The Marketing Rule (the “Marketing Rule”) became effective as of May 4, 2021 (the “Effective Date”).1 The Marketing Rule, which applies to SEC-registered investment advisers (each, an “adviser,” and collectively, “advisers”), is designed to modernize the requirements governing adviser advertising. The Effective Date began an eighteen-month period for advisers to transition into compliance with the requirements of the new rule by November 4, 2022 (the “Compliance Date”).2 An adviser that intends to rely on the Marketing Rule prior to the Compliance Date must be fully compliant with all of its provisions before doing so.3
This Alert is the first of a series that we expect to publish analyzing the new Marketing Rule and its impact on advisers to private funds. In this Alert, we (i) describe circumstances in which different forms of direct and indirect communications may be deemed adviser advertisements, (ii) consider the implications of the Marketing Rule’s general prohibitions on the use of specific investment advice (which includes past specific recommendations and case studies) in marketing materials, and (iii) suggest preliminary actions that advisers may consider taking in anticipation of transitioning to the Marketing Rule.
1. Could the Marketing Rule apply to communications to current private fund investors? If so, what types of private fund investor communications are covered?
Yes, the Marketing Rule could apply to communications with current private fund investors. Whether and how the Marketing Rule applies will depend on the communication’s content and manner of dissemination.4 Direct or indirect communications by the adviser offering new or additional advisory services relating to securities to existing private fund investors are “advertisements” under the Marketing Rule.5
Subject to certain exceptions, the following types of communications would not be advertisements.
- One-on-One Communications. One-on-one communications, including with existing private fund investors, would be excluded from the definition of advertisement under the Marketing Rule.6 Multiple persons that constitute a single entity or account will be considered a single person for purposes of this exclusion. In the Release, the SEC contemplated that a communication nominally directed to a single person could be deemed to be a communication to more than one person, if the communication is duplicative with communications being sent to other persons.7 Accordingly, template or form communications tailored for individuals, but which are distributed broadly would not qualify as a one-on-one communication. In addition, if a portion of a one-on-one communication is duplicative with a portion of a communication sent to another, those portions will not qualify as one-on-one communications and may be advertisements, even if the two communications are otherwise distinct.8
- Private Placement Memoranda. Information included in a private placement memorandum (“PPM”) relating to the material terms, objectives and risks would not be an advertisement. Other information included in the PPM could, however, be deemed and advertisement, such as:
- Similarly Managed Account Performance Information: Related performance information of separate accounts could be advertisements and may require disclosures.9
- Targeted or Projected Return Information. A portion of a PPM that includes targeted or projected performance returns may be considered an advertisement, because targeted and projected performance returns are forms of hypothetical performance.10
- Account Statements and Similar Reports. Account statements, transaction reports and similar materials, including presentations, provided to existing private fund investors about the performance of funds in which they have invested are not advertisements unless the communication also offers new or additional advisory services of the adviser relating to securities.
- White Papers, Educational Materials and Market Updates. General information about investing, including information about types of investment vehicles, asset classes, strategies, geographic regions, sectors or general market commentary are not advertisements if they do not offer the advisers’ securities-related services.
- Extemporaneous, live, oral communications. Extemporaneous, live, or oral communications are not be advertisements. The Release states that the goal of this exclusion was to avoid the difficulties inherent in ensuring extemporaneous statements comply with the Marketing Rule. However, written communications prepared in advance would not be eligible for this exclusion.
- Regulatory Filings. Information contained in a statutory or regulatory notice, filing, or other required communication is excluded from the definition of “advertisement”, as long as such information is reasonably designed to satisfy the requirement of such notice, filing or other required communication.
In anticipation of the Compliance Date, private fund managers may wish to review whether their: (i) communications to existing private fund investors would be deemed advertisements, under the Marketing Rule and (ii) one-on-one communications qualify for the one-on-one exclusion from the definition of advertisement.
2. Could an adviser be responsible for marketing communications related to the adviser that are created and/or disseminated by a third-party?
Yes, the definition of advertisement under the Marketing Rule includes indirect communications by an adviser, which may capture communications made through or disseminated by a third-party, such as placement agents or fund-of-fund managers, among others.11 The extent to which a third-party communication is deemed an indirect communication by the adviser (and, therefore, an advertisement) will be a facts and circumstances analysis, turning on the extent to which the adviser participated in the creation or dissemination of the communication, or otherwise approved of the communication.12
An adviser will be responsible for third-party information or materials when it explicitly or implicitly endorses or authorizes the information or materials.13 However, if an advertisement is altered or edited by a third-party without the adviser’s approval, the adviser will not be responsible for such alterations or edits.14 An adviser involved in preparing a third-party communication may separately be deemed to have helped create or influence the third-party’s communication, and, by extension, the communication may qualify as an indirect advertisement by the adviser.15
Material Provided to Fund of Funds. An underlying fund manager in a fund of funds will be responsible for ensuring that the material it prepares and provides to the fund of funds manager for distribution to the investors in the fund of funds complies with the Marketing Rule.
Social Media. An adviser that includes a hyperlink to third-party content in an advertisement may be deemed to have implicitly approved of the content.16 If an adviser takes affirmative steps to alter, manipulate or otherwise influence third-party commentary on social media or another website, including its own website, the SEC may deem such commentary as attributable to the adviser.17
In anticipation of the Compliance Date, an adviser should consider (i) whether sufficient controls are in place to monitor materials provided by third-parties on its behalf and (ii) restricting third parties from disseminating any materials concerning the adviser that it has not explicitly approved.
3. Could an adviser be responsible for its employees’ activity on their personal social media accounts?
Yes. Advisers that wish to prevent employee social media accounts from falling within the scope of the Marketing Rule should consider adopting and implementing a policy that prohibits the use of employee social media accounts to market the adviser’s services.18 Notwithstanding the adviser’s policy, an employee may be held personally responsible for violations of the Marketing Rule in respect of postings on the employee’s social media account.19 In such a situation, the adviser’s relative responsibility will be determined through a facts and circumstances analysis of the adviser’s supervision and compliance efforts.20
To the extent an adviser would like employee personal social media accounts to remain outside of the scope of the Marketing Rule, the adviser should consider adopting the policies and procedures specified in the Release, which include prohibiting employees from using social media in a manner that would violate the Marketing Rule, conducting periodic training, obtaining employee attestations and periodically reviewing publicly available content on employees’ personal social media accounts.21
4. Under the Marketing Rule, can marketing materials include references to specific investment advice (e.g., past specific recommendations and case studies)?
Yes. An advertisement may reference an adviser’s favorable or profitable specific investment advice (which includes past specific recommendations and case studies), provided that the advice is presented in a fair and balanced manner.22 The fair and balanced requirement applies to all forms of specific investment advice, regardless of whether the advice is current or past, was acted upon, reflected actual portfolio holdings, or was profitable.23
Determining whether a reference to specific investment advice is presented in a fair and balanced manner will depend on the relevant circumstances and context.24 The Release states that the fair and balanced standard could be satisfied when the presentation:
- includes, for case studies, the overall performance of the relevant strategy or private fund for at least the relevant period covered by the list of investments used as case studies;25
- applies, for specific investment advice, the same non-performance related criteria when selecting the references to specific investment advice across measurement periods (e.g., such as listing them on an alphabetical or rotational basis);26 or
- meets the previous Advertising Rule’s requirements, including those methods for complying imposed under existing SEC staff No Action letters.27
Among other factors, advisers will need to carefully consider an advertisement’s intended audience when determining whether references to specific investment advice are fair and balanced.28 According to the SEC, an institutional audience may reasonably be expected to be better positioned than a retail audience to understand the inherent risks associated with relying on, and may attach relatively less importance to, specific investment advice.29
In anticipation of the Compliance Date, an adviser should consider adopting policies and procedures addressing the presentation of specific investment advice in marketing materials to ensure that such information is presented in a fair and balanced manner.30 Those policies and procedures may include documenting an adviser’s reasonable expectation for an advertisement’s intended audience, and the adviser’s basis for such expectation.31 An adviser may wish to further amend marketing, placement and distribution agreements to limit the scope of potential investors to be solicited.32
5. For purposes of the general prohibitions under the Marketing Rule, how can an adviser establish a reasonable basis for believing that it will be able to substantiate a material statement of fact on demand by the SEC staff?
The Marketing Rule prohibits an advertisement from including any material statement of fact that the adviser does not have a reasonable basis for believing it can substantiate upon demand by the SEC staff.33 Whether a statement of fact will be considered material will depend on the relevant facts and circumstances.34 Any performance returns included in an advertisement would be material statements of fact.35 Other material statements of fact include stating that an investment professional holds a particular certification, or that an adviser offers a certain type or number of investment products.36
The Rule requires advisers to retain records that form the reasonable basis for all material statements of fact contained in an advertisement and to produce such records on demand by the SEC staff.37
In anticipation of the Compliance Date, an adviser should evaluate whether changes will be needed to its advertisement review and recordkeeping processes to substantiate material statements of fact included in advertising.38 The Release contemplates that the most streamlined and effective way to satisfy the requirement may be to create contemporaneous records of the material statements of fact contained in advertisements with corresponding cross references to where such statements can be substantiated.39