FINRA recently published guidance to help broker/dealers ensure their communications regarding private placement offerings comply with FINRA rule 2210, Communications with the Public. FINRA Notice 20-21 reminds firms that all communications must be fair and balanced and not misleading under Rule 2210. 

The guidance in the notice discusses what may and may not be used in retail communications about private placement offerings. Below is a summary of the topics covered in the notice, but to read the full notice, you may access it by clicking here:

  • Third-party Prepared Materials:  Any type of third-party materials that are prepared must contain the appropriate disclosures.  If the Firm assists in the preparation of a communication, and the communication is not fair and balanced, or is misleading, the Firm can be in violation due to the Firm assisting in preparation of the material.
  • Balanced Presentation of Risks and Investment Benefits: Any prepared communication that discuss the benefits of an investment, must also 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.
  • Reasonable Forecasts of Issuer Operating Metrics: Generally, Rule 2210 prohibits the use of any prediction or projection of performance, as well as any exaggerated or unwarranted claim, opinion or forecast. However, 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.
  • Distribution Rates: The notice contains guidance regarding communications with the public for registered and unregistered real estate investment programs, Some issuers fund a portion of their distributions through return of principal or loan proceeds. For example, a portion of a newer program’s distributions might include a return of principal until its assets are generating significant cash flows from operations.
  • Internal Rate of Return: Internal Rate of Return (IRR) is a measure of performance commonly used in connection with marketing private placements of real estate, private equity and venture capital.

It is important for Firms to ensure they have a process for reviewing disclosures in these types of communications and that written supervisory procedures are adequate.