On July 1, 2020, the Financial Industry Regulatory Authority, Inc. (FINRA) released Regulatory Notice 20-21 (the Notice), in which it provided guidance to member firms on compliance with FINRA Rule 2210, Communications with the Public, in the context of private placements involving retail customers.1

The Notice focuses mainly on offerings exempt from registration under the Securities Act of 1933 by virtue of Regulation D thereunder. Private placements, such as Regulation D offerings, sold to retail investors by FINRA member firms are generally subject to the filing requirements of FINRA Rules 5122 or 5133. Regulation D offerings offered directly by issuers without the use of a FINRA member intermediary are not subject to those rules, and neither are Rule 144A or Regulation S offerings.

For retail communications in private placements, FINRA reminded member firms that:

  • Under Rule 2210(d)(1), all member firm communications must be fair, balanced and not misleading;
  • Any promotion of potential rewards must be balanced by disclosure of the associated risks;
  • Communications must be accurate and provide a sound basis to evaluate the facts with respect to the products or services discussed; and
  • Retail communications must be approved by a registered principal of the FINRA member.

These issues may arise even when the communication is prepared by a third party but distributed or used by the member firm. Also, if a retail communication is included in the same electronic file with an issuer-prepared private placement memorandum and distributed by a member firm, the retail communication is still subject to Rule 2210 (i.e., it is still a communication by the member firm).

Retail communications must balance any discussions of benefits with a discussion of the related risks. These risk factors must be in the same retail communication; placing the risk factors in a separate document, such as the private placement memorandum, or in a different section of the website, is no substitute for disclosure integrated into the retail communication.

Under Rule 2210(d)(1)(F), retail communications may not contain any prediction or projection of performance, subject to certain exceptions, as well as any exaggerated or unwarranted claim, opinion or forecast. As an example, retail communications may not project or predict returns to investors such as yields, income, dividends, capital appreciation percentages or any other future performance. However, reasonable forecasts of issuer operating metrics, together with a sound basis for evaluating the facts and the related risks, would not be inconsistent with Rule 2210.

The Notice also discussed FINRA's guidance on the use of distribution rates and internal rate of return calculations.

Originally published in REVERSEinquiries: Volume 3, Issue 7.
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1 The Notice is available at: https://bit.ly/2Wy5yWr.

Originally published 22 July, 2020

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