A FINRA Regulatory Notice issued last year includes statements that its member broker-dealers use of internal rates of return (IRRs) for unrealized investments in marketing materials should be calculated in accordance with GIPS. This has led broker-dealers to seek information from PE funds on how they are complying with the Notice or addressing its guidance. Fund managers have options with respect to the Notice, from preparing GIPS compliant IRRs to removing their obligations under its guidance. For the latter, Amy Lynch, FrontLine’s Founder and President, explains that one such way would be to include language in the placement agent agreement limiting the use of marketing materials to one-on-one or small group settings of under 25 prospects. Ms. Lynch further states that this would allow PE sponsors to comply with the Notice without changing their IRR calculation methodologies while their compliance staff would need to ensure the materials have the appropriate disclosures for that use.
See Private Equity Law Report (subscription required),“FINRA Mandate of GIPS-Compliant IRRs for Unrealized Investments: How Broker-Dealers and PE Sponsors Are Complying (Part Two of Two)”
Also see FINRA Regulatory Notice 20-21, “FINRA Provides Guidance on Retail Communications Concerning Private Placement Offerings”