Commentary October 09, 2021 at 07:44 AM Share & Print
What You Need to Know
- Firms can post videos without filing them with FINRA if they don’t recommend or promote a product or service of the firm.
- BDs can use hyperlinks to provide further information, as long as the original communication is fair and balanced.
- A broker-dealer may not include in a private placement communication a target return.
The Financial Industry Regulatory Authority has updated its frequently asked questions guidance concerning its advertising regulation to address videos posted online as well as hyperlinks in electronic communications as well as “targeted return” projections.
FINRA also explains how its ad rule is consistent with the Securities and Exchange Commission’s new marketing rule.
The broker-dealer self-regulator explains that a firm is not required to have a principal approve prior to use or file with FINRA a video posted online “that does not recommend or promote a product or service of the firm, provided that the firm supervises and reviews such videos.”
Another question probes whether broker-dealers are allowed to include in electronic communications hyperlinks to content that provides additional information related to the communication in a fair and balanced manner.
Yes, according to FINRA.
FINRA explains that “Rule 2210(d)(1)(A) requires firm communications, among other things, to be fair, balanced, and not to omit any material fact or qualification if the omission would cause the communication to be misleading.
“Consistent with these standards, a firm may rely on a hyperlink to provide additional information or explanations so long as the initial electronic communication that includes the link is itself fair and balanced,” it stated.
For instance, “a non-misleading electronic communication about opportunities in emerging markets could link to an additional explanation about the basis for a claim in the initial post as well as the risks associated with emerging markets investments,” FINRA said.
However, FINRA added, “a firm may not rely on linked explanations or disclosures to correct a communication that is, on its face false, misleading, exaggerated or promissory.”
The link itself, or the text within the communication that introduces the link, should state what will be provided through the link, FINRA said.
“Historically, FINRA has interpreted the Communications with the Public Rules to permit hyperlinks to explanations and further information in a variety of situations,” FINRA said.
For example, FINRA Rule 2210 “permits firms to use hyperlinks within banner advertisements to generate interest in a topic and provide more information through hyperlinks, and FINRA has interpreted FINRA Rule 2210 to permit firms to link to required information about testimonials.”
This approach, FINRA stated, is also consistent with the treatment of hyperlinks in the SEC’s recently adopted Investment Adviser Marketing rule under the Investment Advisers Act of 1940.
The SEC’s Marketing Rule Adopting Release notes that the rule’s use of “fair and balanced” is closely aligned with FINRA Rule 2210’s general standards, and that investment advisors may use layered disclosure that employ hyperlinks to meet these requirements, FINRA said.
No Target Returns
A broker-dealer may not include in a private placement communication a “target return” if the communication also includes the assumptions and key risks underlying the return, FINRA said.
FINRA Rule 2210(d)(1)(F) prohibits predictions or projections of performance, the implication that past performance will recur, and any exaggerated or unwarranted claim, opinion or forecast.
“Targeted returns reflect the assumed receipt of future cash flows by investors and are not guaranteed. These returns may include cash flows based on contractual sources of revenue such as master lease agreements or sales contracts,” FINRA explained.
“Such forward-looking cash flows necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking metrics,” it said.