Regulatory Update: FINRA NTM 20-21 Private Placement Communications

FINRA Issued Notice to Members (NTM) 20-21 to remind member firms of the requirements to compliance with FINRA communication rules when marketing private placements. The following are some select excerpts from the NTM.  The NTM addresses communications, fair and balance considerations, internal rates of return, forecasts, distribution rates, third-party materials and more. Please see the full NTM for complete details. https://www.finra.org/sites/default/files/2020-06/Regulatory-Notice-20-21.pdf

“Private placements are unregistered, non-public securities offerings that rely on an available exemption from registration with the Securities and Exchange Commission (SEC) under either Sections 3 or 4 of the Securities Act of 1933 (Securities Act).1 Most private offerings, however, are sold pursuant to one of three “safe harbors” under Rules 504, 506(b), and 506(c) of Securities Act Regulation D (Reg D).”

“FINRA Rule 2210(d)(1) requires that all member firm communications be fair, balanced and not misleading. Communications that promote the potential rewards of an investment also must disclose the associated risks in a balanced manner.”

“FINRA disciplinary actions demonstrate that member firms can be liable for violations of Rule 2210 when distributing or using noncompliant retail communications prepared by a third party.”

“Rule 2210 requires communications that discuss the benefits of an investment also to include a discussion of its risks.”

“Rule 2210(d)(1)(F) generally prohibits the use of any prediction or projection of performance, as well as any exaggerated or unwarranted claim, opinion or forecast.13 Accordingly, 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.”