Interpretive letter to Joan E. Boros, Esq., Stradley Ronon Stevens & Young, LLP
A member firm may include related performance information in institutional communications concerning variable contracts, subject to the stated conditions discussed in the letter.
April 16, 2018
Joan E. Boros, Esq.
Stradley Ronon Stevens & Young, LLP
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036-2652
Re: Request for Interpretive Guidance Regarding Related Performance Information in Institutional Communications for Variable Contracts
Dear Ms. Boros:
In your letter of April 16, 2018, you request interpretive guidance on behalf of your client, Jackson National Life Distributors LLC (“JNLD”), regarding the use of Related Performance Information, as described below, in communications pertaining to variable annuity and life insurance contracts (“Variable Contracts”) that are distributed solely to “institutional investors” as defined in FINRA Rule 2210(a)(4), that function as financial intermediaries. The communications will be made by JNLD, as principal underwriter and wholesaler for its affiliated life insurance companies, Jackson National Life Insurance Company and Jackson National Life Insurance Company of New York (collectively, “Jackson”).
The use of Related Performance Information will be for communications relating to: (i) open-end management companies registered under the Investment Company Act of 1940 (“1940 Act”) that are investment alternatives of Jackson's registered separate accounts (the “Underlying Fund(s)”), and (ii) Jackson’s separate accounts registered under the 1940 Act that invest in the Underlying Funds (the “Separate Account(s)”). For purposes of this request, Related Performance Information is the actual performance of all registered open-end management investment companies (other than the Underlying Fund) that have (i) substantially similar investment policies, objectives, and strategies as the Underlying Fund that is the subject of an institutional communication, and (ii) are currently managed or were previously managed by the same adviser or sub-adviser that manages the Underlying Fund that is the subject of an institutional communication (the “Related Funds”).
You state that Jackson issues a variety of Variable Contracts funded through Separate Accounts that invest in the Underlying Funds. You state that the Underlying Funds are not available to retail investors, and are subject to the provisions of federal tax law applicable to underlying funds of variable insurance products. You state that JNLD distributes the Variable Contracts pursuant to agreements entered into with institutional investors, which include registered broker-dealers and registered investment advisers that may sell or recommend the Variable Contracts to their customers. You state that these institutional investors assist customers in determining which Variable Contract to invest in and may assist them as to which investment divisions of the Separate Account (“Sub-Accounts”) to allocate their investments based in great measure on the investment objectives and performance of the Underlying Funds in which the Sub-Accounts invest.
JNLD proposes to provide Related Performance Information in institutional communications as follows: (1) communications presenting only performance of the Related Fund(s), net of fees and expenses imposed by such fund(s) (“Related Fund Performance”); (2) communications presenting only performance information of the Related Fund(s) net of fees and expenses imposed by both the Related Fund(s) and by the Sub-Accounts of a particular Variable Contract (“Related Sub-Account Performance”); and (3) communications presenting both Related Fund Performance and Related Sub-Account Performance, as described in (1) and (2), (“Dual Performance”).
You state that JNLD believes that the presentation of Related Performance Information would help institutional investors evaluate and understand the Variable Contracts, the Underlying Funds, and the Sub-Accounts.
You propose that Related Performance Information will be used in institutional communications that present Related Fund Performance, Related Sub-Account Performance and Dual Performance, only under the following conditions:
- Related Performance Information may be provided only if it is actual performance of all registered open-end management investment companies (other than the Underlying Fund) that have (i) substantially similar investment policies, objectives, and strategies as the Underlying Fund that is the subject of the institutional communication, and (ii) are managed or were previously managed by the same adviser or sub-adviser that manages the Underlying Fund that is the subject of an institutional communication.
- JNLD will provide materials with Related Performance Information only to persons who qualify as “institutional investors” under FINRA Rule 2210(a)(4), excluding institutional investors who intend to share the Related Performance Information with persons other than institutional investors.
- The presentation of Related Performance Information will include the performance of all Related Funds described in the first condition. If there are multiple Related Funds, this investment performance will be presented either in a composite or a list (in which the investment performance of each Related Fund will be displayed with equal prominence).
- All institutional communications with Related Performance Information will be clearly labeled “For Institutional Use Only, Not for Use with Retail Investors.” JNLD will instruct institutional investors who receive such materials not to provide them to current or prospective customers or others who are not institutional investors.
- The presentation of Related Fund Performance will disclose performance information that is net of fees and expenses of the Related Funds, or net of a model fee that is the highest fee charged to any Related Fund managed in the strategy. The communication will prominently disclose the fees and expenses of the Underlying Fund that is the subject of the communication, and if applicable, that these fees and expenses are higher than the Related Funds’ fees and expenses.
- Related Sub-Account Performance Information may also be presented, provided that such performance must be net of both the fees and expenses imposed by Sub-Account of the particular Variable Contract that is the subject of the institutional communication and of the Related Funds’ fees and expenses as described in Condition 5. In this case, the communication will prominently disclose the Sub-Account’s and Related Funds’ fees and expenses, that the performance information is net of these expenses, and any applicable disclosures described in Condition 5.
- Related Performance Information will (i) include the performance of each Related Fund, (ii) be for a period of at least one year and since the inception of the investment strategy, and (iii) be current as of the most recently-ended calendar quarter.
- Related Performance Information will be clearly labeled as such and contain clear disclosure of the applicable dates for the performance.
- For an Underlying Fund in existence for more than one year, its actual performance will be displayed more prominently than the Related Performance Information and its performance information will reflect all fees and expenses.
- The institutional communications will disclose any material differences between the Related Fund(s) for which Related Performance Information is provided and the Underlying Fund(s) that is the subject of the institutional communication.
- All institutional communications that contain Related Performance Information shall comply with all other applicable FINRA rules and federal securities laws and be subject to the same supervisory requirements that JNLD applies to all other firm communications.
FINRA Rule 2210 subjects institutional communications to certain content and supervision standards. In particular, institutional communications must be fair and balanced and must provide a sound basis for evaluating the facts in regard to the subject security. Institutional communications may not omit material information, include false, exaggerated, or misleading statements, or misstate material facts. A firm must establish written procedures for the review of institutional communications by a registered principal that are appropriate to the firm’s business, size, structure, and customers. When those procedures do not require prior-to-use review, the firm must adopt training and surveillance procedures to ensure compliance with the rule.
FINRA has taken the position in the past that the presentation of Related Performance Information in communications with the public, in some cases, may be inconsistent with the content standards of Rule 2210(d)(1).1 However, FINRA has recognized that communications provided solely to institutional investors do not raise the same investor protection concerns as sales materials provided to retail investors, and FINRA has permitted member firms to provide certain related performance information to certain institutional investors, with appropriate safeguards.
In 2003, FINRA stated that it would not object if a member firm included related performance information in sales materials for private funds relying on Section 3(c)(7) of the 1940 Act, if the information was made available only to qualified purchasers, as defined in the 1940 Act, and the member firm complied with all other applicable standards in Rule 2210.2 Additionally, in 2015, FINRA issued an interpretive letter to Hartford Fund Distributors, LLC, an underwriter and wholesale distributor of registered mutual funds, in which it recognized that, under conditions similar to those contained in this letter, the use of Related Performance Information in institutional communications as defined in FINRA Rule 2210(a)(4) concerning open-end registered investment companies would not be inconsistent with the applicable standards of Rule 2210.3
FINRA believes that the same policy rationale and analysis in the 2003 Interpretive Letter and the Hartford Letter apply in this context. Accordingly, FINRA staff believes that the use of Related Performance Information in institutional communications concerning Variable Contracts in the manner proposed in your letter is consistent with the applicable standards of Rule 2210.
While we do not object to the use of Related Performance Information in institutional communications as discussed herein, this letter does not affect FINRA’s position that the presentation of related performance information, other than the performance of a predecessor private account or fund as described above, in communications used with retail investors does not comply with FINRA Rule 2210(d).
The opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the FINRA Board of Governors. This staff letter responds only to the issues raised, and does not address any other rule or interpretation of FINRA, or all the possible regulatory and legal issues involved.
If you have any questions regarding this letter, please contact me at (240) 386-4534.
Joseph P. Savage
cc: Lance Burkett, District Director, Sales Practice
Jeff Aelmore, Surveillance Director, Sales Practice
FINRA Denver District Office
1. See, e.g., “Adviser Performance Prohibited in New Fund Advertising,” NASD Regulatory & Compliance Alert (June 1992), at p. 7. FINRA has permitted members, under appropriate conditions, to describe predecessor performance (concerning insurance company separate accounts, private investment companies or common trust funds) in their sales materials, consistent with the SEC staff’s no-action letter issued to MassMutual Institutional Funds. See Notice to Members 97-47 (August 1997), at footnote 2; see also MassMutual Institutional Funds, SEC staff no-action letter (September 28, 1995).
2. See Letter from Thomas M. Selman, Senior Vice President, NASD, to Yukako Kawata (Davis Polk & Wardwell) (Dec. 30, 2003) (“2003 Interpretive Letter”), available at www.finra.org.
3. See Letter from Joseph E. Price, Senior Vice President, FINRA, to Edward P. Macdonald, Hartford Funds Distributors, LLC (May 12, 2015) (the “Hartford Letter”); see also Letter from Joseph P. Savage, Vice President, FINRA, to Clair Pagnano, K&L Gates LLP (June 9, 2017), both available at www.finra.org.