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November 4, 2022

Investment Advisers Required to be in Full Compliance with New Marketing Rule by November 4, 2022

By no later than November 4, 2022, all investment advisers that are registered or required to be registered with the US Securities and Exchange Commission are required to be in full compliance with the SEC’s new rule—referred to as the “Marketing Rule”—governing the advertising and cash solicitation practices of registered investment advisers, which is codified in Rule 206(4)(1) under the Investment Advisers Act of 1940, as amended (the Advisers Act). The new Marketing Rule merges a number of changes to the existing advertising and cash solicitation rules into a single rule.

From and after the compliance date, all communications by registered investment advisers that qualify as “advertisements” under the Marketing Rule, as well as any testimonials or endorsements by third parties for which an investment adviser pays compensation, will need to be in compliance with the Marketing Rule. Existing materials, including PPMs of legacy funds and performance results, regarding services that will be provided by an adviser after the compliance date (e.g., a private fund that is still in its offering period) or that will be provided to current or prospective investors after the compliance date in connection with the offering of new services (e.g., the launch of a new private fund) may be considered advertisements, subject to the provisions of the Marketing Rule.

The Marketing Rule includes seven general, principles-based rules that apply to all advertisements as well as special requirements for performance results, third-party ratings and testimonials and endorsements.

In addition, investment advisers are required to be in full compliance with the related amendments made by the SEC to its books and records rule (Rule 204-2 under the Advisers Act) by no later than November 4, 2022.

In a risk alert issued on September 19, 2022, the SEC indicated that it will conduct a broad review through the examination process of investment advisers for compliance with the Marketing Rule. In particular, the SEC highlighted the following areas of initial examination review:

  • Adoption and implementation of appropriate policies and procedures reasonably designed to prevent violations of the Marketing Rule.
    • Such policies and procedures should include objective and testable means reasonably designed to prevent violations of the Marketing Rule, including, for example, requiring internal pre-reviews and approvals of all advertisements, samples of advertisements based on risk or pre-approving templates.
  • Whether an investment adviser has a reasonable basis for believing that it can substantiate all statements of material fact in every advertisement.
  • Compliance with performance advertising requirements, including those relating to the presentation of actual, related, extracted, hypothetical, and predecessor performance.
  • Compliance with expanded books and records requirements.

In order to ensure compliance with the Marketing Rule, advisers should:

  • Review internal policies and procedures and revise/adopt new policies and procedures as necessary, including policies and procedures regarding:
    • Social media use by adviser-associated persons.
    • Third-party communications regarding the adviser, including testimonials and endorsements.
    • One-on-one communications.
    • Compensation for testimonials or endorsements.
    • The substantiation of claims of material fact in advertisements.
    • The use of hypothetical performance advertising and the intended audience therefor.
  • Assess and catalogue the universe of existing materials, content and communications that might be considered an advertisement. Such communications may include:
    • Legacy PPMs and other marketing materials (such as flipbooks) relating to existing funds that are still in their fund-raise periods.
    • PPMs and other marketing materials relating to new funds that will be launched after November 4, 2022.
    • PPMs and other marketing materials and communications from funds of funds or feeder funds that the adviser passes along to its clients.
    • Pre-recorded audio or video content.
    • Presentation decks.
    • Written, prepared remarks.
    • Responses to diligence requests or other one-off communications that include inserts that are provided to multiple investors.
    • Information and presentations at investor meetings to which prospective investors are invited.
    • Financial and other information regarding an adviser’s products and services provided to persons (including existing clients) that do not currently use such products or services.
    • Website material and content on social media (including content by an adviser’s associated persons).
    • Third party content regarding the adviser, including posts, comments or other information on websites and social media.
    • Brand content, educational information, market commentary, articles, white papers or other general information published by the adviser regarding investments.
    • Regulatory filings.
  • Review any communications that may be considered advertisements for compliance with the Marketing Rule, and revise as necessary. Pay particular attention to:
    • Statements of material facts.
    • Performance information.
    • Past specific investment advice.
    • Third party content, including testimonials and endorsements.
    • Third party ratings.
  • Review agreements with placement agents and make sure they include provisions (such as a pre-review of materials or other appropriate limitations) that allow the adviser to form a reasonable basis that placement agent communications comply with the Marketing Rule.
  • Use the updated Form ADV (and respond to the new questions) when filing the first annual amendment after the compliance date.

In addition, advisers should take steps to ensure compliance with the revised books and records rule, including adopting appropriate policies and procedures, as necessary. The revisions to the books and records rule include expanded requirements for the maintenance of records relating to:

  • Predecessor performance (if advertised).
  • Communications that include performance information regarding proprietary accounts and private funds and the underlying calculations for those accounts or funds.
  • Advertisements (including copies thereof and intended audience records).
  • Testimonials and endorsements.
  • Third-party ratings.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.