The rule defines advertisement in two prongs. The first prong defines advertising as:
- Any direct or indirect communication that offers the adviser’s services regarding securities to more than one person. The definition explicitly includes communications to private fund investors.
- An offer to one or more persons if the communication includes hypothetical performance.
- The offer of new advisory services to current clients/investors.
- Exclusions from the definition include extemporaneous, live, oral communications and information included in legal and regulatory filings.
- One-on-one communications are generally not considered advertising unless the communication to a client or prospective client includes hypothetical performance. In the case of private fund investors, the use of hypothetical performance is not considered advertising.
The second prong defines advertising as:
- Any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly. This provision covers paid solicitors in addition to other testimonials and endorsements. The old cash solicitor rule will no longer apply. Compensation new includes non-cash compensation. Such things as entertainment and fee discounts may be considered non-cash compensation if they are designed to incentivize a positive statement.
General Prohibitions – Advertisements may not:
- Include any untrue statement of a material fact or omit to state a material fact necessary to make the statement not misleading.
- Include a material statement of fact that an adviser does not have a reasonable basis for believing it will be able to substantiate to the SEC.
- Include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to adviser.
- Discuss any potential benefits to clients or investors connected with the adviser’s services or methods of operation without providing fair and balanced treatment of material risks or limitations.
- Include a reference to specific investment advice provided by adviser where advice is not presented in a fair and balanced manner.
- Include or exclude performance results, or present performance time periods, in a way that is not fair and balanced.
- Otherwise, be materially misleading.
Testimonials and Endorsements are no longer prohibited
- Specific disclosures are required for compensated testimonials and endorsements. Among the requirements are disclosures regarding the fact the person is compensated, any conflicts that arise from this relationship and the material terms of the compensation arrangement.
- All testimonials and endorsements including those that are not compensated are subject to oversight by compliance.
- Solicitors for private funds are now considered promoters in most cases. Due diligence and annual reviews of promoters are required.
Third party Ratings are subject to additional conditions and disclosures
- Questionnaires or surveys from the rating company must be structured to make it easy for a favorable or non-favorable review and not designed for a pre-determined outcome.
- When using third party ratings in advertisements, clear and prominent disclosure of the date, identity of the provider and any compensation paid is required.
Major changes to performance presentations for firms that do not claim GIPS.
The changes to performance presentations include:
- Gross and net returns must be presented with equal prominence in all advertisements
- Advisers must present performance for 1-. 5- and -10 years.
- Related performance must show performance of all related accounts.
- Performance of a representative account may only be used if it is not higher than the return of a composite of all related accounts.
- Extracted performance is a subset of investments in a single portfolio. Adviser is required to offer the return for the entire portfolio and include disclosures about allocation of cash.
- Hypothetical performance includes not only back-tested and model performance, but targeted and projected returns. Robust disclosure and relevancy to target audience are required.
- Significant new conditions are imposed on the use of predecessor performance.
Disclosure of Advertising and Marketing Practices in Form ADV Part 1A
- New Item 5.L. will require advisers to disclose advertising practices.
Additional Requirements for Marketing Books and Records.
- New marketing records are required to be retained around hypothetical and predecessor performance, performance and rates of return, and third party ratings.
The deadline for compliance with the new marketing rule is November 4, 2022. For advisers that wish to adopt the rule before the deadline, the SEC has made clear in a recent FAQ that firms must be ready to comply with the entirety of the rule when it is adopted.
How can SCA help?
SCA can review current marketing pieces against the new rule requirements, develop new marketing policies and procedures, and strategize on the optimal time to adopt the marketing rule. Contact SCA at 929-346-7239 or email at firstname.lastname@example.org.