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Wall Street watchdog floats plan to let brokers promise future results


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

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

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

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

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

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

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

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

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

The SEC has zealously guarded against allowing money managers to make promises about the future to ordinary people. In September the SEC fined nine asset managers a total of $850,000 for putting hypothetical results on websites that were available to the general public.

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

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

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



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