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The BD/IA Regulator

Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

FINRA Permits Related Performance Information in Institutional Communications for Registered Closed-End Funds

Posted in Fund Regulation


In an interpretive guidance letter issued to a registered closed-end fund on June 9, 2017, FINRA permitted the use of “related performance information” in communications that are distributed solely to institutional investors.

For purposes of the interpretive letter, “related performance information” is the actual performance of separate or private accounts or funds:

  1. that have substantially similar investment policies, objectives, and strategies to those of a registered closed-end fund; and
  2. are currently managed or were previously managed by the same adviser or sub-adviser that manages the applicable fund.

In connection with their marketing processes, funds with limited or no track records often seek to leverage the performance history of other accounts managed by the adviser and employing a substantially similar investment strategy.  Generally, substantial disclaimers and disclosures accompany these communications so that investors are aware that the differences in fees, expenses, investment restrictions, and flows, among other things, may result in performance differences.


Generally, FINRA Rule 2210 (the “Rule”) governs broker-dealers’ communications with the public, including communications with institutional and retail investors.  The Rule defines communications as either: (1) retail communication, (2) correspondence, or (3) institutional communication.

In 2003, FINRA issued an interpretive guidance letter (the “2003 Letter”) stating that it would not object if a member firm included related performance information in sales materials for private funds relying on Section 3(c)(7) of the Investment Company Act of 1940 (the “1940 Act”), if the information was made available only to “qualified purchasers,” as defined in the 1940 Act, and the member firm complied with all other applicable standards in the Rule.

In 2015, FINRA issued an interpretive guidance letter (the “Hartford Letter”) to an underwriter and wholesale distributor of registered mutual funds, in which FINRA took the position that the use of related performance information in institutional, but not retail, communications concerning open-end registered investment companies would be consistent with the applicable standards of the Rule.

Application to Closed-End Funds

According to the June 9, 2017 letter, the fund offers two separate classes of shares, Class A shares and Class I shares, to “accredited investors” as defined in Regulation D under the Securities Act of 1933, as amended.  The shares are offered on a continuous basis and, subject to any applicable sales loads, may be purchased on a monthly basis at the then-current net asset value. The shares may be purchased from the fund or through advisers, brokers, or dealers that have entered into agreements with the fund’s principal underwriter.  The fund is not listed on an exchange and, to provide liquidity to shareholders, may conduct periodic repurchase offers.

The fund’s marketing material is often presented to advisers and broker-dealers that qualify as “institutional investors,” as defined in the Rule, that may in turn recommend the fund to their advisory or brokerage customers.  These intermediaries are subject to suitability obligations and often request related performance information to assist in their evaluation of a fund’s strategy and performance of the fund’s adviser.

Based upon the rationale applied in the 2003 Letter and the Hartford Letter, and under the conditions enumerated in the June 9, 2017 letter, FINRA believes that the use of related performance information in institutional communications concerning continuously offered closed-end funds is consistent with the applicable standards of the Rule.  FINRA noted, however, that the guidance letter “does not affect FINRA’s longstanding position that the presentation of related performance information . . . in communications used with retail investors does not comply with FINRA Rule 2210(d).”

Our Take

This is a logical next step in the application of FINRA’s interpretation of Rule 2210 since both the 2003 Letter and the Hartford Letter left open the interpretation of the Rule as applied to closed-end funds.  Importantly, however, nothing in this interpretation changes existing no-action positions taken by the SEC’s staff with respect to the use of related performance in certain advertisements.

Attention Retail Investors: The SEC Wants to Hear Your Views on the DOL’s Fiduciary Rule

Posted in Broker-Dealer Regulation, Investment Adviser Regulation

In connection with the Department of Labor’s (“DOL”) fiduciary rule (the “Fiduciary Rule”), key provisions of which became applicable on June 9, 2017, SEC Chair Jay Clayton issued a public statement seeking retail investors’ (and other interested parties’) views in advance of any “possible” future SEC action in the area.

The Chair said that he welcomed the public’s views on, among other things:

  • Whether there is any confusion among retail investors about the type of professional or firm that is providing investment advice, and the standards of conduct applicable to different types of relationships, and, if so, how to address that confusion;
  • Whether there are any potential conflicts of interest related to the provision of investment advice to retail investors in various circumstances and, if so, whether they have been adequately addressed;
  • How retail investors perceive market developments and advances in technology (g., robo-advisers, FinTech) and the duties that apply when investment advice is provided in new ways;
  • Whether there are any trends in providing retail investment advice toward a fee-based advisory model and away from a commission-based brokerage model;
  • The experience of retail investors and market participants, thus far, in connection with the implementation of the Fiduciary Rule;
  • The benefits and costs of the different standards of conduct for accounts subject to the Fiduciary Rule, as well as existing differences between standards of conduct applicable to broker-dealers and those applicable to investment advisers when providing investment advice;
  • Whether there are particular segments of the market (e.g., smaller and regional broker-dealers and investment advisers or smaller investor accounts) to which the SEC should pay particular attention in considering potential future actions; and
  • If the SEC should proceed with a disclosure-based or a standards-of-conduct approach to potential regulatory action, how these approaches should be implemented and at what pace.

“I look forward to working with my fellow Commissioners, the SEC staff, retail investors, and other market participants in assessing these matters, as well as the range of potential [SEC] actions and their expected effects,” said Chair Clayton.

Submissions can be made in webform and by email to rule-comments@sec.gov (Subject Line: “IA-BD-Conduct Standards”).  Comments already received to date are available here.

Our Take

It is not clear whether the SEC will jump into the fray and propose its own fiduciary rule, which would apply to all accounts rather than to ERISA-regulated accounts and IRAs.  This latest round of public attention, at the very least, signals the SEC’s continued interest in regulating the standards of conduct for investment advisers and broker-dealers in tandem with the DOL—even if it is still only a “possibility.”  Nonetheless, many industry participants do not expect immediate SEC action.  After all, as Chair Clayton noted, the SEC has been reviewing this area since 2006

IFLR Webinar: Living with the DOL Fiduciary Rule

Posted in Broker-Dealer Regulation, Events, Investment Adviser Regulation

Wednesday, June 28, 2017
12:00 p.m. – 1:30 p.m. EDT

The first phase of the Department of Labor’s (“DOL”) new fiduciary rule (“Fiduciary Rule”) was implemented on June 9, 2017. The Fiduciary Rule greatly expands the categories of persons who are deemed fiduciaries when dealing with retail retirement investors.  Many investment professionals will now be deemed fiduciaries and need to comply with the new standards.  Join Morrison & Foerster and the ACA Compliance Group for this timely webinar in conjunction with the International Financial Law Review.  Topics will include:

  • An overview of the history of the DOL rule;
  • The substance of the rule;
  • The exemptions;
  • Changes we’re already seeing in how broker-dealers interact with clients and organize their offerings;
  • What we can expect in terms of future challenges and changes to the rule; and
  • Legal liability and potential litigation.


  • Paul Borden, Partner, Morrison & Foerster LLP
  • Hillel Cohn, Senior Of Counsel, Morrison & Foerster LLP
  • Thomas Grygiel, Principal Consultant, ACA Compliance Group

CLE credit is pending for California and New York.

For more information, or to register, please click here.

U.S. Treasury Department Report on Core Principles for Regulating the United States Financial System

Posted in Broker-Dealer Regulation, Enforcement, Investment Adviser Regulation

As required by the President’s Executive Order 13772 setting forth the core principles that should be taken into account in connection with the regulation of the U.S. financial system, the U.S. Treasury Department published a report identifying regulations inconsistent with the seven principles articulated in the order. The report is the first of series of reports. The current report addresses only the depository system and defers an evaluation of the orderly liquidation authority established by the Dodd-Frank Act. We await future reports that address the regulation of the capital markets, the asset management and insurance industries, and non-bank financial services companies. The report notes that stimulating economic growth depends, in the administration’s view, on relieving regulatory burdens on financial institutions and establishing a more efficient system of financial regulation. The report not only identifies regulations inconsistent with the core principles but also recommends changes in varying degrees of specificity and identifies whether the recommendations contemplate regulatory changes or Congressional actions. Thus the report provides both recommendations and a general road map for implementing changes.

Read our client alert.

Complimentary Teleconference – A Closer Look into State Money Service Business Licensing Issues

Posted in Events

Thursday, June 22, 2017
5:00 p.m. – 5:45 p.m. EDT

Join us for one of our upcoming monthly telephone briefings led by members of our Fintech team.

Topic: A Closer Look into State Money Service Business Licensing Issues

This call will be an operator-assisted call of approximately 45 minutes in duration, and will be followed by a brief Q&A opportunity. We also invite you to submit questions before the start of the call. A replay will be available upon request.

In order to RSVP for the June call, and to submit questions, please click here.

Complimentary Teleconference – Keeping up with Regulatory Developments Affecting Social Media Use

Posted in Events, Investment Adviser Regulation

Thursday, June 15, 2017
12:00 p.m. – 1:00 p.m. EDT

This session will focus on the considerations for issuers, broker-dealers, registered investment advisers, and commodity pools in using social media, whether for corporate communications or in the context of securities offerings.

Topics of discussion will include:

  • Reg FD and other liability concerns;
  • FINRA guidance on communications and social media;
  • Social media for “business” versus “personal” use by employees of financial services firms;
  • SEC guidance for investment advisers;
  • General solicitation; and
  • CFTC and NFA guidance for funds.

For more information, or to register, please click here.

CLE credit is pending for California and New York.