Investment Analysis Tools

When a firm uses an interactive tool that simulates possible investment outcomes (a Monte Carlo retirement calculator, a portfolio optimizer, an allocation modeler), it is relying on an investment analysis tool. The investment-analysis-tool rule governs the disclosures the firm must make, and the access the firm owes to FINRA's Advertising Regulation Department.

What does the investment-analysis-tool rule cover?

• Any investment analysis tool: interactive technology that produces simulations and statistical analyses presenting the likelihood of various investment outcomes
• The tool itself, any written report generated by the tool, and any related retail communications
• Applies regardless of whether the tool is available to the public, to customers only, or only internally for rep use

Examples relevant to Series 6:

• Retirement income calculators that project 30-year Monte Carlo outcomes
• Portfolio optimization tools that suggest an allocation mix
• 529 plan savings calculators that simulate education-funding paths
• Variable annuity income-rider modelers

Think of it this way: If the tool takes customer inputs and outputs probabilities, projections, or a specific allocation, the investment-analysis-tool rule applies. If it just returns a static fact (today's NAV, the fund's 5-year return), it is not an investment analysis tool.

What written narrative disclosures does the investment-analysis-tool rule require?

The investment-analysis-tool rule requires clear and prominent written narrative disclosure of the following items.

What Must the Methodology Disclosure Say?

• Criteria and methodology used by the tool
• The tool's limitations and key assumptions
• A statement that results may vary with each use and over time

What Must the Universe-of-Investments Disclosure Say?

• A description of the universe of investments considered
• How the tool selects securities for analysis
• Whether the tool favors certain securities and, if so, why
• A statement that other investments not considered may have similar or superior characteristics

Which Disclosure Must Use Fixed Wording?

Alongside the narrative disclosures, the rule requires this additional disclosure in these exact words:

IMPORTANT: The projections or other information generated by [name of investment analysis tool] regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.

The firm inserts the tool's name and changes nothing else.

What Must the Revenue and Relationship Disclosures Say?

The disclosures must state whether the tool favors securities based on:

• Revenue received by the member (12b-1 fees, revenue sharing, sub-accounting fees)
• Relationships with the entity that created or maintains the tool
• Whether the tool is limited to searching, analyzing, or favoring securities in which the member makes a market, acts as underwriter, or has any other direct or indirect interest

Exam Tip: Gotchas

• Revenue bias in the tool must be disclosed. If the tool tends to select securities on which the firm earns higher 12b-1 fees (or receives revenue-sharing payments), that bias must appear in the written disclosure. An undisclosed revenue bias in an investment analysis tool violates the investment-analysis-tool rule even if the tool's methodology is otherwise sound.

What access must a firm give FINRA for an investment analysis tool?

A member that offers, or intends to offer, an investment analysis tool must provide FINRA's Advertising Regulation Department access to the tool upon request.

There is no first-use deadline and no general template-filing deadline. An answer choice offering "within 10 business days of first use," or any other count of business days, is offering a deadline the operative rule does not set.

The firm must also respond to the Department's requests for supplemental information about the tool.

Exam Tip: Gotchas

• "Upon request" is the whole trigger. There is no clock to memorize here, which is exactly why the exam offers one. Treat any specific number of business days in an answer choice as the distractor.

How does the investment-analysis-tool rule apply to related retail communications?

Retail communications that accompany or are related to the investment analysis tool are still subject to:

• The FINRA communications rule's content standards
• The FINRA communications rule's filing requirements
• The FINRA communications rule's recordkeeping standards

In short, the investment-analysis-tool rule is additional: it does not replace the FINRA communications rule. If the tool's output is shared in a retail communication, the communication itself must meet the FINRA communications rule's general standards on top of the investment-analysis-tool rule's tool-specific requirements.

What is the investment-analysis-tool rule NOT?

• Not a suitability rule. It governs disclosures and filing, not the underlying recommendation
• Not limited to public-facing tools. Internal rep-only tools still qualify if they produce simulations and statistical analyses
• Not an excuse to skip Reg BI or the FINRA suitability rule. If the tool's output is used in a recommendation to a retail customer, Reg BI still applies to that recommendation

Think of it this way: the investment-analysis-tool rule is the label on the box. Reg BI and the suitability rule are what you do with what came in the box. Proper labeling does not waive the duties that attach to the recommendation.

What are the most tested investment-analysis-tool requirements?

Exam Tip: Gotchas

• Disclosures required: methodology, limitations, key assumptions, results-may-vary statement, universe of investments (if applicable), favoritism disclosures, revenue-bias disclosures.
• Access is upon request. There is no first-use deadline and no general template-filing deadline. Every "within N business days" choice is a distractor.
• One disclosure is required in fixed words, the "IMPORTANT:" hypothetical-results statement. The other disclosures may be paraphrased; this one may not.
• The investment-analysis-tool rule is additive to the FINRA communications rule and to Reg BI/suitability rule.
• Revenue bias must be disclosed if the tool favors securities on which the firm earns higher revenue.

What Should You Check on Exam Day?

• Can you name examples of investment analysis tools tested on the exam: retirement income calculators, portfolio optimizers, 529 calculators, and variable annuity income-rider modelers?
• Do you know that access to the tool for FINRA's Advertising Regulation Department is required "upon request," with no first-use deadline?
• Can you state that one disclosure must use fixed wording: the "IMPORTANT" statement that results are hypothetical and not guarantees?
• Do you know that the disclosures must state whether the tool favors securities based on revenue the firm receives?
• Can you explain that the investment-analysis-tool rule is additive: it does not replace the FINRA communications rule, Reg BI, or the suitability rule?