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FINRA’S Box of Chocolates

While we know you prefer a box of chocolates today instead of this industry update on compliance, this one is a gift and hence, will not add to your ever-growing list of compliance duties. Enjoy!

FINRA recently released an interpretive letter to Foreside Fund Services, LLC establishing conditions under which it is permissible for broker-dealers to include pre-inception index performance data in institutional communications concerning passive open-end investment companies. This is an expansion of the 2013 interpretive letter to ALPs Distributors, Inc., which provides similar guidance regarding the use of pre-inception performance (“PIP”) data by the fund, but only as it applies to financial intermediaries. The Foreside letter allows those financial intermediaries to then share the performance with their institutional clients.

The conditions for both scenarios are virtually identical and include:

  1. Any piece of marketing material that includes PIP data will be clearly labeled “For use with institutions only, not for use with retail investors.” If the recipient is a financial intermediary, the recipient will be instructed not to circulate communications containing PIP data to retail investors.
  2. Any PIP data will be used only with respect to the Index, which was created according to a pre-defined set of rules that cannot be altered except under extraordinary market, political or macroeconomic conditions.
  3. PIP data will not be used to market the Fund if the Fund alters its investment strategy to permit active management of the Fund’s securities portfolio.
  4. Any marketing material containing PIP data will include an offer to provide an overview of the methodology of the index upon request and electronic marketing material will include a hyperlink to such information.
  5. The presentation of PIP data will reflect the deduction of fees and charges currently applicable to the Fund.
  6. PIP data will reflect a period of time that includes multiple securities market environments, and at a minimum, ten years of pre-inception data.
  7. PIP data will be current as of the most recently ended calendar quarter.
  8. PIP data will be clearly labeled and shown separately from Fund performance and will be presented along with disclosure of the applicable dates for the PIP data and the dates for actual performance since inception.
  9. As the Fund has been in existence for more than one year, the use of PIP data will be accompanied by the prominent presentation of actual performance of the Fund since inception that reflects the deduction of fees and charges of the Fund.
  10. PIP data will not be inconsistent with information in the prospectus but may be used regardless of whether the fund prospectus contains the data.
  11. PIP data will be accompanied by the following disclosures:
  12. i.The Fund is a relatively new product and any performance prior to the date of inception is hypothetical;
  13. ii. The identity of the entity that performs the calculation and distribution of the PIP data, and the fact that ABR pays this entity to perform those functions;
  14. iii. The fact that PIP data are based on criteria that has been applied retroactively with the benefit of hindsight, and that these criteria cannot account for all financial risk that may affect the actual performance of the Fund;
  15. iv. The actual performance of the Fund may vary significantly from the PIP data; and
  16. v. 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).

Perhaps the most notable reiteration in the letter, however, is FINRA’s statement that their current position does not affect FINRA's long standing opinion that the presentation of hypothetical back-tested performance in communications used with retail investors does not comply with the content standards of FINRA rules governing communications with the public.

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Events

Chief Compliance Officer Roundtable: Breakfast Briefing - November 8, 2018

When: November 8, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Dorsey PF 2018 Symposium

When: September 26, 2018 (8:30 am - 6 pm Where: Dorsey & Whitney LLP | 51 W. 52nd Street | New York, NY 10019 Directions > SEC3’s President, Janaya Moscony will join...

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...