Marketing materials for private funds often state that the fund’s manager will seek to achieve an annual return (a “targeted return”) of X percent. Is this legally permissible? The answer depends in part on whether the materials are used by a registered broker-dealer, and, if so, how one reads relevant Financial Industry Regulatory Authority (FINRA) precedents. FINRA’s less-than-transparent approach to the question fuels debate within the private funds industry, and is even a factor in some fund managers’ regulatory strategies.
Despite perennial debate regarding whether and when private fund managers must use a registered broker-dealer to market their funds, many resist creating an affiliated broker-dealer or using a non-affiliated registrant to distribute their funds, and prefer to use their own (unregistered) in-house marketing staff.1 One important reason for this reluctance is that registered broker-dealers and their associated persons (but not private funds or their investment advisors) are subject to FINRA rules, which generally prohibit communications that “predict or project performance or imply that past performance will recur.”2 Some fund managers are concerned that the application of these and other FINRA rules would subject their marketing efforts to a competitive disadvantage. In some respects, FINRA exacerbates the problem by not publicly and consistently stating how its rules prohibiting performance projections apply to specific situations.
