On June 9, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued a letter (the “Letter”) giving guidance in response to a request by an open-ended fund to allow it to provide “Related Performance Information” in marketing material used with institutional investors. “Related Performance Information” is defined as the actual performance of separate or private accounts or funds that have (i) substantially similar investment policies, objectives, and strategies; and (ii) are currently managed or were previously managed by the same adviser or sub-adviser that manages the applicable registered fund.
FINRA has taken the view that institutional investors do not require the same protections as retail investors in relation to performance information. As the Letter notes, in 2003, FINRA issued a no-objection letter allowing a broker-dealer to include related performance information in sales materials for private funds relying on Section 3(c)(7) of the 1940 Act, if the information was made available only to “qualified purchasers”. In 2015, FINRA issued an interpretive letter allowing Related Performance Information to be used by an underwriter in institutional communications regarding open-end registered investment companies.
The new Letter relies on those prior analyses to allow an open-ended fund to include Related Performance Information in its marketing materials given to intermediary institutions and ultimately to “institutional investors” (as defined in FINRA Rule 2210(a)(4)) under certain circumstances set forth in the Letter, including, without limitation, compliance with the applicable standards in FINRA Rule 2210 and the following:
- Any institutional communication with Related Performance Information will be clearly labeled “for use with institutions only, not for use with retail investors.”
- The presentation of Related Performance Information will disclose performance information that is consistent with the presentation of such performance information in The Adviser’s Past Performance (Related Performance) Appendix in the fund’s prospectus. Specifically, the performance information will be based on gross of fees portfolio composite performance adjusted to deduct the fees and expenses (taking into account expense caps) of the class of fund shares that are the subject of the presentation. The presentation will prominently disclose: (i) the fact that the Related Performance Information is shown net of the applicable fund share class’s fees and expenses; (ii) if applicable, that such share class’s fees and expenses are lower than those of the related accounts; and (iii) if applicable, that the Related Performance Information would have been lower had the expense limitation not been taken into account.
- The composite’s gross performance may be shown alongside the net performance described above. If gross performance information is also provided, the institutional communication will prominently disclose that: (i) the performance information does not reflect the deduction of fees and expenses, (ii) different funds and accounts have different fees and expenses, and (iii) that the Related Performance Information would have been lower to the extent the related funds or accounts were subject to higher fees and expenses.
- The fees and expenses of the fund will be prominently disclosed and the fund’s performance information will reflect all fees and expenses. If the fees and expenses are higher than the fees and expenses of the related accounts, that fact will be disclosed.
- Related Performance Information will (i) include the performance of each related account, (ii) be for a period of at least one year and since the inception of the investment strategy, and (iii) be current at least as of the most recently-ended calendar quarter.