On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) announced it has adopted amendments (also known as the “marketing rule”) to its rules under the Investment Advisers Act of 1940 as amended that govern advertising and cash solicitation activities by investment advisers registered with the SEC. The new marketing rule will regulate marketing activities by investment advisers registered with the SEC including advertising, marketing and soliciting. Previously, these activities were governed by separate SEC rules (Rule 206(4)-1 and Rule 206(4)-3). Listed below are frequently asked questions about the SEC’s new marketing rule.
To view slides from a webinar about the advertising component of the SEC’s new Marketing Rule, please click here.
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Please click the following link to read a recent blog post about the SEC’s Adoption a New Marketing Rule for Investment Adviser Advertising and Solicitation https://www.ria-compliance-consultants.com/2021/01/sec_new_marketing_rule_for_investment_advisers/.
This webinar was recorded on February 4, 2021. The viewer should understand that this webinar is for educational purposes only and do not constitute specific advice to the viewer or an engagement RIA Compliance Consultants, Inc.
The SEC’s new marketing rule (Rule 206(4)-1) applies to all investment advisers registered, or required to be registered, with the U.S. Securities and Exchange Commission. The SEC’s marketing rule does not apply to exempt reporting advisers (“ERAs”) or others not required to register with the SEC. Furthermore, the new marketing rule does not apply to the marketing of registered investment companies or business development companies.
A state registered investment adviser should consult with its state securities regulators as to whether the state securities regulator will be following the SEC’s lead with respect to the new marketing rule. See “Nebraska Proposes Rule Changes that Allow Investment Advisers to Utilize Client Testimonials & IARs to Dual License” for details about proposed rule changes for state registered investment advisers in Nebraska.
The SEC’s marketing rule for SEC registered investment advisers will go into effect 60 days after publication in the Federal Register. The Investment Adviser Marketing Rule was published in the Federal Register on March 5, 2021 and will go into effect on May 4, 2021. Click here to view the finalized rule in the Federal Register. This new marketing rule under the Investment Advisers Act of 1940 as amended replaces SEC’s previous advertising and solicitor rules. The SEC has adopted an extended, eighteen-month transition period after the effective date to give investment advisers registered with the SEC an opportunity to bring their practices into compliance with the new marketing rule.
No, during the eighteen-month transition period which starts May 4, 2021, an SEC registered investment adviser firm may not take the position that it is only complying with some of the requirements under the new Marketing Rule while also relying on other requirements under the old SEC rules and no-action letters. However, an SEC registered investment adviser may choose at any time during the eighteen-month transition period to comply with the SEC’s new Investment Adviser Marketing Rule in its entirety. The SEC noted that when a SEC registered investment adviser transitions to the SEC’s Marketing Rule, the investment adviser should update its compliance policies and procedures and record when such policies and procedures went into effect. See the SEC’s Marketing Compliance Frequently Asked Questions at https://www.sec.gov/investment/marketing-faq for additional details.
The SEC’s marketing rule introduces a new definition of “advertisement” that addresses activities traditionally understood as advertising but also widens the scope of the new marketing rule to encompass additional marketing activities of investment advisers, such as cash and non-cash solicitation, testimonials, and endorsements. In addition to introducing new definitions, the SEC’s final marketing rule for investment advisers adopts specific conditions for the use of solicitations, testimonials, and endorsements by SEC and adopts seven general principal-based prohibitions for the use of advertisements by investment advisers.
The definition of “advertisement” under the SEC’s marketing rule has two prongs. First, an advertisement includes any direct or indirect communication that 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 (subject to exceptions discussed below).
Second, an advertisement includes any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly.
The SEC’s marketing rule includes several exclusions from the definition of advertising by investment advisers, including extemporaneous, live oral communications, or for 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 rule also excludes communication that include hypothetical performance provided in response to an unsolicited request from a prospective or current client or investor in a private fund or to a prospective or current investor in a private fund in a one-on-one communication.
In the final rule release, the SEC also noted the following specific examples of communications by an investment adviser that it would not consider advertisements: brand content, including statements about firm culture and philanthropy; educational material; market commentary; account statements and other account related communications; and information in a private placement memorandum.
The SEC’s marketing rule covers all advertisements by an investment adviser registered with the SEC regardless of the means of dissemination, subject to the exceptions enumerated in the marketing rule. Emails, text messages, instant messages, electronic presentations, videos, films, podcasts, digital audio or video files, blogs, billboards, social media, and paper communications, such as newspapers, magazines and the mail, are all covered by the SEC’s marketing rule.
The SEC’s marketing rule excepts live, extemporaneous and oral communications as an from the definition of advertising. Live, extemporaneous, oral communications include discussions and remarks that are not prepared in advance and do not include prepared remarks or speeches, nor any slides or other written materials that are distributed or presented to an audience. Live, extemporaneous communications that are written, such as text messages or online chats are similarly not eligible for the exception. However, the exception does apply to live, extemporaneous, oral communications regardless of whether such communications occur in person or over broadcast, such as non-prepared remarks that are made over live webcast.
A previously recorded oral communication disseminated by the adviser would not qualify as for the exception, even if it was live, oral and extemporaneous at the time it was recorded.
The SEC’s marketing rule prohibits an investment adviser from the following:
No. Under the SEC’s marketing rule, an investment adviser can also be held responsible for indirect communications, including those made by third parties, if the investment adviser “adopts” the communication or “entangles” itself in the preparation of the communication. Adoption occurs when the investment adviser approves or endorses a communication. Entanglement occurs when the investment adviser involves itself in the preparation of the third-party communication.
Whether an investment adviser is responsible for a particular advertisement depends on the facts and circumstances. If, for example, an investment adviser provides comments on a marketing piece, but the third party does not accept such comments or otherwise makes unauthorized modifications, the investment adviser will not be responsible for the third party’s subsequent modifications that were made independently of the investment adviser and that the investment adviser did not approve. In contrast, mere formatting changes made by a third party would not typically absolve the investment adviser of responsibility for the advertisement.
In limited cases, an investment adviser is permitted to edit an existing third-party communication without such edits resulting in attribution of that communication to the adviser, if such revisions are based on pre-established, objective criteria (i.e., editing to remove profanity, defamatory or offensive statements, threatening language, materials that contain viruses or other harmful components, spam, unlawful content, or materials that infringe on intellectual property rights, or editing to correct a factual error) that are documented in the investment adviser’s policies and procedures and are not designed to favor or disfavor the investment adviser.
Whether such posts or comments are attributable to the investment adviser depends on the facts and circumstances. For example, merely permitting all third parties to post public commentary to the investment adviser’s website or social media page would not cause such content attributable to the investment adviser, so long as the investment adviser does not selectively delete or alter the comments or their presentation and is not involved in the preparation of the content. Similarly, even if the investment adviser has the ability to sort or otherwise alter the presentation of public comments, the investment adviser would not be responsible unless it in fact does so.
Under the SEC’s marketing rule, an investment adviser may permit the use of “like,” “share,” or “endorse” features on a third-party website or social media platform without implicating the final rule, so long as the investment adviser merely enables the feature(s) and does not manipulate them to highlight favorable content and/or suppress negative content.
The SEC has indicated that if the investment adviser adopts and implements policies and procedures reasonably designed to prevent the use of a supervised person’s social media accounts for marketing the investment adviser’s advisory services, it generally would not view such communication as the adviser marketing its advisory services. Such policies and procedures might include prohibiting supervised persons from using personal social media accounts to market advisory services, conducting training (including attestations), and periodically reviewing the content of its supervised persons’ personal social media accounts.
The SEC’s marketing rule permits testimonials and endorsements subject to the certain disclosure, oversight, and disqualification requirements.
Under the SEC’s marketing rule, a testimonial is any statement by a current client of the investment adviser or investor in a private fund advised by the investment adviser: (i) about the client or investor’s experience with the investment adviser or its supervised persons (ii) that directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or (iii) that refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser.
The SEC’s marketing rule defines an endorsement is any statement by a person other than a current client of the investment adviser or investor in a private fund advised by the investment adviser that: (i) indicates approval, support, or recommendation of the investment adviser or its supervised persons or describes that person’s experience with the investment adviser or its supervised persons; (ii) directly or indirectly solicits any current or prospective client or investor in a private fund for the investment adviser; or (iii) refers any current or prospective client of, or an investor in a private fund advised by, the investment adviser.
For purposes of the marketing rule, whether a communication by a former client is a testimonial or endorsement depends on the facts and circumstances at the time of dissemination, such whether the statement refers to recent prior experience or an experience further removed from the time of dissemination.
Provided there is indirect or direct compensation, yes. The frequency of referral is not determinative, although the partial exemption for de minimis compensation might apply.
Generally, no, unless it includes hypothetical performance. The SEC has noted, however, that mass communications by an investment adviser that are nominally tailored to appear customized (e.g., by including the client’s name in the salutation but with little or no other customization) will not be considered one-on-one communications. Any duplicated insert included in an otherwise customized communication would be subject to the rule.
A communication is considered one-on-one if made to a single natural person or to multiple natural persons representing a single entity or account, such as multiple natural persons at a company that is a client or an account that belongs to a married couple that shares the same household.
Yes, a partial exemption is available in cases where the promoter is compensated $1,000 or less (or the equivalent value in non-cash compensation) during the preceding twelve months. A testimonial or endorsement that is disseminated for de minimis compensation is not subject to the disqualification provisions or the written agreement requirement but must still comply with the disclosure and oversight provisions of the SEC’s marketing rule.
Investment advisers are required to “clearly and prominently” disclose (1) whether a testimonial or endorsement was given by a client or investor or a non-client or investor; and (2) if applicable, that compensation was provided by or on behalf of the investment adviser in connection with the testimonial or endorsement. In addition, a brief statement of any material conflicts of interest on the part of the person giving the testimonial or endorsement must also be made clearly and prominently.
To be clear and prominent, these disclosures should be included within the testimonial or endorsement itself (or at the same time as an oral testimonial or endorsement) in a size and font at least as prominent as the testimonial or endorsement itself. The specific format of the disclosure may be tailored to the type of advertisement. For example, the SEC has noted a disclosure for an advertisement on a mobile device may be “clear and prominent” if the viewer is automatically redirected to view the disclosure prior to viewing the substance of the advertisement. Other disclosures, which can provide useful information but are not integral to the SEC’s concerns about testimonials and endorsements, can be provided by hyperlink or other separate disclosure.
Under the marketing rule, the required disclosures must be provided at the time the testimonial or endorsement is disseminated. In cases involving a promoter or solicitor, either the investment adviser or the solicitor is permitted to make the required disclosures. However, if the investment adviser does not make the disclosures, it must have (and document) a reasonable belief that the solicitor is making the disclosures.
Disclosures that are not subject to the “clear and prominent” standard, such as those regarding material risks, may use layered disclosures. In one example given by the SEC, an advertisement could identify one benefit of an investment adviser’s services, accompany the discussion of the benefit with fair and balanced treatment of material risks associated with that benefit within the four corners of that advertisement, and then include a hyperlink to additional content that discusses additional benefits and additional risks of the adviser’s services in a fair and balanced manner. Each layer of the disclosure should present the risks and benefits in a fair and balanced manner. An investment advisor should not, for example, present only benefits in the first layer, while placing a discussion of risks and limitations behind a hyperlink.
An investment adviser is not required to oversee all activities of a third party but remains responsible for ensuring its advertisement(s) comply with the SEC’s marketing rule.
An investment adviser must have a reasonable basis for believing that a testimonial or endorsement complies with the rule, including testimonials or endorsements made for de minimis compensation. A reasonable basis could be established, for example, by periodically making inquiries of a sample of investors solicited or referred by the promoter in order to assess whether that promoter’s statements comply with the rule. Similarly, the investment adviser might include provisions in a written agreement with the solicitor that give the investment adviser the right to restrict the content of the solicitor’s testimonials or endorsements and/or review testimonials or endorsements prior to dissemination.
Yes, assuming there is direct or indirect compensation, these arrangements most likely would be considered an endorsement. In the final rule release, the SEC has noted these types of firms and referral networks may tout the advisers included in their network, guarantee that the advisers meet the network’s eligibility criteria, and/or offer to “match” an investor with one or more advisers, resulting in compensated solicitation and referral activities.
The final marketing does not include a presumption that a person providing an endorsement or testimonial meets, or does not meet, the definition of investment adviser. However, a promoter or solicitor may, depending on the facts and circumstances, be acting as an investment adviser within the meaning of section 202(a)(11) of the Advisers Act. Similarly, some promoters may meet the definition of “associated person” of an investment adviser, depending on the facts and circumstances.
Any promoter must determine whether it is subject to statutory or regulatory requirements under federal law, including the requirement to register as an investment adviser pursuant to the Advisers Act. A promoter also must determine whether it is subject to certain state securities laws, including state registration as an investment adviser and any applicable state licensing requirements applicable to individuals.
No. Instead, the investment adviser should consider the context and totality of information presented in order to avoid any misleading implications or inferences. For example, an investment adviser might choose to include a disclaimer that the testimonial was not representative and then direct the recipient to a representative sample of the testimonials about the adviser.
Yes, private funds and private fund investors are covered under the marketing rule, specifically with regard to testimonials and endorsements. Given that the prior solicitation rule did not cover private fund investors, adjustments will need to be made by investment advisers and solicitors for private funds.
Not all communications to private fund investors would be advertisements under the marketing rule. Information included in private placement memoranda about the material terms, objectives, and risks of a fund offering is not considered an advertisement, nor are account statements, transaction reports, and other similar materials delivered to existing private fund investors, or presentations to existing clients concerning the performance of funds they have invested in.
Both cash and non-cash compensation must be disclosed. Non-cash compensation that must be disclosed can include (but is not limited to) gifts or entertainment, reduced fees or fee waivers, directed brokerage, prizes or sales awards. Compensation must be disclosed regardless of whether the compensation is contingent on the solicited person executing a new advisory relationship or investment in a private fund.
Non-cash compensation does not include attendance at training and education meetings, including company-sponsored meetings such as annual conferences, unless such attendance is provided in exchange for solicitation activities.
Yes, subject to certain requirements. The rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides certain disclosures and conducts due diligence to ensure the ratings are not cherry picked or unfairly prepared. The third party must not be a “related person” as defined in the Form ADV Glossary and must provide ratings in the ordinary course of business.
Yes, subject to multiple conditions. The SEC’s marketing rule prohibits an investment adviser from including the following in any advertisement:
Yes, subject to the general prohibitions and restrictions for performance advertising (if the case study includes performance). Under the SEC’s marketing rule, case studies by investment advisers must avoid cherry picking and should be presented in a fair and balanced manner as determined by the facts and circumstances, such as the sophistication of the intended recipient.
No. However, the SEC expects the investment adviser’s communications, including advertisements, to be tailored to its intended audience. An advertisement by an investment adviser for retail clients might include different information or be presented in a different format than an advertisement intended for a more sophisticated audience, even though both advertisements must comply with the conditions and requirements of the SEC’s marketing rule.
Yes. The SEC’s marketing rule for investment advisers is somewhat broader than the disqualification provisions of the prior solicitation rule, as it applies to all compensated testimonials and endorsements. Further, if the disqualified person is an entity, the disqualification extends to certain of the entity’s employees, officers, directors, general partners, and elected managers. Conversely, an entity that is not an ineligible person will not become an ineligible person solely because its employee, officer, or director is an ineligible person.
There is a ten year look back for disqualifying events from the time of dissemination of the advertisement. The frequency with which an investment adviser must monitor eligibility and the steps an investment adviser must take to assess disqualifying events will vary depending on the facts and circumstances, with the expectation that the investment adviser will exercise “reasonable care”.
In the event that a promoter is newly disqualified under the marketing rule, an investment adviser may continue to pay trailing compensation for solicitations that were made prior to the marketing rule’s effective date, provided the adviser complied with rule 206(4)-3 as in effect at the time.
No. This requirement has been eliminated.
Yes. Performance information must be presented by an investment adviser in a fair and balanced manner, subject to specific requirements with regard to gross and net performance, prescribed time periods, related performance, extracted performance, hypothetical performance, and predecessor performance. No statements are permitted that imply the SEC has reviewed or approved the investment adviser’s presentation of performance results. Investment advisers are not required to disclose proprietary or confidential information when discussing performance (e.g., by disclosing every specific investment in a portfolio).
Investment advisers must make and keep records of all advertisements they disseminate under the SEC’s marketing rule. In the case of oral advertisements, the investment adviser may retain a copy of any written or recorded materials used by the investment adviser in connection with the oral advertisement, in lieu of obtaining and preserving a recording of the oral communication. If the oral advertisement includes a compensated oral testimonial or endorsement, the investment adviser may keep a record of the disclosures provided to investors, in lieu of obtaining and preserving a recording of the oral communication. Whenever an investment adviser’s disclosures for a testimonial or endorsement are not included in the advertisement itself, the investment adviser must retain copies of the disclosures provided to investors.
Further, an investment adviser must make and keep any communication or other document related to its determination that the investment adviser has a reasonable basis for believing that a testimonial or endorsement complies with rule 206(4)-1 or that a third-party rating complies with rule 206(4)-1(c)(1). With regard to third party ratings, in the event the adviser obtains a copy of the questionnaire or survey used by the third party to develop its ratings, the investment adviser must retain a copy in its records.
In addition, the marketing rule requires investment advisers to maintain written communications relating to the performance or rate of return of any portfolios (as defined in the marketing rule), and to maintain accounts, books, internal working papers, and other documents necessary to form the basis for or demonstrate the calculation of the performance or rate of return of any portfolios. Similar requirements apply to the retention of records relating to hypothetical performance and predecessor performance.
Investment advisers that rely on the partial disclosure exemption for affiliated personnel, must keep a record of the names of all affiliated personnel and document their affiliates’ status at the time the investment adviser disseminates the testimonial or endorsement.
No. An investment adviser is required to have a reasonable basis to believe that they can substantiate material claims of fact upon demand by the SEC. An investment adviser is not required to substantiate material claims of opinion, nor does it need to proactively develop and maintain a file of substantiating materials for every advertisement – provided it has a reasonable basis to believe it could provide such substantiation on demand. It is important to note, however, that the SEC has indicated that if an investment adviser is unable to substantiate the material claims of fact made in an advertisement on demand, the SEC will presume that the adviser did not have a reasonable basis for its belief. An investment adviser should implement policies and procedures to ensure it can substantiate all material claims of fact in its advertisement, as well as memorialize its contemporaneous reasonable belief regarding such substantiation at the time the advertisement is disseminated.
Advertising records must be maintained by an investment adviser in an easily accessible place for a period of not less than five years (with the first two years in an appropriate office of the investment adviser) from the end of the fiscal year during which the investment adviser last published or otherwise disseminated the advertisement.
No, the SEC is withdrawing all no-action letters and other guidance addressing the application of the current advertising and cash solicitation rules, as they no longer apply.
The following information will now be required in Item 5 of the Form ADV, Part 1:
No. Although this requirement was included in the proposed marketing rule, the SEC determined that the other provisions of the marketing rule will adequately protect investors without imposing the burden of a pre-approval requirement.
The SEC continues to take the position that most of the substantive provisions of the Advisers Act do not apply with respect to the non-U.S. clients (including funds) of a registered offshore adviser. For an investment adviser whose principal office and place of business is in the United States (onshore adviser), the Advisers Act and rules thereunder apply with respect to the adviser’s U.S. and non-U.S. clients.
Yes, RIA Compliance Consultants has a recorded webinar on the SEC’s new marketing rule with respect to the traditional advertising. Click here to purchase this webinar.
*The information contained in this Frequently Asked Questions webpage is general in nature and intended for educational purposes only and is not intended to be a comprehensive analysis of the securities regulations applicable to registered investment advisers. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures.