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09 April 2019
In a January 2019 interpretative letter, the Financial Industry Authority (FINRA) provided guidance to a registered broker-dealer as to the use of pre-inception index performance (PIP) data relating to a proprietary index. The broker-dealer sought to use the information in communications about open-end investment companies, which would be distributed solely to "institutional investors." The full text of the letter may be found here.
The letter restates and updates FINRA's prior guidance as to the use of back-tested index information, including its historic position that the use of this type of information would be inappropriate in communications provided to retail investors. FINRA's previous advice was set forth in a 2013 letter to ALPS Distributors.(1) The guidance in the letter is useful to some extent to issuers of structured notes and structured CDs that are linked to new or proprietary indices.
In the new letter, FINRA approved of the use of the PIP data, subject to a number of conditions, including:
- that the fund in question is a relatively new product, and any performance prior to the date of inception is hypothetical;
- the identity of the entity that performs the calculation and distribution of the PIP data, and the fact that the relevant investment advisor pays this entity to perform those functions;
- the fact that the PIP data are based on criteria that has been applied retroactively with the benefit of hindsight, and that these criteria cannot account for all of the financial risk that may affect the actual performance of the fund;
- that the actual performance of the fund may vary significantly from the PIP data; and
- the reasons (if any) why the PIP data would have differed from actual performance during the period shown (e.g., transaction costs, liquidity, or other market factors).
As noted above, FINRA also restated in the letter its historic position that the use of hypothetical backtested performance information in communications with retail investors does not comply with FINRA's content rules.
The letter does not materially change FINRA's guidance for the use of this type of information; however, it remains useful guidance as to the issues to consider when presenting the information in an offering document or marketing materials.
For further information on this topic please contact Lloyd Harmetz at Morrision and Foerster's New York office by telephone (+1 212 468 8000) or email (firstname.lastname@example.org). Alternatively, please contact Peter Green or Jeremy Jennings-Mares at Morrison & Foerster LLP's London office by telephone (+44 20 7920 4000) or email (email@example.com or firstname.lastname@example.org). The Morrison & Foerster LLP website can be accessed at www.mofo.com.
This update has been reproduced in its original format from Lexology – www.Lexology.com.
(1) FINRA's 2013 letter to ALPS Distributors may be found here.
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