Advisers Act Marketing Rule Compliance Deadline Fast Approaching: Key Preparations and Considerations for Compliance | Dechert LLP


The November 4, 2022, deadline for advisers to implement amended Rule 206(4)-1 (Marketing Rule) and related rules under the Investment Advisers Act of 1940 is fast approaching. Advisers required to comply with the rule are reminded that:

  • The SEC Staff has signaled its intention to conduct exams focused on compliance with the Marketing Rule.
  • The Marketing Rule applies to marketing and distribution for advisory services as well as any 3(c)(1) and 3(c)(7) vehicles (private funds) advised by a registered adviser. This includes traditional private funds as well as certain structured products and non-U.S. investment vehicles but not to investment companies registered under the Investment Company Act of 1940, business development companies or funds relying on other 1940 Act exceptions.
  • The rule broadens the definition of advertisement to cover traditional advertising concepts as well as testimonials and endorsements (which incorporates and expands the scope of the prior cash solicitation rule).
  • Policies and procedures adopted under the prior advertising and cash solicitation rules will, in most cases, need to be updated. Advisers should review their other policies and procedures, such as social media and electronic communications policies and procedures, that could be implicated by the new Marketing Rule and consider updates.
  • Existing marketing materials will need to be considered in light of the new rule, if they will continue to be distributed following the adviser’s implementation of the new Marketing Rule.
  • Existing solicitation and private fund distribution arrangements, agreements and disclosure practices should be reviewed for updates.
  • Recordkeeping requirements were updated to include new requirements, and recordkeeping procedures should be updated accordingly.
  • Form ADV amendments soliciting information about advisers’ marketing practices must be completed with the adviser’s next annual updating amendment following the implementation date.

This Dechert Newsflash discusses the SEC Staff’s recent focus on Marketing Rule compliance and notes key steps advisers should consider ahead of the upcoming compliance date.

Background

The SEC adopted amended Rule 206(4)-1 (Marketing Rule) under the Advisers Act in December 2020.1 The Marketing Rule, which amends and consolidates existing Rule 206(4)-1 (Advertising Rule) and Rule 206(4)-3 (Cash Solicitation Rule) under the Advisers Act, became effective on May 4, 2021. Investment advisers registered or required to be registered with the SEC must come into compliance with the Marketing Rule by November 4, 2022 (Compliance Date). As of the Compliance Date, advisers must adopt the new Marketing Rule and can no longer choose to comply with the prior Advertising Rule and Solicitation Rule.2

The new Marketing Rule represents a significant change to the regime governing advertising and promotion of advisory services and private funds. Principal among the new aspects that advisers must consider are: an updated and expanded definition of “advertisement”; the seven, principles-based “general prohibitions” for investment adviser advertisements; detailed requirements for performance advertising (some of which were drawn from prior guidance); and significant expansion and revision to the rules governing solicitation of advisory clients and private funds placement activities.3

Related amendments to the Advisers Act recordkeeping rule, Rule 204-2, require advisers to retain:

  • All Advertisements. Records of all “advertisements” they disseminate (previously required to retain records of advertisements distributed to 10 or more persons);4
  • Performance of Portfolios. (1) All written communications received and copies of all written communications sent by the adviser relating to the performance or rate of return of any portfolios;5 and (2) all accounts, books, internal working papers, and any other records or documents necessary to form the basis for or demonstrate the calculation of any performance or rate of return of any portfolios;
  • Hypothetical Performance. (1) Copies of all information provided or offered pursuant to the hypothetical performance provisions of the Marketing Rule; and (2) a record of who the “intended audience” is pursuant to the Marketing Rule’s hypothetical performance provisions;
  • Predecessor Performance. All written communications received and copies of all written communications sent by the adviser relating to predecessor performance;
  • Testimonials and Endorsements. (1) Records of the disclosures provided to clients or investors under the testimonials and endorsements provisions, if not included in the advertisement; (2) documentation substantiating the adviser’s reasonable basis for believing that a testimonial or endorsement complies with the Marketing Rule; (3) if relying on the partial exemption for testimonials or endorsements disseminated by certain affiliated persons and personnel, records of the names of all persons who are the adviser’s partners, officers, directors, or employees, or a person that controls, is controlled by, or is under common control with the adviser, or is a partner, officer, director or employee of such a person; and
  • Third-Party Ratings. (1) Documentation substantiating the adviser’s reasonable basis for believing that any questionnaire or survey used in the preparation of the third-party rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result; and (2) a copy of any questionnaire or survey used in the preparation of a third-party rating included or appearing in any advertisement in the event the adviser obtains a copy of the questionnaire or survey.

Together with these rule changes, the SEC Staff will withdraw and modify certain Staff statements related to the prior Advertising and Cash Solicitation Rules as of the Compliance Date.6

SEC Staff Focus on Marketing Rule Compliance

On September 7, 2022, the Staff of the Division of Examinations (Exams) sent an “Investment Adviser Notice” via email to advisers that included a reference to the Cash Solicitation Rule in their Form ADV Part 2A brochures, that the Cash Solicitation Rule will be rescinded.7 Exams recommended in the notice that such advisers “should review the accuracy their Form ADV Part 2A brochures’ disclosures, including Item 14 (client referrals and other compensation), with respect to the Marketing Rule.”

On September 19, 2022, Exams issued a risk alert (Risk Alert) highlighting areas of focus for upcoming examinations related to the Marketing Rule.8 The Risk Alert noted that advisers should consider whether their written policies and procedures should be updated to comply with the Marketing Rule and noted advisers’ related recordkeeping obligations. The Risk Alert emphasized a non-exhaustive list of four key areas of review as part of its examination process:

  • Marketing Rule Policies and Procedures. Exams Staff will review whether advisers have adopted and implemented written policies and procedures reasonably designed to prevent violations of the Marketing Rule. The Risk Alert noted the SEC’s discussion in the Adopting Release of such policies and procedures including “objective and testable means,” which the Exams Staff said could include internal pre-review and approval of advertisements, risk-based reviews of advertisements or pre-approval of templates.
  • Substantiation Requirement. Exams Staff will review whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
  • Performance Advertising Requirements. Exams Staff will review whether advisers are in compliance with the performance advertising requirements of the Marketing Rule.
  • Books and Records. Exams Staff will review for compliance with associated new recordkeeping requirements.

Steps Advisers Can Take to Prepare for Implementation

  • Consider the scope of application of the Marketing Rule’s advertising and testimonials and endorsements provisions to your business and marketing activities and confirm that all in-scope activities and relationships are accounted for in compliance preparations. For example:
    • In addition to traditional marketing, the Marketing Rule applies to marketing and distribution for private funds, which can include certain structured products and non-U.S. investment vehicles in addition to more traditional private funds.
    • Indirect communications on behalf of the adviser, such as those through third parties on social media, could be in scope of the Marketing Rule.
  • Review and consider updates to written policies and procedures governing advertising, solicitation and distribution practices for advisory clients and private funds.
  • Review advertisements (e.g., pitch books, fact sheets, websites) for consistency with the Marketing Rule’s seven general prohibitions and for compliance with the content-based requirements and restrictions on testimonials and endorsements, third-party ratings or rankings, and performance advertising.
  • Confirm that advertisements which include performance results comply with the Marketing Rule’s new requirements (e.g., net of fees requirements, related and extracted performance, hypothetical performance, predecessor performance, time period requirements).
  • Cease dissemination of any non-compliant materials prior to implementation of the new Marketing Rule.
  • Review client solicitation and private fund placement or distribution agreements, and consider whether any amendments are necessary in light of the Marketing Rule’s disclosure, oversight and compliance requirements and disqualification provisions.
  • Consider outreach to client solicitors and private fund distribution partners (e.g., placement agents, distributors) concerning disclosure obligations and updated disqualification provisions.
  • Consider how the adviser will address potential requests by Exams for substantiation of material facts.
  • Review recordkeeping policies and procedures and update as necessary in light of new recordkeeping requirements.
  • Confirm personnel responsible for preparing and reviewing marketing materials receive training on the Marketing Rule.

Conclusion

With the Compliance Date fast approaching and Exams having announced that they will be focused on advisers’ compliance with the Marketing Rule, advisers should finalize their compliance preparations and aim to be ready for potential inspections.

Although the SEC considered the contours of the prior Advertising and Cash Solicitation Rules and in many instances codified prior guidance to shape the new Marketing Rule, the Marketing Rule’s breadth and detailed requirements can represent significant new compliance burdens for advisers. And, the number and sensitive nature of documents and relationships potentially impacted by it is meaningful to advisers. The critical role these documents and relationships play in an adviser’s ability to raise assets makes implementing the Marketing Rule a heavy lift that requires a coordinated effort across the adviser. Even so, the SEC Staff has sent a strong message that an adviser will be expected to be able to demonstrate compliance from and following the date it implements the new Marketing Rule. We believe that the steps described in this Dechert Newsflash will be helpful for advisers in the final weeks before the Compliance Date.

* The authors would like to thank Stephen Rutman for his contributions to the Newsflash.

Footnotes

1) See Investment Adviser Marketing, SEC Rel. No. IA-5653 (Dec. 22, 2020) (Adopting Release). There may be instances where this Newsflash tracks the Marketing Rule and Adopting Release without the use of quotation marks.

2) Advisers could elect to begin complying with the new Marketing Rule prior to the Compliance Date but, once such compliance is elected, such advisers could no longer rely on the prior rules.

3) For further detail on these changes, please refer to Dechert Newsflash: SEC Adopts Modernized Investment Adviser Marketing Rule Governing Advertisements and Solicitation

4) Special recordkeeping provisions are included with respect to oral advertisements and compensated oral testimonials and endorsements. See Advisers Act Rule 204-2(a)(11)(i)(A)(1) – (2).

5) The Marketing Rule defines “portfolio” to mean “a group of investments managed by the investment adviser. A portfolio may be an account or a private fund and includes, but is not limited to, a portfolio for the account of the investment adviser or its advisory affiliate (as defined in the Form ADV Glossary of Terms).”

6) See Division Of Investment Management Staff Statement Regarding Withdrawal And Modification Of Staff Letters Related To Rulemaking On Investment Adviser Marketing, SEC Division of Investment Management, IM Information Update, IM-INFO-2021-10 (October 2021); see also Division Of Investment Management: Modified or Withdrawn Staff Statements.

7) Correspondence, Reminder – Rule 206(4)-3 (Cash Payments for Client Solicitations) to be Rescinded, SEC Exams IA Notices (Sept. 7, 2022).

8) Examinations Focused on the New Investment Adviser Marketing Rule, SEC Division of Examinations, Risk Alert (Sept. 19, 2022).