In December 2020, the U.S. Securities and Exchange
Commission voted to finalize key reforms under the Investment Advisers Act to
modernize the rules that govern investment adviser advertisements and payments
to solicitors.
The finalized amendments created a single rule to replace
the previously distinct advertising and cash solicitation rules. According to
the SEC’s leadership, the final rule is designed to more “comprehensively and
efficiently” regulate investment advisers’ marketing communications. They say
the reforms will allow advisers to provide investors with useful information as
they choose investment advisers and advisory services, subject to conditions
that are reasonably designed to prevent fraud.
With its vote to finalize the new marketing standards, the
SEC set a final compliance date of Nov. 4, 2022. Since then, in anticipation of
the compliance date, the SEC has withdrawn or modified a significant number of
No-Action Letters published under the previous advertising rule and the cash
solicitation rule.
In a new white paper assessing the state of the evolving
adviser advertising landscape, Wagner Law Group Attorneys Seth Gadreau and
Stephen Wilkes say the SEC’s actions represent a “substantial overhaul” of the
now-defunct advertising and cash solicitation rules. Based on a firm’s current
practices, they warn, compliance with the marketing rule can be a significant
process. If firms have not done so already, they need to make sure they are on
track for full compliance by Nov. 4.
“The technology used for communications has advanced, the
expectations of investors seeking advisory services have changed and the
profiles of the investment advisory industry have diversified,” the attorneys
write. “The new marketing rule recognizes these changes and the SEC’s
experience administering the current rules.”
As the Wagner attorneys explain, the framework taking effect
in early November will expand the scope of communications that are considered
“advertisements” for purposes of the rule. In this sense, while the rule
permits more types of advertisements—including testimonials, endorsements, third-party
ratings and hypothetical performance—these new strategies are subject to the
marketing rule’s new principles-based regime. In other words, the forthcoming
framework is far from a marketing free-for-all, and it still demands
significant planning and diligence on the part of registered firms.
The SEC also instituted related amendments to Form ADV, the
investment adviser registration form, and Rule 204-2, the books and records
rule. The Wagner attorneys point out that the marketing regulation is the first
significant change to these rules and has important implications for all
investment advisers—particularly with respect to presentation of performance
and solicitation activities.
The Wagner white paper explains that, under the marketing
rule, the definition of “advertisement” now has two prongs. The first includes
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 adviser’s investment advisory services regarding
securities to prospective clients or investors in a private fund advised by the
investment adviser. This same prong also defines an advertisement as any offer
of new investment advisory services regarding securities to current clients or
investors in a private fund advised by the investment adviser.
The second prong of the definition, as described in the
white paper, generally includes any testimonial or endorsement for which an
adviser provides compensation. Communications directed to only one person are
included, the attorneys point out, as are oral communications. Compensation
includes cash and non-cash compensation paid directly or indirectly by the
adviser.
“A key to the SEC’s view of compensation is whether it is
the basis of some form of quid pro quo for the testimonial or endorsement,” the
attorneys say. “Attendance at training and education meetings, including
company-sponsored meetings such as annual conferences, is not considered
compensation if it is not provided in exchange for the endorsement or
testimonial. The SEC declined to offer a bright-line test.”
Notably, for purposes of the marketing rule, the new
advertisement definition does not differentiate between retail and non-retail
investor communications and applies a uniform standard for both institutions
and individuals.
The white paper points out that the marketing rule permits
the use of testimonials and endorsements, subject to compliance with multiple
conditions. The first pertains to disclosure: an adviser must clearly and
prominently disclose, or reasonably believe that the person giving the
testimonial or endorsement discloses, whether the “promoter” giving the
testimonial or endorsement is a client of the investment adviser. Additionally,
the adviser must disclose whether the promoter is being compensated, including
both cash and non-cash compensation.
“Further disclosures are required for any material conflicts
of interest on the part of the person giving the testimonial or endorsement
resulting from the compensation arrangement and/or the adviser’s relationship
with the promoter,” the attorneys warn.
Another condition requires that investment advisers enter
into written agreements with promoters in connection with the use of a
testimonial or endorsement. Investment advisers that use testimonials or
endorsements in advertisements must also have policies and procedures to ensure
compliance with the new marketing rule, the Wagner attorneys note.
Finally, an adviser will not be able to directly or
indirectly compensate a person for a testimonial or endorsement if the adviser
knows, or in the exercise of reasonable care should know, that the person
giving the testimonial or endorsement is ineligible under the marketing rule at
that time. As the attorneys explain, certain “bad actors,” as defined under
Rule 506 of Regulation D, and other “ineligible persons” are prohibited from
acting as promoters.
The Wagner attorneys emphasize that advisers will need to
analyze the particular facts and circumstances of each advertisement when
applying the general prohibitions of the marketing rule—including the nature of
the audience to which the advertisement is directed. They point out that the
SEC has noted the requirements’ similarity to FINRA Rule 2210’s general
standards regarding communication with the public.
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