On December 20, 2020, the Securities and Exchange Commission (the “SEC”) adopted reforms under the Investment Advisers Act of 1940, which modernized rules that govern investment adviser advertising and payments to solicitors.1 The compliance date for the Marketing Rule is November 4, 2022 (the “Compliance Date”). With only thirty (30) days until the Compliance Date, SEC-registered investment advisers (“Advisers”) should be finalizing their steps to compliance with the Marketing Rule, with consideration to several key items:
- Scoping Issues. The Marketing Rule provides a two-pronged definition of “advertisement”. An Adviser should inventory and then assess its investor communications to determine what constitutes an “advertisement” under the Marketing Rule. An Adviser’s assessment of its investor communications should include the assessment of previously disseminated communications that the Adviser will continue to use.
- Placement agent agreements. The Marketing Rule expands upon the persons and activities to which the Cash Solicitation Rule2 applied. Traditional private fund placement arrangements involving broker-dealers and other intermediaries, which were not covered by the Cash Solicitation Rule, fall within the requirements of the Marketing Rule. An Adviser should inventory and then assess its current placement agent, solicitation and other arrangements to determine whether such arrangements fall within and comply, as necessary, with the Marketing Rule.
- Performance calculations. Advisers will need to ensure that all advertisements that include performance comply with the relevant requirements of the Marketing Rule. Advisers should consider and confirm the following:
- Gross and Net Performance. Advisers should ensure that any time Gross Performance3 is shown, is it accompanied by a presentation of Net Performance.4 Advisers should ensure that definitions of both Gross and Net Performance included in the adviser’s marketing materials align with the definitions outlined in the Marketing Rule.
- Prescribed Time Periods. If an Adviser includes in any advertisement any performance results of any portfolio or any composite aggregation of related portfolios, then the Adviser should also confirm that this also includes performance results of the same portfolio or composite aggregation for one-, five- and ten- year time periods and that the results are presented with equal prominence and end on a date that is no less recent than the most recent calendar year-end. Advisers should note, however, that private fund performance results are not subject to these prescribed time periods.
- Extracted Performance. If an Adviser shows performance results of a subset of investments extracted from a portfolio, the Adviser should ensure the advertisement provides, or offers to provide promptly, the performance results of the total portfolio. In addition, if an Adviser includes the performance of portfolios other than the portfolio being advertised, the Adviser must ensure that the performance results reflect all portfolios with substantially similar investment policies, objectives, and strategies as the portfolio being offered in the advertisement (with limited exceptions).
- Hypothetical Performance. If an Adviser includes Hypothetical Performance5 in an advertisement, the adviser must ensure that it adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the investment adviser provides certain required additional information. Hypothetical performance includes, but is not limited to performance derived from model portfolios, performance that is backtested by the application of a strategy to data from prior time periods when the strategy was not actually used during those time periods, and targeted or projected performance returns with respect to any portfolio or to the investment advisory services with regard to securities offered in the advertisement. In addition, Advisers must ensure that any assumptions on which the Hypothetical Performance is based are disclosed, including, in the case of targeted or projected returns, the Adviser’s view of the likelihood of a given event occurring. When presenting Hypothetical Performance, Advisers must ensure that Net Performance reflects the fees and expenses that would have been paid if the Hypothetical Performance had been achieved by an actual portfolio.
- Predecessor Performance. If an Adviser includes Predecessor Performance6 in an advertisement, the Adviser must ensure that the personnel primarily responsible for achieving the prior performance manage accounts at the Adviser and the accounts that were managed by those personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the Adviser. In addition, an Adviser must maintain original books and records to substantiate Predecessor Performance.
- Related Portfolios. If an Adviser includes in an advertisement the performance of portfolios other than the portfolio being advertised, the Adviser must ensure that performance results do not reflect fewer than all portfolios with substantially similar investment policies, objectives, and strategies as the portfolio being offered in the advertisement, with limited exceptions.
- Case Studies. Under the Marketing Rule, case studies are specific investment advice and are permitted subject to the Marketing Rule’s general prohibitions. Advisers should inventory all its case studies and then assess whether the information presented therein is presented in a fair and balanced manner. Additionally, to the extent an Adviser’s case studies contain performance information, the Adviser should assess such case studies to ensure they are complying with the Marketing Rule’s restrictions and requirements for performance advertising.
- Recordkeeping Policies. The Marketing Rule requires an Adviser to maintain certain records regarding all advertisements it disseminates, subject to certain exemptions or different requirements with respect to oral advertisements. Advisers’ should ensure their policies and procedures regarding recordkeeping are in compliance with the Marketing Rule by the Compliance Date.
Seward & Kissel strongly urges Advisers to review their own policies and procedures and to implement any appropriate modifications. This Alert does not contain an exhaustive list of considerations for compliance with the Marketing Rule.
If you have any questions regarding the matters covered herein, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.