) even where those funds are available to non-
QPs.\144\ This commenter explained that FINRA could mitigate the risk 
of indirect distribution of projected performance or targeted returns 
to non-QP investors by labeling covered materials as ``for QPs only'' 
or instructing QP recipients not to disseminate the material to non-
QPs.\145\ Two other commenters stated that QP-status alone--regardless 
of the type of investment--should be sufficient for eligibility to 
receive projected performance and targeted returns.\146\
---------------------------------------------------------------------------

    \143\ See SIFMA Letter at 3; ICI Letter I at 6-7; ABA Letter at 
3.
    \144\ SIFMA Letter at 3.
    \145\ Id.
    \146\ ICI Letter I at 6-7 (``If QP status is meant to be a proxy 
for financial sophistication and resources, it makes no sense to 
prohibit QPs from receiving performance projections or targets for 
more highly regulated investments available to retail investors 
(e.g., mutual funds and ETFs) when they would be permitted for 
private placements.''); ABA Letter at 3 (``[T]he Committee believes 
that QPs can generally be expected to have the requisite degree of 
sophistication and resources available to them to benefit, rather 
than be susceptible to harm, from receiving targeted returns and 
projections. The Committee believes that this is the case regardless 
of whether the relevant broker-dealer communication is in relation 
to an offering in which only QPs can invest (e.g., a 3(c)(7) Fund 
offering) or an offering in which non-QPs can also invest (e.g., a 
fund offering that is exempt from registration pursuant to Section 
3(c)(1) of the 1940 Act or a registered offering).'').

---------------------------------------------------------------------------

[[Page 60470]]

    In response, FINRA declined to amend the proposed rule change to 
permit communication of projected performance or targeted returns of 
any type of investment to QPs.\147\ FINRA explained that--by limiting 
the use of projected performance and targeted returns to certain 
private placements available only to Projection-Eligible Investors--it 
may limit the risk that the performance information erroneously reaches 
``less sophisticated investors, including retail investors, in 
contravention of the rule.'' \148\
---------------------------------------------------------------------------

    \147\ FINRA Response Letter I at 8.
    \148\ FINRA Response Letter II at 7.
---------------------------------------------------------------------------

    The proposed rule change reasonably limits the scope of investments 
eligible for projected performance and targeted returns in 
communications with QPs and knowledgeable employees. As discussed 
above, the proposed rule change is intended to restrict the audience of 
communications including such performance information to certain 
categories of investors who FINRA believes have the expertise or 
resources to understand their risks and limitations. This limitation in 
scope is reasonably designed to further that goal. Because 
communications to QPs that include projected performance or targeted 
returns would only relate to certain private placements made available 
only to QPs and knowledgeable employees, the proposed rule change may 
reduce the risk that the inadvertent disclosure of such communications 
would harm a wider range of investors. In this way, the proposed rule 
change is reasonably designed to protect investors and the public 
interest.
    Furthermore, the proposed rule change incrementally expands the 
exceptions to the general prohibition against member firms' 
communicating projected performance or targeted returns to investors. 
It builds upon FINRA's regulatory experience with rules addressing 
communications with the public and registration exemptions.
3. Scope of Performance Information
    The proposed rule change would prohibit member firms from basing 
projected performance or a targeted return upon: (1) hypothetical, 
back-tested performance (herein, ``back-tested performance''); or (2) 
the prior performance of a portfolio or model that was created solely 
for the purpose of establishing a track record (herein, ``prior 
performance of a seed account'').\149\
---------------------------------------------------------------------------

    \149\ Proposed Rule 2210.01(b). The proposed rule change leaves 
undisturbed pre-existing guidance on the use of extracted 
performance, which constitutes performance results of a subset of 
investments extracted from a portfolio. FINRA, Frequently Asked 
Questions About Advertising Regulation, FAQ D.6.2, D.6.3 (Sept. 30, 
2021), https://www.finra.org/rules-guidance/guidance/faqs/advertising-regulation. One commenter asked FINRA to rescind and 
replace this guidance, asserting that it is inconsistent with the 
Commission's IA Marketing Rule. Dechert Letter at 6-7. In response, 
FINRA stated that the proposed rule change does not address 
extracted performance, and it declined to modify pre-existing 
guidance that is peripheral to the proposed rule change. FINRA 
Response Letter II at 10. The Commission does not address this 
issue, as it agrees that it is outside the scope of the proposed 
rule change.
---------------------------------------------------------------------------

    Two commenters requested that FINRA permit the use of back-tested 
performance or the prior performance of a seed account to generate 
performance projections or targeted returns, stating that not doing so 
would limit the utility of the proposed rule change.\150\ Both 
commenters criticized FINRA's divergence from the IA Marketing Rule, 
asserting that the IA Marketing Rule permits the use of such 
information. To address any concern that a member firm would 
misrepresent hypothetical, back-tested performance as actual 
performance, one of these commenters recommended that FINRA require 
``prominent identification of targets and projections based on back[-
]tests and disclosures regarding the reliability of such information.'' 
\151\
---------------------------------------------------------------------------

    \150\ Dechert Letter at 2-4; Monument Group Letter II at 3.
    \151\ Dechert Letter at 4.
---------------------------------------------------------------------------

    In response, FINRA declined to permit member firms to base 
projected performance or targeted returns upon back-tested performance 
or the prior performance of a seed account.\152\ FINRA expressed its 
belief that they ``are not sound bases'' for projected performance or 
targeted returns.\153\ In addition, FINRA stated that, based on its 
experience, ``back[-]tested performance may pose an increased risk for 
misleading investors, as it allows hypothetical investment decisions to 
be optimized by hindsight.'' \154\ Accordingly, FINRA has interpreted 
FINRA Rule 2210(d) to prohibit the presentation of hypothetical back-
tested performance in communications used with retail investors.\155\ 
This existing interpretation remains unchanged, and FINRA stated that 
it ``sees little difference between allowing members to use back[-
]tested performance as a basis for a projection or targeted return and 
allowing members to present back[-]tested performance on its own.'' 
\156\
---------------------------------------------------------------------------

    \152\ FINRA Response Letter I at 13-14.
    \153\ FINRA Response Letter II at 10 (citing Joel M. Dickson, 
Sachin Padmawar & Sarah Hammer, Joined at the hip: ETF and index 
development, Vanguard Research, at 6 (July 2012); Carl Ackerman & 
Tim Loughran, Mutual Fund Incubation and the Role of the Securities 
and Exchange Commission, 70 Journal of Business Ethics 33-37 
(2007)).
    \154\ FINRA Response Letter I at 14.
    \155\ Id. at 13 n.48; FINRA, Interpretive Letter to Meredith F. 
Henning, Foreside (Jan. 31, 2019), https://www.finra.org/rules-guidance/guidance/interpretive-letters/interpretive-letter-meredith-f-henning-foreside; Interpretive Letter to Bradley J. Swenson, ALPS 
Distributors, Inc. (Apr. 22, 2013), https://www.finra.org/rules-guidance/guidance/interpretive-letters/bradley-j-swenson-alps-distributors-inc.
    \156\ FINRA Response Letter I at 13.
---------------------------------------------------------------------------

    With respect to comments requesting alignment with the IA Marketing 
Rule's treatment of back-tested performance, FINRA stated that the 
proposed rule change was not intended to be identical to that 
rule.\157\ FINRA recognized that commenters ``continue to advocate for 
greater regulatory harmony'' with the IA Marketing Rule, but it stated 
that the proposed rule change ``is nevertheless a step towards 
regulatory harmonization.'' \158\
---------------------------------------------------------------------------

    \157\ Id. at 14.
    \158\ FINRA Response Letter II at 13.
---------------------------------------------------------------------------

    The proposed rule change reasonably maintains the prohibition on 
the use of back-tested performance and the prior performance of a seed 
account in projected performance or targeted returns. Citing studies of 
back-tested performance and the prior performance of seed 
accounts,\159\ FINRA explained its belief that such information is not 
a sound basis for projected performance or targeted returns under the 
proposed rule change. This is a reasonable interpretation that is 
consistent with FINRA's position that the presentation of hypothetical 
back-tested performance may pose a heightened risk of misleading 
brokerage customers and would violate the content standards in FINRA 
Rule 2210(d).\160\ For these reasons, FINRA reasonably chose to 
continue the prohibition on the use of back-tested performance and the 
prior performance of a seed account in projected performance or 
targeted returns.
---------------------------------------------------------------------------

    \159\ See supra note 153.
    \160\ See FINRA Response Letter II at 10.
---------------------------------------------------------------------------

B. Written Policies and Procedures

    The proposed rule change would require any member firm that 
communicates projected performance or targeted returns 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.'' \161\
---------------------------------------------------------------------------

    \161\ Proposed Rule 2210(d)(1)(F)(iv)(b).

---------------------------------------------------------------------------

[[Page 60471]]

    One commenter asked FINRA to clarify that broker-dealers ``can 
consider the category of investor, rather than an investor's individual 
characteristics, when ensuring that the communication is relevant to 
the investor.'' \162\ This commenter explained that such an 
interpretation would ``better align'' this obligation with that of the 
IA Marketing Rule, which requires that the communication be relevant to 
the intended audience, not the individual investor.\163\
---------------------------------------------------------------------------

    \162\ SIFMA Letter at 3-4.
    \163\ Id. at 3.
---------------------------------------------------------------------------

    Other commenters asked FINRA to eliminate or modify this proposed 
condition, asserting that it is unnecessary or redundant.\164\ Two 
commenters stated that the separate determination that the performance 
is relevant to the intended audience is redundant because the proposed 
rule change--as originally proposed--already would limit the 
communication of projected performance and targeted returns to 
institutional investors and QPs.\165\ In addition, two commenters 
stated that member firms' independent obligations under FINRA Rule 
2111(b) \166\ and Regulation Best Interest also render this condition 
redundant.\167\
---------------------------------------------------------------------------

    \164\ See Monument Group Letter II at 5; Dechert Letter at 4-5; 
ABA Letter at 4-5. In the alternative, the ABA's Federal Regulation 
of Securities Committee requested that FINRA issue guidance ``that 
explains what broker-dealers acting as placement agents should do in 
circumstances where they determine that projections or targeted 
returns are appropriate for some potential investors in the 
prescribed nonpublic offerings, but not others, including whether 
broker-dealers should limit the use of projection and targeted 
return information to prospective fund investors who pass the 
independent suitability requirements of FINRA Rule 2111 and 
Regulation Best Interest.'' ABA Letter at 4-5.
    \165\ Dechert Letter at 4-5 (acknowledging that the separate 
requirement ``that FINRA members develop policies and procedures 
that are reasonably designed to ensure compliance with [FINRA] Rule 
2210 . . . is reasonable''); ABA Letter at 4-5.
    \166\ FINRA Rule 2111(b) addresses a member firm's ``customer-
specific suitability obligation for an institutional account.''
    \167\ ABA Letter at 4; see Monument Group Letter II at 5. 
Monument Group indicated that proposed Rule 2210(d)(1)(F)(iv)(b) 
would impose an affirmative obligation upon any member firm 
communicating projected performance or targeted returns to a 
Projection-Eligible Investor ``to collect information concerning the 
financial objectives/financial situation of institutional 
investors--solely for the purpose of providing marketing material 
containing investment projections and targets.'' Monument Group 
Letter II at 5 n.3. In response, FINRA explained that the proposed 
rule change would not impose an ``express document or data 
collection requirement and would not require firms to assess 
individual investors'' under suitability or Regulation Best Interest 
standards. FINRA Response Letter II at 9.
---------------------------------------------------------------------------

    In response, FINRA declined to amend or eliminate this provision. 
FINRA explained that the provision is important, as it would help to 
ensure that member firms focus on the relevance of their communications 
to their intended audience, and not simply whether or not the audience 
is a Projection-Eligible Investor.\168\ In addition, FINRA stated that 
FINRA Rules 2210 and 2111 are ``distinct rules with different scopes 
and objectives,'' and it stated FINRA Rule 2111 and Regulation Best 
Interest only apply when a broker-dealer makes a recommendation of a 
security or investment strategy.\169\ FINRA Rule 2210, on the other 
hand, ``is broader and governs any communications that a member 
distributes or makes available to retail customers, regardless of 
whether the communications contain a recommendation that would also 
trigger [FINRA] Rule 2111 or Regulation Best Interest.'' \170\ 
Therefore, in response to requests for guidance on whether the proposed 
rule change would require member firms to limit the use of performance 
projections and targeted returns to prospective fund investors who pass 
the suitability requirements of FINRA Rule 2111 or the standards set 
forth in Regulation Best Interest, FINRA stated that the proposed rule 
change would not require member firms to assess their audience under a 
suitability or Regulation Best Interest standard to determine whether 
the projected performance or targeted return is relevant to the 
audience's likely financial situation and investment objectives.\171\
---------------------------------------------------------------------------

    \168\ FINRA Response Letter II at 9.
    \169\ FINRA Response Letter I at 12.
    \170\ Id.
    \171\ FINRA Response Letter II at 9.
---------------------------------------------------------------------------

    However, FINRA clarified that it would interpret this condition 
``consistently with the substantially similar provision in the IA 
Marketing Rule.'' \172\ Because the proposed rule change requires the 
adoption and implementation of 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, FINRA explained that a member firm ``is 
not required to know the actual financial situation or investment 
objectives of each investor that receives the communication.'' \173\ 
Instead, the proposed rule change ``permits members to comply with this 
condition by grouping investors into categories or types.'' \174\
---------------------------------------------------------------------------

    \172\ See FINRA Response Letter I at 12-13.
    \173\ Id. at 13.
    \174\ Id.
---------------------------------------------------------------------------

    FINRA reasonably determined to require member firms communicating 
projected performance or targeted returns to Projection-Eligible 
Investors 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.'' \175\ The adoption and 
implementation of such written policies and procedures would help 
ensure that member firms focus not only on whether the intended 
audience is a Projection-Eligible Investor but also that the 
communication is relevant to that audience's likely financial situation 
and investment objectives. FINRA also reasonably determined to permit 
member firms to comply with this obligation by relying upon the member 
firms' past experiences with specific investors or types of investors 
to group them into categories of investors, as appropriate.\176\ 
Moreover, this proposed condition is not redundant of preexisting 
obligations under FINRA Rule 2111 and Regulation Best Interest, as the 
proposed rule change applies more broadly to any communications of 
projected performance or targeted returns, whether or not they contain 
recommendations.\177\ Finally, FINRA Rule 2111, Regulation Best 
Interest, and the proposed rule change serve different ends. FINRA Rule 
2111 and Regulation Best Interest regulate the conduct of member firms 
and their associated persons in making recommendations to retail 
investors, whereas this provision of the proposed rule change would 
require policies and procedures reasonably designed to help ensure that 
the communication is relevant to the likely financial situation and 
investment objectives of the intended audience. Consequently, as FINRA 
has clarified, the proposed rule change would not require a separate 
assessment under the suitability or Regulation Best Interest standard.
---------------------------------------------------------------------------

    \175\ Proposed Rule 2210(d)(1)(F)(iv)(b).
    \176\ See Notice at 82484; FINRA Response Letter I at 13.
    \177\ See supra Part III(A)(1).
---------------------------------------------------------------------------

C. Reasonable Basis Requirement

    As stated above, the proposed rule change would require any member 
firm that communicates projected performance or targeted returns to 
Projection-Eligible Investors to have ``a reasonable basis for the 
criteria used and assumptions made in calculating the projected 
performance or targeted

[[Page 60472]]

return[ ] and retain[ ] written records supporting the basis for such 
criteria and assumptions.'' \178\ The proposed rule change states that 
``members should consider multiple factors, with no one factor being 
determinative,'' in forming a reasonable basis for the criteria used 
and assumptions made in calculating projected performance or a targeted 
return.\179\ Proposed Supplementary Material .01 includes a non-
exhaustive list of factors that member firms may consider in forming a 
reasonable basis.\180\
---------------------------------------------------------------------------

    \178\ Proposed Rule 2210(d)(1)(F)(iv)(c).
    \179\ Proposed Rule 2210.01(a).
    \180\ Id.
---------------------------------------------------------------------------

    One commenter stressed the importance of this provision--and 
compliance with it--to FINRA's stated goal of helping to ensure that 
the proposed rule change would not increase risk to retail 
investors.\181\ A second commenter suggested removal of this provision 
to align with the IA Marketing Rule, ``which imposes no such 
requirement.'' \182\
---------------------------------------------------------------------------

    \181\ PIABA Letter at 2 (``PIABA strongly believes the `sound 
basis' requirement should be strictly adhered to and not just be 
window dressing to further a more liberal standard for 
communications.'').
    \182\ SIFMA Letter at 2.
---------------------------------------------------------------------------

    Commenters also identified compliance challenges associated with a 
member firm's use of third-party information to comply with the 
reasonable basis requirement.\183\ Specifically, one commenter asked 
whether the proposed rule change would require member firms to make 
their own reasonable-basis determinations about third-party 
projections.\184\ Other commenters stated that member firms may 
struggle to comply with this condition--especially its document-
retention requirement--as it relates to third-party projections or 
targeted returns because firms are usually uninvolved in their creation 
and lack access to the underlying materials.\185\ One of these 
commenters also questioned the investor-protection benefit associated 
with a member firm's retention of third-party records about a third-
party projection or targeted return.\186\
---------------------------------------------------------------------------

    \183\ See Monument Group Letter II at 4; ICI Letter I at 7; 
SIFMA Letter at 3; Dechert Letter at 7.
    \184\ Monument Group Letter II at 4.
    \185\ ICI Letter I at 7; SIFMA Letter at 3; Dechert Letter at 7; 
Monument Group Letter II at 4.
    \186\ Dechert Letter at 7.
---------------------------------------------------------------------------

    In light of these compliance challenges, one commenter asked FINRA 
to clarify (if it declines to remove the condition) what it expects 
with respect to third-party performance projections and targeted 
returns.\187\ This commenter stated that member firms should be able to 
``rely upon the certification or representations of the sponsor, 
manager[,] or party calculating this information (who has far greater 
access to information than the broker-dealer does), absent information 
to the contrary.'' \188\ Another commenter suggested further 
streamlining of the condition to ``avoid potentially overlapping, 
ambiguous, and onerous requirements.'' \189\
---------------------------------------------------------------------------

    \187\ SIFMA Letter at 3.
    \188\ Id.
    \189\ ICI Letter I at 7 (``For instance, if registered fund 
materials are created by the fund (or its distributor) and a third-
party broker wishes to use them, it could be difficult for the 
third-party broker to establish that it ``has a reasonable basis for 
the criteria used and assumptions made in calculating the projected 
performance or targeted return'' and ``retain . . . written records 
supporting the basis for such criteria and assumptions.'').
---------------------------------------------------------------------------

    As an alternative to FINRA's proposed condition, another commenter 
recommended that member firms be required to establish a reasonable 
basis to believe that the criteria used and assumptions made in 
calculating targeted returns or projected performance are appropriate 
and not misleading, and to retain records supporting that 
determination.\190\ This commenter explained that this alternative 
approach would better address the use of third-party projections, as it 
would require the retention of records demonstrating the member firms' 
testing processes.\191\
---------------------------------------------------------------------------

    \190\ See Dechert Letter at 7-8.
    \191\ Id. at 8.
---------------------------------------------------------------------------

    One commenter recognized the potential utility of the factors 
enumerated in the proposed Supplementary Material in making a 
reasonable basis determination, but asked that FINRA clarify that the 
consideration of any such factors would depend on the facts and 
circumstances.\192\ Another commenter, however, stated that the factors 
could ``create potentially overlapping, ambiguous[,] and onerous 
requirements'' that might dissuade member firms from using projected 
performance or targeted returns.\193\ Another commenter asked FINRA to 
confirm that a member firm could include projected performance or 
provide a targeted return relevant to the time horizon of an 
investment.\194\
---------------------------------------------------------------------------

    \192\ ICI Letter I at 7.
    \193\ Monument Group Letter II at 4. In a subsequent letter, 
Monument Group stated that FINRA Rule 2210 already has general 
content standards, and proposed Rule 2210.01(a)'s guidelines ``would 
overlap with those of private fund managers.'' See letter from Molly 
Diggins, Partner & General Counsel, Monument Group, Inc., dated Mar. 
29, 2024, at 2-3, https://www.sec.gov/comments/sr-finra-2023-016/srfinra2023016-452579-1160882.pdf (``Monument Group Letter III'').
    \194\ See SIFMA Letter at 4.
---------------------------------------------------------------------------

    In response, FINRA declined to modify the proposed rule change to 
eliminate or otherwise amend a member firm's obligation to form a 
reasonable basis for either its own or a third-party generated 
projected performance or targeted returns.\195\ Absent this condition, 
FINRA stated that projected performance or targeted returns ``could be 
based on guesswork, dubious presumptions, and wildly inaccurate or 
inherently misleading reasoning.'' \196\ This requirement, FINRA 
stated, would help to ensure that member firms act ``with reasonable 
diligence and good faith'' when communicating performance information 
pursuant to this proposed rule change.\197\
---------------------------------------------------------------------------

    \195\ FINRA Response Letter I at 10-11.
    \196\ FINRA Response Letter II at 4.
    \197\ Id.
---------------------------------------------------------------------------

    FINRA stated that the proposed rule change ``does not prescribe the 
manner in which the member forms its reasonable basis'' and member 
firms retain the ``flexibility to determine what is reasonable based 
upon the particular facts and circumstances.'' \198\ Further, FINRA 
stated that the factors it identified in the proposed Supplementary 
Material ``are meant to be a helpful guide'' and ``not all factors may 
be relevant'' in every instance. FINRA further stated that it would 
monitor the implementation of this proposed condition and issue 
guidance, as necessary, ``once FINRA and members have experience with 
these factors over time.''
---------------------------------------------------------------------------

    \198\ FINRA Response Letter I at 10.
---------------------------------------------------------------------------

    With regard to concerns about its interactions with other 
requirements, FINRA stated the condition's consistency with other 
requirements.\199\ For example, FINRA Rules 2210 and 2241 (Research 
Analysts and Research Reports) require price targets in research 
reports to have a reasonable basis.\200\ In addition, FINRA stated that 
SEC rules require issuers to have a good faith and reasonable basis for 
performance projections contained in certain documents,\201\ and that 
the IA

[[Page 60473]]

Marketing Rule's general prohibitions would have the effect of 
prohibiting the advertisement of hypothetical performance for which the 
adviser lacks a reasonable basis.\202\
---------------------------------------------------------------------------

    \199\ Id. (indicating that the reasonable-basis requirement 
``follows well-established precedents'').
    \200\ Id.
    \201\ Id. (citing Securities Act Regulation S-K, 17 CFR 
229.10(b)). Regulation S-K's ``policy on projections'' provides 
guidelines on the factors to be considered in formulating and 
disclosing certain projections. It states ``that management must 
have the option to present . . . its good faith assessment of a 
registrant's future performance'' in documents specified in 
Securities Act Rule 175 (17 CFR 230.175) and Exchange Act Rule 3b-6 
(17 CFR 240.3b-6)). 17 CFR 229.10(b), (b)(1). Any such projection, 
however, must have a reasonable basis. 17 CFR 229.10(b)(1). The 
documents specified in this policy include documents filed with the 
Commission, Part I of quarterly reports on Form 10-Q, and certain 
annual reports to security holders. See 17 CFR 230.175(b)(1); 17 CFR 
240.3b-6(b)(1).
    \202\ FINRA Response Letter I at 10.
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    Moreover, FINRA explained that FINRA Rule 2210's content standards 
apply to all member communications ``distributed or made available'' to 
investors, whether or not the firm ``created the communication.'' \203\ 
For that reason, FINRA Rule 2210 and the proposed rule change would 
apply to a member firm's communication of third-party generated 
projected performance or targeted returns.\204\ Accordingly, FINRA 
explained that a member wishing to use a third-party projection or 
targeted return would need to ``obtain enough information to form a 
reasonable basis as to the issuer's assumptions and the underlying 
criteria.'' \205\ If the member firm is unable to secure that 
information, FINRA stated ``it should refrain from using the 
communications.'' \206\ FINRA concluded that modifying this condition 
for third-party projections would ``increase[ ] the risk that 
``unreasonable, issuer-created projections would be distributed to 
investors, which is contrary to the public interest.'' \207\
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    \203\ Id. at 11.
    \204\ Id.
    \205\ Id. at 10-11.
    \206\ Id. at 11. FINRA stated that the proposed rule change 
would not require member firms to ``obtain trade secrets from third 
parties,'' but it would require member firms to consider whether the 
information at its disposal is sufficient to form a reasonable basis 
for the projected performance or targeted returns. FINRA Response 
Letter II at 4; see FINRA Response Letter I at 10-11.
    \207\ FINRA Response Letter I at 11.
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    Finally, with respect to the comment requesting whether a member 
could provide a performance projection or targeted return based on a 
time horizon of investment, FINRA stated that this determination will 
always depend on the facts and circumstances of the projection or 
targeted return, which may or may not be consistent with an 
investment's time horizon, or in the case of a debt security, its 
maturity date.\208\ In addition, FINRA explained that an investment's 
time horizon may be an unreliable criterion for calculating a 
projection or targeted return of the investment because it is often 
uncertain at the time a security is issued and may change due to 
subsequent events.\209\ FINRA also explained that ``a time horizon 
could be of such a length that it would be unreasonable'' to project 
performance or provide a targeted return for that same period of 
time.\210\ For these reasons, FINRA stated that there should not be an 
exception from the reasonable-basis requirement ``based solely on an 
investment's estimated time horizon.'' \211\
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    \208\ FINRA Response Letter II at 9.
    \209\ FINRA Response Letter I at 16.
    \210\ FINRA Response Letter II at 9.
    \211\ See FINRA Response Letter I at 16.
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    The proposed rule change reasonably requires member firms to have a 
reasonable basis for the criteria used and assumptions made and to 
retain relevant records. Projected performance and targeted returns 
about private placements often rely on unique criteria and assumptions, 
including the time horizon of the investment.\212\ Under these 
circumstances, the proposed rule change reasonably requires member 
firms to have a reasonable basis for such projections and returns; the 
substance and reasonableness of this determination will depend on the 
facts and circumstances of the projection or targeted return. Further, 
in response to concerns that the factors identified in the proposed 
Supplementary Material would create onerous, ambiguous, and overlapping 
requirements, the proposed rule change does not mandate the 
consideration of each factor in every instance, and it only indicates 
that a member firm should consider multiple factors in its reasonable-
basis determination. In light of this flexibility, the proposed rule 
change would aid member firms in identifying relevant factors for 
consideration in making the reasonable-basis determination, which 
should assist firms in compliance.
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    \212\ SIFMA Letter at 4; FINRA Response Letter I at 16.
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    To eliminate this reasonable basis requirement would allow a member 
firm to disseminate information without forming a view as to its 
content. This result would be inconsistent with FINRA Rule 2210's 
general content standards, which apply broadly to any of a firm's 
communications with investors, regardless of the source of information 
in the communication, and would risk--as FINRA states--communications 
of projected performance or targeted returns ``based on guesswork, 
dubious presumptions, and wildly inaccurate or inherently misleading 
reasoning.'' \213\
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    \213\ FINRA Response Letter II at 4. Moreover, as FINRA notes, 
the IA Marketing Rule's general prohibitions would prohibit the 
advertisement of hypothetical performance for which the adviser 
lacks a reasonable basis, even if that rule lacks a requirement 
identical to that of the proposed rule change. FINRA Response Letter 
I at 10.
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    With regard to third-party information, the reasonable-basis 
condition also contemplates a principles-based approach and does not 
mandate a specific method for establishing that the member firm has a 
reasonable basis for the criteria used and assumptions made regarding 
such information. Indeed, as FINRA emphasizes, member firms retain the 
flexibility to determine whether, depending on the facts and 
circumstances, they have received sufficient information from a third-
party to conclude that its projected performance or targeted returns 
has a reasonable basis; this flexibility should alleviate some of the 
compliance challenges identified by commenters regarding third-party 
information.\214\ By extending the reasonable basis obligation to a 
member firm's use of third-party projected performance or targeted 
returns, FINRA has reasonably sought to extend the proposed rule 
change's investor protection benefits to all communications with 
investors, regardless of the source of information, and to ensure 
consistency with FINRA Rule 2210, whose general content standards apply 
broadly to any of a firm's communications with investors, regardless of 
the source of information in the communication.
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    \214\ Id. at 10-11.
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    In support of this principles-based approach, the proposed rule 
change requires member firms to ``retain[ ] written records 
supporting'' their reasonable-basis determination and does not per se 
mandate that the firm obtain and maintain third-party records.\215\ 
Although the records supporting a member firm's determination may, in 
some circumstances, be third-party records, member firms retain the 
flexibility to determine whether the circumstances of a particular 
performance projection or targeted return would require the acquisition 
and retention of third-party records to support its determination. As a 
result, the proposed rule change's document-retention provision 
reasonably helps to ensure that firms substantiate their reasonable 
basis determinations while simultaneously providing them with the 
flexibility to determine what the circumstances of a particular case 
would require. In this way, the proposed rule change is reasonably 
designed to prevent fraudulent and manipulative acts and practices.
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    \215\ Proposed Rule 2210(d)(1)(F)(iv)(c); see FINRA Response 
Letter II at 4 (``there is no requirement to obtain trade secrets 
from third parties'').
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D. Disclosure Requirements

    The proposed rule change would impose three disclosure-related

[[Page 60474]]

requirements on any member firm communicating projected performance or 
targeted returns to a Projection-Eligible Investor. First, a 
communication would be required 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.'' \216\ Second, member firms would be required to 
``provide[ ] sufficient information to enable the investor to 
understand . . . 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.'' \217\ Third, member firms would be required to ``provide[ ] 
sufficient information to enable the 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.'' \218\
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    \216\ Proposed Rule 2210(d)(1)(F)(iv)(d).
    \217\ Proposed Rule 2210(d)(1)(F)(iv)(e).
    \218\ Id.
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    No commenter offered a substantive comment related to these 
disclosure provisions.
    The proposed rule change's disclosure provisions are reasonably 
designed to provide investors with information that will help them to 
understand the assumptions, methodologies, risks, and limitations 
associated with the projected performance or targeted returns.\219\ The 
disclosures would help to inform Projection-Eligible Investors that 
projected performance and targeted returns are hypothetical in nature. 
The disclosures also provide information to Projection-Eligible 
Investors regarding the criteria and assumptions associated with the 
calculation of the projected performance or targeted returns. The 
disclosures would emphasize to Projection-Eligible Investors that such 
information has inherent risks and limitations. In sum, the disclosure-
related provisions are reasonably designed to help Projection-Eligible 
Investors understand the risks and limitations of relying on projected 
performance or targeted returns.
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    \219\ See Notice at 82485 (absent the disclosure of criteria and 
assumptions, ``it is more likely that a projection or targeted 
return would mislead a potential investor''; disclosures about risks 
and limitations help ensure that investors ``do not unreasonably 
rely on a projection or targeted return given its uncertainty and 
risks'').
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IV. 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.\220\
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    \220\ 15 U.S.C. 78o-3(b)(6).
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    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \221\ that the proposed rule change (SR-FINRA-2023-016), 
as modified by Amendment No. 1, be, and hereby is, approved.
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    \221\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\222\
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    \222\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-16304 Filed 7-24-24; 8:45 am]
BILLING CODE 8011-01-P