The staff of Financial Industry Regulatory Authority (“FINRA”) recently issued an interpretive letter¹ (the “Letter”) permitting the use of related account performance information in marketing materials of registered funds distributed solely to institutional investors, which include registered broker-dealers, registered investment advisers, banks and insurance companies. “Related Performance Information” is defined in the Letter as “actual performance of all separate or private accounts or funds that have (i) substantially similar investment policies, objectives, and strategies, and (ii) are currently managed or were previously managed by the same adviser or sub-adviser that manages the registered mutual fund that is the subject of an institutional communication.”

Under this new interpretation, FINRA will permit the use of Related Performance Information in a registered fund’s marketing materials distributed to institutional investors, subject to several conditions. The conditions include:

• The Related Performance Information must only be provided to institutional investors, excluding institutional investors who intend to share the Related Performance Information with persons other than institutional investors;
• The Related Performance Information must be the actual performance of all separate or private accounts or funds (a “Related Account”) that have (i) substantially similar investment policies, objectives, and strategies, and (ii) are currently managed or were previously managed by the same adviser or sub-adviser that manages the registered mutual fund that is the subject of an institutional communication;
• If there is more than one Related Account, the communication must contain Related Performance Information for all such accounts presented with equal prominence in a composite or list;
• Any institutional communication with Related Performance Information must be clearly labeled “for use with institutions only, not for use with retail investors,” and recipients must be instructed not to provide the communication to current or prospective customers or others who are not institutional investors;
• The Related Performance Information must disclose performance information that is net of fees and expenses of the Related Accounts, or net of a model fee that is the highest fee charged to any account managed in the strategy and, if Gross performance is also presented, it must be accompanied with additional disclosure;
• The fees and expenses of the registered fund that is the subject of the institutional communication must be prominently disclosed and the fund’s performance information must reflect all fees and expenses. If the fees and expenses are higher than the fees and expenses of the Related Accounts, that fact must be disclosed;
• The Related Performance Information must (i) be for a period of at least one year and since the inception of the investment strategy, (ii) be current as of the most recently-ended calendar quarter, and (iii) be clearly labeled as such and contain clear disclosure of the applicable dates for the performance;
• For institutional communications relating to registered funds in existence for more than a year, its actual performance must be displayed more prominently than the Related Performance Information; and
• The institutional communication must disclose any material differences between the funds or accounts for which Related Performance Information is provided and the registered fund that is the subject of the institutional communication;

In contrast to SEC staff positions on the use of related account performance information, FINRA staff has long held that Rule 2210 prohibits FINRA members from including Related Performance Information in written communications distributed to the public, including to institutional investors. The Letter partially harmonizes the related performance positions of the staffs of FINRA and the SEC.² In issuing the Letter, FINRA staff was clear in noting that nothing in the Letter changes its longstanding position that Rule 2210(d) prohibits the distribution of Related Performance Information to retail investors.

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¹ Letter from Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, FINRA to Edward P. Macdonald, Hartford Funds Distributors, LLC (May 12, 2015)

² See, e.g., ITT Hartford Mutual Funds (pub. avail. Feb. 7, 1997); Nicholas Applegate Mutual Funds (pub. avail. Aug. 6, 1996)

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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.