BDs/RIAs – Something New and Different in Private Placement Disclosures

 BDs/RIAs should be aware of changes they may be seeing in current PPMs due to varying interpretations of the July 1, 2020 FINRA Regulatory Notice 20-21, providing guidance on NTM 2210, relating to communication with the public on DPPs. 

In the Notice FINRA indicates they may feel it unreasonable to have public communication which includes forecasts of more than five years. Some industry participants are applying this statement to PPM disclosures as a legal document, while others feel the statement was intended to apply to marketing material. 

As most private placement offerings generally expect to have holding periods of longer than five years, showing a shorter forecast period in the disclosure document could create some potentially misleading optics. For example, if loan amortization begins after the disclosed forecast period one could expect a decline in investor distributions at that time which would not be reflected in the five-year forecast. Investors may also see a five-year projection and wrongly assume an estimated five-year holding period. 

While the PPM taken as a whole will very likely have appropriate language fully disclosing these facts, this could go against BDs in any future arbitration, where there are often reshaped investor memories surrounding disclosure documents and how things were sold. 

Sales of such offerings requires a clear understanding of facts and implications from a DD, an advisor sales perspective as well as ensuring adequate potential investor understanding. 

Assumptions in any case are estimates based on facts and circumstances and are always deviated from to some degree. Regardless of the time horizon of any forecast, BDs/RIAs still have the responsibility to both determine the reasonableness of the underlying assumptions and to ensure adequate PPM disclosures relating to the totality of anticipated investor benefits throughout the entire estimated holding period.