Summary: SEC Adopts Amendments to Investment Adviser Marketing Rule

Practus LawLegal Insights

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Authored By Karen Aspinall & Ethan Corey 

SEC Amendments to Investment Adviser Marketing Rule

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
– John Wanamaker

On December 22, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to Rule 206(4)-1 under the Investment Advisers Act of 1940 (Advisers Act).  The amended rule replaces both the current advertising and cash solicitation rules.  These amendments are intended to reflect market developments and regulatory changes since the advertising rule’s adoption in 1961 and the cash solicitation rule’s adoption in 1979.

The amended rule contains principles-based provisions intended to accommodate developments in the investment advisory industry, including the role of technology.  The amended rule also contains tailored restrictions and requirements for certain types of advertisements, such as performance advertising, testimonials and endorsements, and third-party ratings.  Compensated testimonials and endorsements, which include traditional referral and solicitation activity, will be subject to disqualification provisions.

Overview of the Amended Investment Adviser Marketing Rule

1. What are the highlights of the latest Rule 206(4)-1 amendments under the Investment Advisers?

  • The final marketing rule will treat some communications and activity as advertisements, which are currently not covered in the current rule.  
    • One-on-one communications that constitute compensated testimonials and endorsements and certain communications that include hypothetical performance information are included.
    • On the other hand, advertisements will continue to exclude:
      • communications designed to retain existing investors;
      • extemporaneous, live, oral communications; and 
      • information contained in a statutory or regulatory notice, filing, or other required communication. 
  • The final rule will apply to certain communications sent to clients and private fund investors; won’t apply to advertisements about registered investment companies or business development companies. 
  • A set of seven principles-based general prohibitions will apply to all advertisements. 
  • An adviser’s advertisements will now be allowed to include testimonials and endorsements, subject generally to the following conditions: 
    • required disclosures; 
    • adviser oversight and compliance, including a written agreement for certain promoters; and 
    • in some cases, disqualification provisions. 

There are partial exemptions for de minimis compensation, affiliated personnel, registered broker-dealers, and certain persons to the extent they are covered by Rule 506(d) of Regulation D under the Securities Act with respect to a securities offering. 

  • An adviser’s advertisement may include a third-party rating, if the adviser forms a reasonable belief that the third-party rating clearly and prominently discloses certain information. 
  • The final rule will apply to performance advertising and will require an adviser to present net performance information whenever gross performance is presented, and performance data over specific periods.  In addition, the final rule will impose requirements on advisers that display related performance, extracted performance, hypothetical performance, and predecessor performance. 
  • There are conforming amendments to the Advisers Act recordkeeping rule and Form ADV to reflect the final rule and enhance the data available to support the SEC staff’s enforcement and examination functions. 
  • In a change from the proposal, the final rule will not require investment advisers to: (i) review and approve their advertisements prior to dissemination; and (ii) provide a schedule of fees in marketing materials. 
  • Finally, certain staff no-action letters will be withdrawn in connection with the final rule as those positions are either incorporated into the final rule or will no longer apply.

Read More Information on the Final Rule

The new amendments to Rule 206(4)-1 under the Advisers Act are complex and lengthy. With 430 pages of text to analyze, we segmented the content to provide summary overviews of the various topic areas covered under the amended rule. There is a tremendous amount of content to be absorbed by in-house counsels, compliance officers, marketing staff, and others in the investment management business. Below are links to our other summaries of the amended rule, which we hope you will find useful as you consider the effects of the new requirements on your business practices and compliance programs.

  1. Definition of an Advertisement Under the Investment Adviser Marketing Rule (Section II) 
  2. General Prohibitions Under the Investment Adviser Marketing Rule (Section III) 
  3. Performance Presentations Under of the Investment Adviser Marketing Rule (Section IV)
  4. Third-Party Ratings Under the Investment Adviser Marketing Rule (Section V) 
  5. Compliance Reviews, Form ADV Amendments & Recordkeeping Requirements – Investment Adviser Advertisements (Section VI)

Who should we talk to if we have further questions?

Please call Karen Aspinall (949.629.3928), Ethan Corey (301.580.6489) or the Practus attorney with whom you deal regularly with questions.  

About the Authors

karen aspinall practus attorney and partnerKaren A. Aspinall is a Financial Services Partner at Practus LLP.  She brings a wealth of experience and a solutions-oriented approach to our legal team as an authority on regulatory compliance matters involving SEC, DOL, NFA and CFTC matters.  Karen’s practical experience and pragmatic approach to problem solving are valuable for clients who are looking to navigate the complex and ever-changing regulatory landscape.

 

 

ethan corey headshot

Ethan Corey has spent 22 years as an investment management lawyer specializing in distribution issues (including FINRA rules) as well as 1940 Act and Advisers Act issues. Ethan is familiar with ERISA, MSRB and CFTC rules, as well as FCA Conduct of Business Rules and MiFID II. He has been an effective advocate with regulators as a member of industry trade groups.

 

 

 

Attorneys Phone Email
Karen A. Aspinall  (949) 629-3928 Karen.Aspinall@Practus.com
Ethan Corey (301) 580-6489 Ethan.Corey@Practus.com

Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.