On December 20, 2020, the Securities and Exchange Commission (the “SEC”) passed reforms under the Investment Advisers Act of 1940 (the “Advisors Act”), which modernized the rules governing advertising investment advisers and payments to lawyers.1 On September 19, 2022, the SEC’s Review Division issued a Risk Alert2 advise SEC-registered investment advisers, including private fund advisers, of upcoming areas of review during reviews focused on new Rule 206(4)-1 of the Advisors Act (the “Rule marketing”).
The Marketing Rule Compliance Date is November 4, 2022 (the “Compliance Date”). Investment advisers should determine whether they should update or revise their written policies and procedures to ensure that they are reasonably designed to prevent marketing rule violations.
II. Marketing Rules Initial Review Initiatives and Review Areas
The risk alert indicated that SEC staff will conduct a thorough review throughout the review process, to verify compliance with the marketing rule, which will include, but not be limited to, the following areas :
Marketing Rules Policies and Procedures: SEC staff will consider whether investment advisers have adopted and implemented policies and procedures reasonably designed to prevent violations of adviser law by investment advisers and their supervised persons, including the rule of marketing. In the release adopting the marketing rule, the SEC said it believed that for policies and procedures to be effective, they should include reasonably designed objective and verifiable means to prevent violations of the marketing rule. , which may include conducting internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.
Substantiation requirement: SEC staff will consider whether investment advisers have a reasonable basis to believe that they will be able to substantiate material statements of fact in their advertisements. To demonstrate this reasonable basis, the Marketing Rule Enacting Release suggests that an investment adviser could make a recording along with the advertisement demonstrating the basis for its belief and could implement policies and procedures to determine how to satisfy to this requirement. However, if an investment adviser is unable to substantiate material allegations of fact in its advertisements when requested by SEC staff, SEC staff will assume that the investment adviser had no basis reasonable for his belief.
Performance Advertising Requirements: SEC staff will review whether investment advisers comply with the performance advertising requirements of the Marketing Rule, including prohibiting the following in an advertisement:
- Gross performance, unless accompanied by a presentation of net performance;
- Any performance results, unless provided for specific time periods (not applicable to private fund performance);
- Any statement that the SEC has approved or reviewed any calculation or presentation of performance results;
- To the extent that an advertisement includes the performance of portfolios other than the advertised portfolio, the performance results from less than all portfolios having substantially similar investment policies, objectives and strategies as the portfolio offered in advertising, with some exceptions;
- The performance results of a subset of investments taken from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
- Hypothetical performance, unless the investment adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial condition and investment objectives of the intended audience and that the investment adviser does provide certain additional information; and
- Previous performance, unless the staff primarily responsible for achieving the previous performance manage the accounts at the investment adviser and the accounts that were managed by such staff at the predecessor adviser are sufficiently similar to the accounts they manage at the adviser in investment. In addition, the investment adviser must include all relevant information clearly and prominently in the advertisement.
Books and records: SEC staff will review investment advisers to ensure they comply with the amended books and records requirements related to the marketing rule. The SEC has also amended Form ADV to require investment advisers to provide additional disclosures regarding their marketing practices and reminds investment advisers of their obligation to accurately answer these questions in their next annual Form ADV amendment.
III. S&K Observations
Seward & Kissel urges SEC-registered investment advisers to review their own policies and procedures and implement appropriate changes.
1 Seward & Kissel’s previous marketing rule alerts can be found here: December 23, 2020; January 26, 2021; and September 13, 2021.