December 1, 2022

Volume XII, Number 335

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The SEC Signals it is Ready to Enforce the New Marketing Rules

On September 19, 2022, the Securities and Exchange Commission (the "SEC") increased its pressure on private funds and their need to get into full compliance with the new Marketing Rule (Rule 206(4)-1) within the next month and a half. The SEC originally published the new rule in March 2021 with a compliance date of November 4, 2022 to modernize and replace a patchwork or old rules and no-action letters that have been in place for over 60 years.

Now the SEC has sent out a risk alert titled, "Examinations Focused on the New Investment Adviser Marketing Rule" announcing that the SEC intends to begin investigations and enforcement of the new marketing rule immediately.  

While enforcement of any of the SEC's rules are to be expected, an announcement with such a narrow focus and in advance of the Marketing Rule's mandatory compliance date suggests a surprising intensity in the Division of Examinations.

The new marketing rule, which is extensive and layered, will affect most communication between investment advisers and their investors. If fund managers have not yet done so, it is time to immediately put in place policies and procedures to get into compliance.

The examination focus areas highlighted by the SEC's September 19, 2022 Risk Alert include:

  • Marketing Rule Policies and Procedures – The SEC staff will review whether investment advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations of the new Marketing Rule. Investigators will be looking for compliance controls with objective and testable means such as "internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates."

  • Substantiation Requirements – The SEC staff will want to see evidence “lockers” or files in place containing backup for each and every material factual statement provided by an investment adviser to an investor / potential investor. The SEC refers to this as being able to substantiate the “reasonable basis” for all material claims of fact made in an advertisement on demand. To that end, the SEC staff refers to having back up “contemporaneous with use”.

  • Performance Advertising Requirements – The SEC staff will determine whether investment advisers are complying with the new Marketing Rule including:

    • Gross Performance: Never listing gross performance, unless the advertisement also presents net performance with equal prevalence.

    • Standard Periods: Non-private fund performance information must include one-, five-, and ten-year (or shorter applicable life of) periods;

    • SEC Approval: Never state or suggest the SEC has reviewed or approved performance information.

    • Selective Past Performance: Avoiding use of selective past performance, instead listing performance results from all portfolios with substantially similar investment policies, objectives, and strategies as the portfolio being offered in the advertisement, with limited exceptions;

    • Hypothetical Performance: Never listing hypothetical performance (which includes targeted performance and strategy performance), unless the adviser adopts and implements compliance 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 adviser provides certain additional information; and

    • Predecessor Performance: Never listing predecessor performance, unless the personnel primarily responsible for achieving the prior performance manages accounts at the advertising adviser and the accounts that were managed by personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the advertising adviser. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in all advertisement.

  • Books and Records – The SEC staff will determine whether investment advisers are complying with the new amendments to Rule 204-2. The SEC staff suggests that investment advisers will want to at least consider revisions to their compliance policies and procedures to assure: that the Adviser maintains records of all advertisements they disseminate, including internal working papers necessary to demonstrate the calculation of performance related information, all information provided or offered under the hypothetical performance information provisions of the rule (including identification of the intended audience for each communication), and documentation for predecessor performance, oral advertisements, testimonials, and endorsements or any questionnaire or survey used to in relation to a third party rating.

  • Form ADV - Investment Advisor Form ADV amendments will need to comply with the new section on advertising and marketing.

For a more detailed review of the new Marketing Rule, please see Foley's summary of the new rule, when it was originally published here.

© 2022 Foley & Lardner LLPNational Law Review, Volume XII, Number 270
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About this Author

Stuart E. Fross, Foley Lardner, Securities lawyer, Finance Attorney
Partner

Stuart Fross is a partner and business lawyer with Foley & Lardner LLP where he concentrates his practice on securities laws and regulations, as part of the Private Equity & Venture Capital, Transactional & Securities and International Practices.

Mr. Fross’ main focus is investment managers and pooled investment vehicles, including U.S. registered open-end, closed end and exchange traded funds, bank collective investment funds (with an emphasis a stable value funds), UCITS funds, as well as private funds, organized in the US and...

617-50-3382
Associate

Leslie A. Pinney is an associate with Foley & Lardner LLP, and a member of the firm’s Transactions Practice.

Prior to joining Foley, Leslie served as a law clerk to the Honorable Nancy G. Edmunds, United States District Court for the Eastern District of Michigan. Leslie also served as a judicial intern to the Honorable Judith E. Levy, United States District Court for the Eastern District of Michigan and interned for a semester with the University of Michigan Vice President and General Counsel's Office.

Before pursuing a legal career, Ms. Pinney worked...

313.234.7118
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