On November 4, 2022, the U.S. Securities and Exchange Commission (SEC) implemented reforms to the Investment Advisers Act of 1940 that governs investment adviser advertising and solicitation of clients. The regulatory change, which consolidates these two principles into a single regulation now known as the Marketing Rule, is designed to, among other things, accommodate the continual evolution of technology while protecting investors.
The impact on regulated parties is considerable. Whereas advertising was once largely interpreted to mean brochures, market updates, magazine advertisements, websites and the like; it now applies to nearly any digital communication including email, social media, instant messaging and certain one-on-one messages. A more detailed discussion of the Marketing Rule is provided below.
The definition of “advertisement” has been significantly revised and broadened, and is broken down into two prongs. Generally speaking, the first prong governs communications traditionally treated as investment adviser advertising and the second prong includes compensated testimonials and endorsements.
Under the first prong, an advertisement is “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[.]”
The first prong, among other things (and subject to various exceptions), generally will capture the following types of communications from advisers:
Separately, under the first prong, other categories of communications have special rules. First, the Marketing Rule excludes extemporaneous, live, oral communications from the definition of advertisement, regardless of whether they are broadcast. By contrast, written materials such as slides presented to an audience, prepared remarks and speeches, are not excluded from the definition of advertising if they otherwise meet the definition of advertisement. Second, information reasonably designed to satisfy the requirements of statutory or regulatory notices and filings will not be considered an advertisement. Finally, presentation of hypothetical performance information is excluded from the definition of advertisement only if the communication is in response to an unsolicited client request, or to a private fund investor in a one-on-one communication. However, hypothetical performance information included in all other communications that offer investment advisory services, including one-on-one communications to prospective advisory clients, will be deemed advertisements subject to the Marketing Rule.
The second prong includes compensated testimonials and endorsements that, until the implementation of the new Marketing Rule, were governed by the solicitation rule. Under the second prong, an advertisement includes “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[.]” Whether an adviser provides direct or indirect compensation is a factual determination and may include, for example, gifts and entertainment, awards or prizes, reduced brokerage fees and other forms of indirect benefits, provided that these benefits are designed to encourage the recipient to make a positive statement about an adviser. Notably, though, this category of testimonials and endorsements do not include an employee’s regular salary and bonus for investment advisory activities or clerical, administrative, support or similar functions.
The Marketing Rule also includes revised recordkeeping requirements. Investment advisers must make and keep copies of all advertisements they directly or indirectly disseminate, including certain internal working papers, performance-related information, and documentation for oral advertisements, testimonials and endorsements. Certain alternative methods for complying with this requirement are available for oral advertisements, including oral testimonials and oral endorsements. The amended rule also includes specific requirements for making and keeping records related to performance information, testimonials, endorsements and third-party ratings.
Form ADV has also been amended. Now, Form ADV requires advisers to provide additional information about an adviser’s marketing activities and advertisements. According to the SEC, this additional information will help to ensure that the SEC has sufficient data to support the SEC staff’s enforcement activities.
The Marketing Rule also addresses numerous other matters. For instance, the Marketing Rule includes and/or governs:
Advisers should be aware of, and carefully consider, the new rules with respect to each of the items referenced above in connection with their communications.
Advisers should be aware of the SEC’s Division of Examinations Risk Alert issued on September 19, 2022. In the Risk Alert, the Division of Examinations advised, among other things, that staff will be conducting broad reviews to evaluate compliance with the Marketing Rule. These reviews will focus on:
Very simply, the Risk Alert puts advisers on notice that their marketing practices will be under increased scrutiny going forward. We strongly recommend that advisers review and understand the Marketing Rule and related guidance, including the Risk Alert, in their entirety.
Advisers subject to the rule should take any and all necessary steps to ensure their timely compliance with the Marketing Rule. That said, high-level next steps should include, but not be limited to, the following:
Phillips Lytle LLP is available for assistance with respect to the Marketing Rule. This may include conducting an internal audit of your policies, practices and procedures to verify that you are meeting your compliance obligations, and in addition to helping uncover non-compliance, assisting with any threatened or actual enforcement action by the SEC.