SEC Risk Alert - Examinations Focused on the New Investment Adviser Marketing Rule

The compliance date for the new Marketing Rule is November 4, 2022 (“Compliance Date”).  Effective on the Compliance Date, investment advisers may no longer choose to comply with the previous advertising and cash solicitation rules.  The SEC staff will be withdrawing certain staff statements related to previous advertising and cash solicitation rules effective on the Compliance Date.  Advertisements distributed after the Compliance Date will be subject to the new Marketing Rule.  Recently, the SEC published a Risk Alert addressing examinations focusing on the new Marketing Rule. 

In review of the SEC’s Risk Alert there are four (4) key takeaways that you should consider in complying with the new Marketing Rule:

• Policies and Procedures: Update and revise written policies and procedures to ensure they are reasonably designed to prevent violations by the advisers and their supervised persons.

• Books and Records: The new Marketing Rule will require investment advisers to make and keep records, such as records of all advertisements distributed, including internal working papers, performance related information, and documentation for oral advertisements, testimonials, and endorsements. Last year the SEC amended Form ADV, requiring advisers to provide additional information regarding their marketing practices.

• Substantiation Requirement: During examinations, the SEC staff will review whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.  The new Marketing Rule strictly prohibits advertisements that include a material misstatement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand to the SEC staff.

• Performance Advertising Requirements: Advisers will need to demonstrate they are in compliance with performance advertising requirements in the new Marketing Rule, including prohibitions on including the following in any advertisement:

  • Gross performance, unless the advertisement also presents net performance;

  • Any performance results, unless they are provided for specific time periods.  This is not applicable to the performance of private funds;

  • Any statement that the SEC has approved or reviewed any calculation or presentation of performance results;

  • To the extent an advertisement includes the performance of portfolios other than the portfolio being advertised, performance results from fewer than all portfolios with substantially similar policies, objectives, and strategies as the portfolio being offered in the advertisement, with limited exceptions;

  • Performance results of a subset of investments extracted from a portfolio, unless the advertisements provides, or offers to provide promptly, the performance results of the total portfolio;

  • Hypothetical performance, unless the adviser adopts and implements written 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, unless the personnel primarily responsible for achieving the prior performance manage accounts at the advertising adviser and the accounts that were managed by those personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the advertising adviser.  The advertising adviser MUST include all relevant disclosures clearly and prominently in the advertisement.

 If you need any assistance complying with the new Marketing Rule, contact an Asgard Compliance Professional at 631-801-2900.