Last month, the SEC voted to adopt new Rule 206(4)-1 (“Advertising Rule” or “Rule”) under the Advisers Act, which updated the Rule and merged it with the Cash Solicitation Rule, 206(4)-3. This effectively rescinded Rule 206(4)-3. The new Rule is principle-based and replaces many of the SEC No-Action Letters that the industry has relied upon for advertising compliance since the 1960s. Registered investment companies and business development companies are not subject to the new Rule; however, private funds are subject to the Rule with specific applications and exemptions. The more important highlights of the newly adopted Rule are detailed here. There will likely be additional interpretation and guidance provided by the SEC prior to the Rule’s compliance date.
Changes to the Rule are intended to bring its compliance requirements up to speed with modern promotional communication methods. Advertisement is now defined as any direct or indirect communication that offers advisory services involving securities to prospective clients/investors, offers any new products to existing clients/investors, and excludes one-on-one presentations (generally). It also includes testimonials, endorsements, and solicitation activities that are compensated via cash or non-cash. The absolute prohibition on testimonials and endorsements is rescinded and solicitation/solicitor activities are now referred to as “promotions” or “promoters.”
Additions and revised language to the prohibitions under the general anti-fraud portion of Rule 206(4)-1 are listed below:
Adviser marketing material must not contain:
- any material statement of fact that the adviser does not have a reasonable basis for and believing it will be able to substantiate upon demand by the Commission;
- 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;
- a discussion of any potential benefits without providing fair and balanced treatment of any associated material risks or limitations;
- specific investment advice provided by the adviser that is not presented in a fair and balanced manner; and
- included or excluded performance results, or presented performance time periods, in a manner that is not fair and balanced.
With the above additions, the Rule now has 7 principle-based guidelines, with the original 2 remaining part of the Rule covering the omission of a material fact or providing information that is otherwise misleading.
Key components of the new Rule are summarized here:
- Testimonials and endorsements are now allowed under the Rule subject to specific disclosures, oversight by compliance, and disqualification measures; this includes cash and non-cash solicitation/promotional activities subject to a deminimus exemption. Most promoters will be required to have a written agreement with the adviser. Certain aspects of Reg D solicitation activities are left intact (disqualification provisions) while putting private fund solicitors/promotors under the new general guidelines.
- Third party ratings will only be allowed in marketing materials under certain conditions and with specific disclosures.
- Gross performance can only be shown along with net performance shown in equal prominence and calculated in accordance with the Rule. This includes one-on-one presentations.
- Performance data must be shown for 1, 5, and 10 year time periods as available. Private funds are not subject to the time period requirement.
- Past specific recommendations as well as current recommendations can be shown as long as properly identified and disclosed.
- Hypothetical performance is generally not allowed unless specific written policies and procedures are implemented and specific disclosures are made. The use of hypothetical performance is essentially limited to private funds. Targeted and projected returns are deemed to be hypothetical performance.
- Predecessor performance data may be shown if appropriate to the accounts and personnel for which is it is attributable, calculations meet Rule requirements, and all required disclosures are made.
- Related performance is also allowed under certain conditions (related portfolio/account exclusions are only allowed if affect is immaterial and calculations are made to document) with the required disclosures.
- Form ADV Part 1 will be updated to gather new information from firms regarding marketing activities.
Many SEC No-Action Letters that the industry has relied upon when drafting marketing materials will be withdrawn by the Staff due to this new Rule. However, the exact list of those to be withdrawn has yet to be released. This will be a key component of compliance with the new Rule.
The Rule has an 18 month phase in period and has not yet been listed in the Federal Register. The actual compliance date will mostly likely fall in June 2022. Look for the SEC to release additional guidance before then, especially in relation to the use of testimonials and endorsements in social media, as well as the list of no-action letters withdrawn. Firms should consider reviewing their current advertising activities in anticipation of making policy and procedural changes to meet the compliance requirements of the new Rule.
View SEC Release No. IA-5653, “Investment Adviser Marketing,” which becomes effective 60 days after publication in the Federal Register (TBD).
