Key Takeaways
- • The SEC approved FINRA's amendment to its marketing rule (Rule 2210) on Oct. 15, adding a fourth exception that allows broker-dealers and registered investment advisers to include performance projections and targeted returns in marketing materials.
- • Firms cannot use the new exception yet; implementation awaits a date FINRA will announce in a subsequent regulatory notice.
- • Eversheds Sutherland partner Issa Hanna warns that plan sponsors forwarding projection materials to all 401(k) participants could create liability, particularly for complex products such as private market investments.
- • Under the rule, broker-dealers must confirm recipients have the expertise and sophistication to understand that projections are hypothetical and not guaranteed, and must maintain written policies and retain supporting records.
- • The change does not alter plan sponsors' fiduciary duties, but sponsors should build an organized process to determine which participants receive such materials.
Summary
The Securities and Exchange Commission has approved changes to the Financial Industry Regulatory Authority's marketing rule that could bring new projected-return materials to plan sponsors from providers pitching 401(k) investment products. FINRA won SEC approval on Oct. 15 for an amendment allowing broker-dealers and registered investment advisers to provide performance projections and targeted returns in marketing resources. FINRA's Rule 2210 generally prohibits investor communications that include projected performance; the amendment adds a fourth exception to that prohibition.
According to the SEC, the exception is intended as an aid to investors who may already have received projected-return information from issuers and investment advisers, rather than a blanket authorization for broker-dealers to promote predictions. The rule requires broker-dealers to create a written policy and procedure ensuring communications are relevant to the intended audience, to provide sufficient information on the criteria and assumptions used in calculating projections and on their risks and limitations, and to retain written records supporting the basis for those projections. Under FINRA, broker-dealers must also determine that recipients have the necessary expertise, sophistication and investment experience to understand that projections are hypothetical and not guaranteed. Firms will not be able to use the exception immediately and must wait for FINRA to announce an implementation date.
Issa Hanna, a partner at Eversheds Sutherland who advises broker-dealers and investment advisers, said the change does not alter a plan sponsor's fiduciary duty. He cautioned, however, that DC employers should be careful about forwarding projection materials to all participants, since many may lack the sophistication to recognize that targeted returns are hypothetical. Broad distribution to non-sophisticated investors could create liability for sponsors and broker-dealers, particularly where products include complex options such as private market investments. Hanna quoted: "You're going to want to be very careful about passing along the materials to your participants because those participants may not have the requisite levels of sophistication and expertise to understand that the targeted returns are hypothetical in nature, not guaranteed."
Hanna recommended that plan sponsors establish an organized process to determine which candidates receive the marketing materials, which could include delegating participant requests to the plan's broker-dealer to assess individual eligibility. The article is part of Defined Contribution coverage by Amanda Umpierrez, which notes that sponsors are increasingly expected to support retirement readiness as participants' needs grow.
According to the SEC, the exception is intended as an aid to investors who may already have received projected-return information from issuers and investment advisers, rather than a blanket authorization for broker-dealers to promote predictions. The rule requires broker-dealers to create a written policy and procedure ensuring communications are relevant to the intended audience, to provide sufficient information on the criteria and assumptions used in calculating projections and on their risks and limitations, and to retain written records supporting the basis for those projections. Under FINRA, broker-dealers must also determine that recipients have the necessary expertise, sophistication and investment experience to understand that projections are hypothetical and not guaranteed. Firms will not be able to use the exception immediately and must wait for FINRA to announce an implementation date.
Issa Hanna, a partner at Eversheds Sutherland who advises broker-dealers and investment advisers, said the change does not alter a plan sponsor's fiduciary duty. He cautioned, however, that DC employers should be careful about forwarding projection materials to all participants, since many may lack the sophistication to recognize that targeted returns are hypothetical. Broad distribution to non-sophisticated investors could create liability for sponsors and broker-dealers, particularly where products include complex options such as private market investments. Hanna quoted: "You're going to want to be very careful about passing along the materials to your participants because those participants may not have the requisite levels of sophistication and expertise to understand that the targeted returns are hypothetical in nature, not guaranteed."
Hanna recommended that plan sponsors establish an organized process to determine which candidates receive the marketing materials, which could include delegating participant requests to the plan's broker-dealer to assess individual eligibility. The article is part of Defined Contribution coverage by Amanda Umpierrez, which notes that sponsors are increasingly expected to support retirement readiness as participants' needs grow.
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