FINRA staff provided interpretive guidance on FINRA Rule 2210, which imposes certain requirements on institutional communications.
In an interpretive letter, FINRA staff stated that it does not object to the use of pre-inception index performance ("PIP") data in institutional communications concerning registered open-end investment companies. FINRA staff clarified that the interpretive letter does not impact its "long standing position that the presentation of hypothetical back-tested performance in communications used with retail investors does not comply with the content standards contained in FINRA Rule 2210(d)."
Commentary / Steven Lofchie
Though well intentioned, the ban on hypothetical past-performance information is not a good rule. After all, the first question one might ask when considering buying a fund whose performance is intended to track an index is: how would that index have performed in the past?
That said, FINRA's concern is legitimate. An author of the index may have back-tested 1,000 different model indices and then picked the one that back-tested the best. It is likely that the law of averages will bring that index down in the future. However, if you were an investor, wouldn't you want to have the back-tested information? Clearly the big investors want it. Maybe the better approach would be to specify disclosures or other information required when publishing such information. See also FINRA Provides Guidance on the Use of "Related Performance Information" in Institutional Communications.
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