FINRA Guidance for Retail Communications Concerning Private Placement Offerings

The Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 20-21 (“RN 20-21”) on July 1, 2020 which provides guidance for complying with FINRA Rule 2210 “when creating, reviewing, approving, distributing, or using” retail communications concerning private placement offerings. Specifically, FINRA addressed five main topics related to such communications:

• Third-party prepared materials
• Balanced presentation of risks and investment benefits
• Reasonable forecasts of user operating metrics
• Distribution rates
• Internal rates of return

FINRA outlined certain general standards applicable to all types of communications as noted in FINRA Rule 2210(d)(1), including retail communications.

Retail communications are defined as communications that include any written (including electronic) communications distributed or made available to more than 25 retail investors (any person other than an institutional investor), regardless of whether the person has an account with the firm, within any 30-day period.

In RN 20-21, FINRA also detailed common deficiencies found in retail communications concerning private placements. In addition, it provided guidance on how to address these deficiencies in accordance with FINRA Rule 2210 and relevant regulatory notices. In particular, FINRA offered the following information and guidance:

• Member firms can be responsible for Rule 2210 violations when distributing or using noncompliant retail communications prepared by a third party.
• Regardless of whether a member firm distributes a retail communication attached to a private placement memorandum or as a standalone document, this act constitutes a member firm communication subject to Rule 2210.
• Retail communications that discuss the potential benefits of investing in private placements should balance this discussion by including a disclosure of risks. Such risks may include the potential for private placement investments to lose value, their lack of liquidity, and their speculative nature.
• Retail communications often highlight the issuer’s business and discuss the potential investment’s value proposition. In such cases, including the key risks associated with such an investment is necessary to balance any positive portrayal.
• In FINRA’s view, reasonable forecasts of issuer operating metrics that may convey important information about the issuer’s plans and financial position are consistent with the rule. That said, such presentations should provide a sound basis for evaluating the facts, as required by Rule 2210(d)(1)(A). In addition, the presentation should not “project or depict specific investment returns to an investor.”
• Some issuers fund a portion of their distributions through return of principal or loan proceeds. To comply with Rule 2210(d)(1)(B)’s prohibition of false, exaggerated, unwarranted, promissory, or misleading claims, member firms must not misrepresent the amount or composition of such distributions.
• The use of internal rates of return (“IRR”) is permitted for completed investment programs. However, the use of IRR for a new program or blind pool would not be consistent with Rule 2210. A private equity fund that has realized and unrealized returns can use an IRR if it is calculated in a manner consistent with the Global Investment Performance Standards (GIPS^®).

ACA Guidance

Firms should review their procedures for conducting marketing and advertising reviews to ensure they meet the requirements outlined in this guidance.

How We Help

ACA provides a variety of services to help broker-dealers comply with FINRA and SEC regulations. Our team of compliance professionals can help implement sound compliance and supervisory programs through our consulting, training, and feedback services.

ACA can assist your firm with enhancing collateral review workflows and protocols to meet this guidance, or conduct communications reviews on your behalf to identify potential trouble spots, provide guidance on regulatory expectations as well as industry norms, and make recommendations for improvement. Our marketing and advertising reviews are designed to help your firm identify potential business and compliance risks that could lead to problems with your key stakeholders: regulators, clients, and prospective clients.

For More Information

For more information about this guidance, or to find out how ACA can help your firm comply, please contact your consultant or contact us below.

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