In reviewed SEC rule-making for 2021, the SEC’s new Marketing Rule—Rule 206(4)-1 under the Investment Advisers Act of 1940—stands out, as it will have a significant but not yet fully understood impact on the manner in which investment advisers promote themselves.
The Marketing Rule, effective May 4, 2021 (but as to which investment advisers have until November 4, 2022 to comply), repeals both the prior rule governing advertising—Rule 206(4)-1—and the rule relating to cash payments to solicitors—Rule 206(4)-3, and combines them, with multiple changes, into one. The SEC also amended Rule 204-2—the books and records rule—to incorporate the retention of advertising materials that the Marketing Rule requires.
The Marketing Rule moves away from specificity—such as the detailed requirements as to the practice of paying solicitors—and adopts a more principles-based approach. In so doing it materially alters the manner in which SEC-registered investment advisers advertise, use testimonials and endorsements, and pay fees to solicitors who refer clients.
The most significant provisions of the Marketing Rule include:
- Advisers may use testimonials and endorsements, provided the advisor discloses who in providing the testimonial, the reason for promoting the adviser (such as a solicitor being paid to do so), whether there is a conflict, and if referring person is being paid, disclosure of the payment terms. In general, a testimonial is from a client of an adviser, while an endorsement is from a third party.
- The definition of “advertisement” has been expanded to include indirect communications—such as social media comments by a third party that the advisor promotes. This means that any communication by an adviser that includes or references communications of third parties must be treated as if coming from the advisor itself, and the adviser is responsible for the accuracy of a third party communication that it references. This would seem to include links to third party websites that rank or otherwise review advisers.
- As to cash payments to solicitors, the advisor and solicitor must still have a written agreement (except where the compensation is less than $1,000). However, and strangely given the SEC’s longstanding efforts to require full disclosure, the adviser no longer has to obtain the client’s signature stating that they received disclosure about the conflicts inherent in the arrangement with the solicitor. The definition of compensation is expanded to include non-cash things of value. Much of the specificity, and the check-the-box compliance format of the prior solicitation rule, has been eliminated, although the provision that disqualifies persons subject to various sanctions (“bad acts”) from acting as solicitors carries through to the new Rule.
- Promotional materials are now guided by general principles: they cannot be false or misleading, must have supporting documentation, and disclosures must be clear and prominent.
- Disclosure of prior performance must display net results (rather than gross, which would exclude fees and other costs), and must show performance over the period of one, five and ten years (as applicable). Actual performance presentations must be fair and balanced.
- Advisers must add to their Form ADV a new subsection disclosing their marketing activities, including specific information about the adviser’s use of advertising regarding performance, prior recommendations, testimonials, endorsements, and third party rankings.
Advisers may elect to comply with the Marketing Rule prior to November 4, 2022, provided they do so in total.
In adopting the Marketing Rule, the SEC stated that it will provide updates to identify pre-Rule 206(4)-1 that will still be valid and those that will not. It is likely that interpretations of and compliance with the principles pronounced in it will be developed by Q &As, no action letters, and, as is sometimes the case, enforcement proceedings against advisers who fail to comply or whose purported compliance is manifestly insufficient.