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The SEC’s new Marketing Rule has expanded its definition of what constitutes an advertisement. Whereas understanding what is or isn’t an advertisement is important, the details are complex and require some scrutiny.
In late December, the SEC adopted a modernized Marketing Rule for investment advisers. The Final Rule Release runs to over 400 pages with a lot of content to digest. This is the first in a series of Bovill articles looking at what the new SEC Marketing Rule means for compliance.
What is an “advertisement” under the Marketing Rule?
The final Marketing Rule expanded the definition of “advertisement”. However, the SEC (mercifully) scaled back the definition of advertisement from the original proposal. Following comments from the industry, communications addressed to one person are no longer included.
The SEC’s definition of an advertisement under the new rule is as follows:
(i) Any direct or indirect communication an investment adviser makes to more than one person, or to one or more persons if the communication includes hypothetical performance, that offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser, but does not include:
(A) Extemporaneous, live, oral communications;
(B) Information contained in a statutory or regulatory notice, filing, or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication; or
(C) A communication that includes hypothetical performance that is provided (1) In response to an unsolicited request for such information from a prospective or current client or investor in a private fund advised by the investment adviser; or (2) To a prospective or current investor in a private fund advised by the investment adviser in a one-on-one communication; and
(ii) Any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly, but does not include any information contained in a statutory or regulatory notice, filing, or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication.
The focus of this review is on the first prong of the definition. We’ll address the second prong, which addresses solicitation activity, in a later article.
What is not an advertisement is also important to the understanding of an advertisement. The following are not advertisements.
- One-on-one communications (see below for a more in-depth discussion of one-on-one communications)
- Responses to requests for proposal (RFPs)
- Communications with existing investors, that do not offer new or additional services
- Statements about a firm’s culture, philanthropy, or community activity
- Brand content, general educational material and market commentary.
Direct and indirect communications
The definition of advertisement specifically includes direct and indirect communications. Direct communications are pretty straight-forward, that is, communications made directly from the adviser to prospective investors. The SEC takes care to distinguish indirect communications saying “we understand that investment advisers often provide intermediaries, such as consultants, other advisers, and promoters with advertisements for dissemination. Those advertisements are indirect because they are statements provided by the adviser for dissemination by a third party.”
The SEC goes on to say where an adviser has participated in the creation or dissemination of an advertisement, or where an adviser has authorized a communication, the communication would be a communication of the adviser. However, where an adviser provides materials to an intermediary, the adviser is not responsible for modifications made by the intermediary.
The SEC also notes third party information may be attributable to an adviser. Whether third-party information is attributable to the adviser is a facts and circumstances analysis. However, the SEC will look to determine (1) whether the adviser has explicitly or implicitly endorsed or approved the information after its publication (what the SEC terms “adoption”) or (2) the extent to which the adviser has involved itself in the preparation of the information (“entanglement”). These concepts have direct application in the context of advisers’ social media usage which we will address in a separate specific article.
One or more persons
As noted, the SEC modified its originally proposed definition of advertisement such that the final definition generally does not include communications to one person. Communications including hypothetical information are the exception although in certain circumstances even these communications may not be advertisements.
The one-on-one exclusion applies regardless of whether the adviser makes the communication to a natural person with an account or multiple people representing a single entity or account. This is generally in line with accepted practice. Nonetheless, the SEC makes it clear if an adviser’s prospective investor is an entity, an adviser is permitted to provide communications to multiple people employed by or owning the entity without those communications being subject to the rule.
The SEC addresses bulk emails and algorithm-based messages designed to “nominally directed at or ‘addressed to’” only one person saying “[the communications] are in fact widely disseminated to numerous investors”. Additionally, customizing a template presentation or mass mailing by filling in the name of an investor and/or including other basic information about the investor would not result in a one-on-one communication.
How Bovill can help
With 18 months to the implementation date Bovill can help you understand the specific tenets of the Marketing Rule that apply to you, amend and provide guidance policies and procedures and review current marketing materials for compliance with the general and performance advertising requirements.