FINRA Provides Marketing Guidance for Private Investment Pools
FINRA has issued a Regulatory Notice warning sponsors of private real estate funds about misleading marketing practices. FINRA indicates that any discussion of investment benefits must include risk disclosure “presented in a clear and prominent manner, commensurate with the discussion of benefits, and is not relegated to a footnote.” Moreover, FINRA warns, “Providing risk disclosure in a separate document, such as the prospectus, does not substitute for the required disclosure.” FINRA provides additional guidance: (1) descriptions of program objectives must be consistent with the prospectus; (2) do not equate distribution rates to a yield and thereby suggest a fixed income investment; (3) disclose how distributions include return of principal; (4) describe redemption and liquidity limitations; (5) do not suggest that the investment is stable; (6) do not cherry-pick information about related investments; (7) use an appropriate and comparable index; and (8) do not use a blended capitalization rate.
OUR TAKE: Although this Notice applies to FINRA members and real estate investment pools, the same guidance generally applies to marketing materials for any private investment fund. The SEC staff often uses FINRA marketing guidance when determining the adequacy of marketing materials used by registered investment advisers.