On May 12, 2015, the staff of the Financial Industry Regulatory
Authority (FINRA staff) issued an interpretive letter to Hartford
Funds Distributors, LLC (Hartford Funds) that conditionally allows
distributors of mutual funds to include certain types of related
performance information in communications with institutional
investors, including registered broker-dealers and investment
advisers.1 In other words, mutual fund distributors for
the first time may include related performance information in sales
literature when selling or recommending mutual fund shares to
institutional investors and communicating with financial
intermediaries.
FINRA Rule 2210 generally governs communications with the
public. Paragraph (d) of the rule includes general content
standards. Historically, FINRA staff has taken the position
that the presentation of related performance information in public
communications regarding mutual funds is inconsistent with those
content standards. In this context, related performance
information generally means the performance of other accounts or
funds that have similar investment policies, objectives and
strategies and are managed by the same adviser. Many financial
intermediaries believe that such related performance information is
valuable for due diligence purposes in assessing the capabilities
of a mutual fund's adviser. This is especially relevant
where the adviser has been managing assets in the same strategy as
the mutual fund and either the mutual fund is new (and therefore
does not have its own performance record) or the mutual fund's
performance record is shorter than that of the adviser. The
FINRA staff position does not limit the use of related performance
information to mutual funds that do not have performance records or
that have only short-term performance records. However, for
mutual funds that have performance records of at least one year,
the fund's performance record must be displayed more
prominently than the related performance information in the
institutional communications.
In 2003, FINRA staff stated that it would not object if a member
firm included related performance information in sales materials
for private funds relying on Section 3(c)(7) of the Investment
Company Act of 1940, if that information was made available only to
qualified purchasers, as defined in the Investment Company Act,
subject to the general content requirements of NASD Rule 2210 (the
predecessor rule to FINRA Rule 2210). However, FINRA staff had
not ever agreed that related performance information could be
included in communications regarding mutual funds. In part for that
reason, many mutual funds chose to include related performance
information in the prospectuses, but could not include the same
information in sales literature.
Conditions of the Letter
In its request, Hartford Funds proposed to provide related performance information solely to institutional investors, subject to the following conditions:
- The performance information may be provided only if it is the actual performance of all separate or private accounts or funds that (1) have substantially similar investment policies, objectives, and strategies, and (2) are managed or were previously managed by the same adviser or subadviser that manages the registered mutual fund that is the subject of an institutional communication (Related Performance Information).
- Hartford Funds will provide materials containing Related Performance Information only to persons who qualify as "institutional investors" under FINRA Rule 2210(a)(4), excluding institutional investors who intend to share the Related Performance Information with persons other than institutional investors. (Rule 2210 defines institutional investor to include a bank, savings and loan association, insurance company, registered investment company, investment adviser registered with the Securities and Exchange Commission or a state securities commission, any other person with total assets of at least $50 million, governmental entity or subdivision thereof; an employee benefit plan that meets the requirements of Section 403(b) or Section 457 of the Internal Revenue Code and has at least 100 participants, but not any participant of such a plan; a qualified plan, as defined in Section 3(a)(12)(C) of the Exchange Act, that has at least 100 participants, but not any participant of such a plan; a FINRA member or registered associated person of such a member; and a person acting solely on behalf of any institutional investor.)
- The presentation of Related Performance Information will include all accounts described in the first condition (Related Accounts). If there are multiple Related Accounts, the investment performance of such accounts will be presented in a composite or a list in which the investment performance of each account will be displayed with equal prominence.
- Any institutional communication with Related Performance Information will be clearly labeled "for use with institutions only, not for use with retail investors." The distributor will instruct institutional investors who receive such materials not to provide them to current or prospective customers or others who are not institutional investors.
- The presentation of Related Performance Information will disclose the performance net of fees and expenses of Related Accounts, or net of a model fee that is the highest fee charged to any account managed in the strategy. If gross performance information is also provided, the institutional communication will disclose prominently that the performance information does not reflect the deduction of fees and expenses, different funds and accounts have different fees and expenses, and 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 registered mutual fund that is the subject of the institutional communication 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 include the performance of each related account, be for a period of at least one year and since the inception of the investment strategy, and be current as of the most recently ended calendar quarter.
- Related Performance Information will be clearly labeled as such and contain clear disclosure of the applicable dates for the performance.
- For a mutual fund in existence more than one year, its actual performance will be displayed more prominently than the Related Performance Information.
- The institutional communications will disclose any material differences between the Related Accounts and the mutual fund that is the subject of the institutional communication.
Conclusion
The interpretation takes effect immediately, meaning that mutual funds and their distributors may now provide Related Performance Information to financial intermediaries and institutional investors without concern that FINRA staff will deem the communications to violate Rule 2210. This should enable mutual fund groups to provide more meaningful information to those intermediaries and institutional investors to enable them to evaluate mutual fund products.
1 WilmerHale represented Hartford Funds in connection with this letter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.