Time to review marketing ahead of SEC Rule

The amended Marketing Rule will come into effect in just a few months. The SEC recently reminded Chief Compliance Officers of their obligations from November 4, 2022 under the revised Advisor Marketing Rule (Rule 206(4)-1 of the Investment Advisers Act of 1940) .

As your firm prepares to comply with the new rule, you should familiarize yourself with the changes and key elements of the proposed rule.  Advisers should review their firms’ marketing efforts as they fall into the following categories in order to assess how their marketing activities and compliance policies will change when the Advisor Marketing Rule becomes mandatory:

 

Marketing Topic Notable differences Important takeaways
Definition of “Advertisement” Advertisements are generally defined as any communication directed to more than one person.

The term “Communications” extends to oral statements, text messages, emails, podcasts, social media, etc.

Also includes any “indirect” communications through intermediaries.

One-to-one presentations are not advertisements unless the presentation contains hypothetical performance and is not directed to prospective private fund investors.
General Prohibitions In addition to the existing anti-fraud provisions of Section 206 of the Investment Advisers Act of 1940, the Commission specified the seven prohibited marketing activities for investment advisers. The principals of the anti-fraud provisions still generally apply.

Specific types of statements and/or omissions are now codified as prohibited under the Rule.

Performance Advertising Actual performance is required to conform to proscribed performance periods (1-, 5- and 10- years).

Related and extracted performance results are permitted.

Hypothetical performance is permitted subject to the conditions in the Rule.

Codifies existing performance guidance.

Standardizes performance reporting by all advisors.

Performance guidelines align with the requirements for GIPS compliant firms.

Testimonials & Endorsements Testimonials are now permitted subject to the conditions of the Rule 206(4)-1.

Conditions for endorsements are extended to third parties who act on behalf of the advisor (i.e., indirect communications).

Endorsement rules replace existing rules governing solicitors.

Extensive disclosure requirements apply to usage of testimonials or endorsements.

Extends to placement agents.

Compliance oversight requirements now in place.

Other Key Considerations Non-U.S. based advisors may continue to rely on the guidance in the Hedge Fund Adviser Release for exemptions from marketing rules when marketing to non-U.S. investors. See Registration Under the Advisers Act of Certain Hedge Fund Advisers, Release No. IA-2333 (Dec. 2, 2004)

See also Investment Adviser Marketing, Release No. IA-5653 (December 22, 2020)

The Seven Prohibitions of the Advisor Marketing Rule (206(4)-1)

Investment advisers may not disseminate any Advertisement that:

  • Includes untrue statement of materials fact; or omits a material fact necessary in order to make the statement made, not misleading
  • Includes unsubstantiated material statements of fact for which the adviser does not have a reasonable basis for believing
  • Includes information which would be reasonably likely to cause an untrue or misleading implications or inferences to be drawn
  • Fails to provide fair and balanced treatment of a potential benefit without providing the associated material risks or material limitations
  • Fails to present specific investment advice in a fair and balanced manner;
  • Includes or excludes performance results (i.e., cherry-picking) or otherwise presents performance in a manner that is not fair and balanced
  • Is otherwise materially misleading.

How we’re supporting

In the coming weeks, we’ll be hosting a webinar covering each of the topic areas and breaking down what you’ll need to know to implement compliant marketing policies.  We’ll also be updating compliance policies and procedures, offering training sessions for both CCOs and firm personnel on the new rules, helping you make the transition with confidence.

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