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IPA Advocacy and Regulatory Updates from the SEC, DOL, NASAA and FINRA


We write today to inform our members of important regulatory updates ahead of the holiday weekend.

NASAA Seeks Comment on Proposed Restitution Fund

NASAA that its board of directors has approved the release for public comment of a proposed model act to assist states in creating a restitution assistance fund for victims of securities law violations.

In addition to establishing the fund, the model act would outline the eligibility requirements for victims seeking restitution, set restitution payment caps, prohibit and forfeit restitution in certain circumstances and provide for recovery mechanisms.

Funding sources for the fund have not been specifically prescribed but may include civil fines or administrative penalties assessed by the jurisdiction; a portion of licensing or registration fees; funds received for deposit into the jurisdiction’s enforcement account; appropriations by the legislature; gifts, grants, bequests or other donations or voluntary contributions received by the jurisdiction; and transfers from an investor education and protection fund.

The proposed model act is open for public comment through July 31, 2020, and you can view the proposition in its entirety on NASAA’s . The IPA anticipates the submission of comments and will communicate any necessary next steps.

FINRA Issues Guidance Helping Firms Comply with FINRA Rule 2210

FINRA recently issued providing guidance to help firms comply with FINRA Rule 2210, Communications with the Public, when creating, reviewing, approving, distributing, or using retail communications concerning private placements offerings.

The guidance provides further detail and information around the following areas:

Third-Party Prepared Materials

  • Rule 2210(a)(5) defines “retail communication” as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.” FINRA disciplinary actions demonstrate that member firms can be liable for violations of Rule 2210 when distributing or using noncompliant retail communications prepared by a third party.
  • Notice 20-21 clarifies that regardless of whether a firm distributes a retail communication that is attached to a private placement memoranda (PPM) or as a standalone document, the communication is subject to Rule 2210.

Balanced Presentation of Risks and Investment Benefits

  • Rule 2210 requires communications that discuss the benefits of an investment also to include a discussion of its risks. Retail communications that discuss the potential benefits of investing in private placements should balance this discussion with disclosure of their risks, such as the potential for private placement investments to lose value, their lack of liquidity and their speculative nature. Providing risk disclosure in a separate document, such as a PPM, or in a different section of a website does not substitute for disclosure contained in or integrated with retail communications governed by Rule 2210.

Reasonable Forecasts of Issuer Operating Metrics

  • Rule 2210(d)(1)(F) generally prohibits the use of any prediction or projection of performance, as well as any exaggerated or unwarranted claim, opinion or forecast. Accordingly, retail communications concerning private placements may not project or predict returns to investors such as yields, income, dividends, capital appreciation percentages or any other future investment performance.
  • FINRA would not consider reasonable forecasts of issuer operating metrics (e.g., forecasted sales, revenues or customer acquisition numbers) that may convey important information regarding the issuer’s plans and financial position to be inconsistent with the rule. Presentations of reasonable forecasts of issuer operating metrics should provide a sound basis for evaluating the facts as required by Rule 2210(d)(1)(A).

Distribution Rates

  • provided guidance to firms regarding communications with the public for registered and unregistered real estate investment programs. Given that some non-real estate private placement investments employ similar structures, the principles relating to distribution rates contained in that notice are applicable to retail communications regarding private placement investments designed to provide distributions to investors.
  • Some issuers fund a portion of their distributions through return of principal or loan proceeds. Consistent with Rule 2210(d)(1)(B)’s prohibition of false, exaggerated, unwarranted, promissory or misleading claim, firms must not misrepresent the amount or composition of such distributions. Nor may firms state or imply that a distribution rate is a “yield” or “current yield” or that investment in the program is comparable to a fixed income investment such as a bond or note.
  • FINRA believes that it is inconsistent with Rule 2210(d)(1) for retail communications to include an annualized distribution rate until the program has paid distributions that are, on an annualized basis, at a minimum equal to that rate for at least two consecutive full quarterly periods.

Internal Rate of Return

  • The use of Internal Rate of Return (IRR) in retail communications concerning privately placed new investment programs that have no operations or that operate as a blind pool would be inconsistent with the prohibition on unwarranted forecasts or projections in Rule 2210(d)(1)(F).
  • FINRA interprets Rule 2210 to permit retail communications to include IRR for completed investment programs (e.g., the holding matured or all holdings in the pool have been sold). In addition, FINRA does not view as inconsistent with the rule retail communications that provide an IRR for a specific investment in a portfolio if the IRR represents the actual performance of that holding.
  • Investment programs such as private equity funds and REITs may have a combination of realized investments and unrealized holdings in their portfolios. Where the program has ongoing operations, FINRA interprets Rule 2210 to permit the inclusion of IRR if it is calculated in a manner consistent with the Global Investment Performance Standards (GIPS) adopted by the CFA Institute and includes additional GIPS-required metrics such as paid-in capital, committed capital and distributions paid to investors.

SEC Prevails in Reg BI Lawsuit

The 2nd U.S. Circuit Court of Appeals in New York rejected a lawsuit aimed at vacating the SEC’s Regulation Best Interest Standard, which went into effect Tuesday.

The court referenced the Dodd-Frank Act in its decision to strike down the suit, citing that the act “grants the SEC broad rule-making authority, and Regulation Best Interest clearly falls within the discretion granted to the SEC by Congress.”

The lawsuit was an outstanding hurdle the SEC needed to clear before the implementation deadline on Tuesday. It remains uncertain whether the plaintiffs will pursue an appeal.

DOL Proposal to Replace Fiduciary Standard

The DOL announced Monday to govern investment advice in retirement accounts to replace the fiduciary rule that was vacated more than two years ago.

The proposed regulation would provide exemptions under ERISA that would allow fiduciaries to receive compensation for advice that would otherwise be prohibited, such as third party payments, as long as they act in a retirement savers’ best interests.

The proposal applies to registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents and representatives.

Brokers adhering to Reg BI will likely be deemed as being in compliance with the new DOL rule. The senior DOL official said the exemption would enable “regulatory efficiencies.”

If you have any questions, please don’t hesitate to reach out to Tony or me, and have a safe Fourth of July weekend.

Best Wishes,

Anya Coverman
SVP, Government Affairs and General Counsel
Institute for Portfolio Alternatives