FINRA Allows Limited Use of Back-Tested Data for ETF Indexes
In response to a request from an ETF distributor, FINRA has indicated that it will allow the presentation of pre-inception index performance (aka hypothetical back-tested performance) to institutional investors with very strict conditions. To present such data, a firm must ensure that the marketing materials satisfy the following conditions: (a) material is used solely for institutional investors and is labeled for institutional use only, (b) only passive indexes that cannot be altered; (c) offer to provide calculation methodology; (d) show effect of fees and charges of the actual product; (e) show at least 10 years performance; (f) clearly delineate actual performance; and (g) include several disclosures about the index provider and the performance as hypothetical.
OUR TAKE: The significantly limiting conditions that FINRA imposes show its general objection to using hypothetical back-tested index data. However, this letter at least opens the door for use with institutions.