The SEC’s New Marketing Rule: Here’s What You Should Know Now

December 23, 2020

The SEC’s New Marketing Rule: Here’s What You Should Know Now

UPDATE: 3/5/2021

On March 5, 2021, the Marketing Rule was published in the Federal Register, setting in motion the need for firms to prepare for compliance. Fairview will publish more information on an ongoing basis about the Rule and how it may affect your firm. We are available to answer specific questions about the Rule and can help your firm transition to the new regulations.

WHAT HAPPENED?

On Dec. 22, 2020, the U.S. Securities and Exchange Commission unanimously voted to pass proposed amendments to the advertising and cash solicitation rules, along with updates to other requirements for registered investment advisers. The formerly separate rules are now combined under the Marketing Rule, Rule 206(4)-1 of the Advisers Act.

There have been no amendments to either the advertising or cash solicitation rules since their adoption over 40 years ago; therefore, changes have been long awaited to what many viewed as antiquated rules. Since the previous rules were issued prior to the advent of the internet and other technological advancements, the new modernized rule streamlines regulations and will have a lasting impact on advisers’ marketing and advertising protocols.

The SEC issued the proposed changes late last year and has since workshopped and reviewed the new provisions leading up to their vote on Tuesday. Below are initial takeaways from this new rule:

THE MARKETING RULE

• Advertisement definitions: 
  • Investment adviser advertisements include any direct or indirect communications from investment advisers that are offering advisory services to prospective clients or offering new services to existing clients.
    • Exceptions apply such as unplanned spoken communications and information included in regulatory notices and filings.
  • Investment adviser advertisements also include any testimonials or endorsements for which an adviser compensates another party with cash or other incentives.

• Marketing prohibitions:
  • Any misleading statements, whether it be misleading by falsely stating material facts or omission of pertinent material information
  • Material statements that could not be substantiated by an adviser if requested to do so by the SEC
  • Advertising any information that could create an implication of a materially false statement
  • Offering information about potential benefits without also discussing the related risks
  • References to the adviser’s investment advice in a manner that is not fair and balanced
  • Other misleading information of material substance

• Testimonials and endorsements are prohibited, except when certain requirements are met:
  • All advertisements containing a testimonial must include a disclosure stating if the promoter is a client and whether they were compensated.
    • There are further requirements for disclosure of related conflicts of interest.
    • The new rule does not require that each investor certify they received testimonial disclosures, as was previously mandated.
  • Advisers utilizing testimonials and endorsements must ensure compliance with these provisions. They also must have a written agreement in place with any promoter providing these statements if compensation of more than $1,000, or its incentive equivalent, was provided in the last year.
  • Certain disqualifications apply to prohibited parties acting as promoters.

• Ratings by third-parties: Third-party ratings are not allowed under the rule, except where proper disclosure is provided, and certain other requirements are met related to the preparation of the rating.

• General performance information prohibitions:
  • Gross performance without the inclusion of net performance, regardless of the client type
  • Performance results, unless they are provided under a specified time period
  • Statements relaying that the SEC has reviewed or approved of any performance results
  • Performance of an individual account, unless it includes all related portfolios, subject to certain exceptions
  • Performance from part of a portfolio without providing or offering to provide performance from the complete portfolio in the ad itself
  • Hypothetical performance claims without meeting certain criteria, like adopting policies and procedures designed to properly examine the projected performance
  • Predecessor performance without substantial similarity in terms of personnel and accounts at the new adviser

OTHER AMENDMENTS

• Withdrawal of stage guidance: The staff will withdraw past no-action letters and other guidance related to the new rule as they will either be incorporated into the new rule or will no longer apply. The SEC will list these letters on their website.

• Books and Records Rule and Form ADV:
  • Form ADV will require advisers to supply additional information about marketing practices in the filing. Previously, there were no requirements to report marketing and advertising practices on Form ADV.
  • Because of the newly narrowed definition of advertisements under the rule, advisers will be required to keep fewer advertising records. Records of advertisements sent to more than ten people must still be retained.

WHAT DOES THIS MEAN FOR ME?

The rule will take effect 60 days following its publication in the Federal Register. The compliance date for the provisions is 18 months after the effective date, giving advisers well into 2022 to alter their operations per the amendments. Although relief from some earlier restrictions are offered by the new rules, significant compliance and operational oversight will be needed to ensure all the new requirements are fulfilled.

Fairview will continue to update you with in-depth information about the impact of these changes and how your firm may be affected. As part of our compliance support services, we offer comprehensive marketing and advertising review, solicitation-related consulting, and complete annual updates to Form ADV. Contact us today for more information about how Fairview can help you come into compliance with the new Marketing Rule.