In an unusual move, on July 26, 2024, the Securities and Exchange Commission (SEC) stayed an order that was previously issued by its own Division of Trading and Markets just one week earlier on July 19, 2024. That order approved amendments to Financial Industry Regulatory Authority (FINRA) Rule 2210 that would have allowed FINRA member broker-dealers to use projected performance and target returns in communications limited to institutional investors and qualified purchasers (subject to compliance with certain other requirements).

It is unusual for the SEC to stay an order issued by one of its divisions pursuant to delegated authority. This action is particularly surprising given that these amendments to Rule 2210 have been years in the making, and presumably were the subject of significant discussions within the SEC and between the SEC and FINRA. This action by the SEC suggests that there may have been a breakdown in communication between the staff in the Division of Trading and Markets and at least one SEC Commissioner. (Pursuant to 17 CFR § 201.431(e), a single SEC Commissioner can initiate a petition to review an action made pursuant to delegated authority, which results in an automatic stay.)

Industry participants have long criticized the asymmetry between broker-dealer and investment adviser advertising rules. Historically, FINRA Rule 2210 has prohibited or significantly limited much content that is generally permitted for investment advisers, such as projections of performance and hypothetical, backtested, and related performance, resulting in an uneven playing field in favor of investment advisers.

The SEC’s adoption of the investment adviser marketing rule (Rule 206(4)-1 under the Investment Advisers Act of 1940) in December 2020 was seen as a ripe opportunity for harmonization, and in November 2023 FINRA proposed these amendments to Rule 2210, permitting projections of performance (subject to certain conditions).

However, the almost three-year gap between the SEC’s adoption of significant amendments to Rule 206(4)-1 and FINRA’s proposal of the amendments, along with indications that FINRA’s proposal was under review by the SEC staff for quite some time (in October 2022, members of FINRA staff stated at a conference that a proposed amendment of Rule 2210 was under review by the SEC staff) suggests that there may have been differing views between FINRA and the SEC, or among different factions within the SEC, regarding the proposal.

Further, despite the proposal generally being received as a welcome step forward, it still fell short of full harmonization of the broker-dealer and investment adviser rules. As noted by commenters to the proposal (including Morgan Lewis), the proposal did not change FINRA’s requirements for hypothetical, backtested, or related performance, and it only allowed projections to be provided to qualified purchasers and institutional investors, whereas Rule 206(4)-1 does not include any qualification requirements for such content.       

We are not aware of the SEC or its staff making any public statement about the decision to stay the approval of the amendments, so the reasons for this move are, as yet, unclear, but it is possible that there is pressure within the SEC for greater alignment between Rule 2210 and Rule 206(4)-1. If that is the case, then this unforeseen delay ultimately could be a silver lining for broker-dealers.

Morgan Lewis will be tracking any developments on this topic.