SEC Greenlights Modern Marketing Rule for IAs
After a nearly year-long comment period, the SEC announced last week that it was replacing its former advertising and cash solicitation rules with a single, streamlined merged marketing rule. The final release, which is approximately 434 pages long, is the first time these two rules have been touched in decades. Fortunately for advisers, however, they will have 18 months after the effective date to comply (which is 60 days after publication in the Federal Register).
The new rule (Marketing Rule) replaces two rules under the Advisers Act, rule 206(4)-1 (Marketing Rule), originally adopted in 1961, and rule 206(4)-3 (Solicitation Rule), originally adopted in 1979. The Marketing Rule reflects market, technological and regulatory changes that have occurred since the rules were originally adopted. Spoiler alert: be on the lookout for a Quest CE course in the near future.
According to a fact sheet, the amended definition of “advertisement” contains two prongs: one that captures communications typically covered by the advertising rule and another that governs solicitation activities previously covered by the cash solicitation rule.
First, the definition includes any direct/indirect communication an investment adviser makes that 1.) offers the investment adviser’s investment advisory services regarding securities to prospective clients or private fund investors; or 2.) offers new investment advisory services regarding securities to current clients or private fund investors.
Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly, such as directed brokerage, awards or other prizes, and reduced advisory fees.
Among the advertising practices that will be prohibited under the marketing rule include:
– making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made not misleading;
– including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
– discussing any potential benefits without providing fair and balanced treatment of any associated material risks or limitations; or
– including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced.
In general, the rule prohibits including in any advertisement:
– gross performance, unless the advertisement also presents net performance;
– any performance results, unless they are provided for specific time periods in most circumstances;
– any statement that the Commission has approved or reviewed any calculation or presentation of performance results;
– performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions;
– performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
– hypothetical performance, unless the adviser implements policies and procedures designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience; and
– predecessor performance, unless there is appropriate similarity regarding the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser.
Books and Records Rule; Form ADV; Policies and Procedures
Rule 204-2 under the Advisers Act is being amended to reflect new requirements under the Marketing Rule, including expanding record keeping requirements to all advertisements. Form ADV is also being amended to include questions regarding an adviser’s advertising practices.
Investment advisers will need to update their compliance policies and procedures to reflect the Marketing Rule in general, as well as its particular requirements. Importantly, the adopting release indicates that for related compliance policies and procedures to be effective, they should include “objective and testable means reasonably designed” to prevent violation of the Marketing Rule.
To read the complete notice, click here.