Special Alert | SEC Investment Adviser Marketing Rule

A “comprehensive framework for regulating adviser’s marketing communications”

Amy S. Matsuo

Amy S. Matsuo

Regulatory and ESG Insights Leader, KPMG US

+1 919-664-7100

The Securities and Exchange Commission’s (SEC) new Investment Adviser Marketing Rule (Marketing Rule) is now in effect; compliance will be required beginning November 4, 2022.

The Marketing Rule is very detailed and complex; it was adopted by a unanimous vote but it is notable that each of the Commissioners published statements outlining their support for aspects of the rule along with their reservations and concerns (available here, here, and here).

The Marketing Rule modernizes and combines two rules under the Investment Advisers Act of 1940 (Advisers Act), which are referred to generally as the Advertising Rule (Rule 206(4)-1) and the Cash Solicitation Rule (Rule 206(4)-3). These two rules were originally adopted in 1961 and 1979, respectively, and the SEC indicates they have not been substantively updated since adoption. The amended framework under the Marketing Rule is designed to recognize the increasing and evolving use of electronic media and mobile communications.

As part of the release, the SEC also adopted amendments to Form ADV (the investment adviser registration form) and the Books and Records Rule (Rule 204-2). These changes will also be subject to the November 4, 2022 compliance date.

Key features of the Marketing Rule provide:

  • Applicability of the rule to all investment advisers registered with, or required to be registered with the SEC. It does not apply to advertisements of registered investment companies or business development companies.
  • A two-pronged definition of “advertisement”:
  • The first prong includes any direct or indirect communication an investment adviser makes that i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser, or ii) offers new investment advisory services with regard to securities to current clients or private fund investors.
  • Exclusions apply for one-on-one communications unless hypothetical performance information is included in certain instances, as well as for extemporaneous, live, oral communication and information contained in a statutory or regulatory notice, filing, or required communication.
  • Advertisements by a third party may be attributed to an adviser as an indirect communication if the adviser i) implicitly or explicitly endorses or approves the information after publication or ii) the adviser is involved in the preparation of the information.
  • Communication may be delivered through emails, texts, instant messages, electronic presentations, videos, films, podcasts, digital audio or video files, blogs, billboards, social media, as well as by paper, including newspapers, magazines, and the mail.
  • The second prong includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).
  • Exclusions apply for information contained in a statutory or regulatory notice, filing, or required communication.
  • General prohibitions against certain marketing practices that may be fraudulent, manipulative, or deceptive. These prohibitions include misstatements or omissions of material facts, unsubstantiated material statements, and failure to present material benefits or risks or performance results in a “fair and balanced” manner.
  • Requirements that “clear and prominent” disclosure of cash or noncash compensation must be provided for endorsements and testimonials, including disclosure of whether the “promoter” is a client and any material conflicts of interest. Disclosures must be provided at the time the endorsement or testimonial is made.
  • Exception is provided for SEC-registered broker-dealers in certain circumstances.
  • Certain “bad actors” and other ineligible persons are prohibited from providing endorsements or testimonials for compensation, though some exceptions apply.
  • Advisers must have a written agreement with certain persons providing an endorsement or testimonial for compensation above a de minimis threshold.
  • Prohibitions against third-party ratings being included in an advertisement unless they comply with the “general prohibitions” and the adviser meets certain additional due diligence and disclosure requirements (as detailed in the Marketing Rule).
  • Specific requirements and restrictions related to the presentation of performance information in advertising, including information related to gross and net performance, hypothetical performance, predecessor performance, and the performance of a subset of a portfolio.
  • Changes to the Books and Records rule that require advisers to make and maintain records of all advertisements for a period of not less than five years. Alternatives are available for oral communications, including oral endorsements and testimonials. The Marketing Rule also sets out records requirements for communications related to performance or rate of return on any portfolios (as defined in the rule) as well as materials relied upon to form the basis of a performance or rate of return in any advertisement.

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