The New Marketing Rule: Part 1 – What is an Ad?

What Happened?

On December 22, 2020, the U.S. Securities and Exchange Commission (SEC) passed amendments to the advertising and cash solicitation rules, along with updates to other requirements for registered investment advisers.  The formerly separated rules are now combined under the new Marketing Rule, Rule 206(4)-1 of the Advisers Act,   made effective May 4, 2021, with a compliance date of November 4, 2022.

With a little over six months until the compliance date for the new Marketing rule, our Flash Reports will cover areas RIAs will need to consider as they update their compliance program for the new regulation.  This Flash Report is the first in that series.

The SEC gave the following reasons for proposing amendments to the advertising rule:

  1. To modify the definition of “advertisement” to be more “evergreen” in light of ever-changing technology;
  2. To replace four per se prohibitions with general prohibitions of certain advertising practices applicable to all advertisements;
  3. To provide certain restrictions and conditions on testimonials, endorsements, and third-party ratings; and
  4. To include tailored requirements for the presentation of performance results, based on an advertisement’s intended audience.

There are two types of advertising under the new, more “evergreen” definition of “advertisement.” The first prong of the new definition specifically relates to adviser communication, with the second prong covering promotion communicated by clients and third parties, in the form of testimonials and endorsement.

Prong One: Adviser Communications (Traditional Advertising)

  • Any direct or indirect communication that:
    • an investment adviser makes to more than one person, or
    • to one or more persons if the communication includes hypothetical performance,\
  • that offers the investment adviser’s investment advisory services
    • to prospective clients or
    • investors in a private fund advised by the investment adviser, or
  • that offers new investment advisory services to
    • current clients or
    • investors in a private fund advised by the investment adviser

This first prong excludes most one-on-one communications and contains other exclusions.

Prong Two: Compensated Testimonials/Endorsements (Solicitation)

Any endorsement or testimonial for which an investment adviser provides compensation directly or indirectly.

The second prong has exclusions and specific disclosures required depending on who is making the statement and the extent to which they are compensated by the adviser.

The Scope of Prong One, includes the adviser’s website, social media, presentation books, factsheets, Private Placement Memoranda, mass emails, newsletters, reused content (such as templates, slides and charts), and GIPS® Reports.  While one-on-one communication is largely excluded from the definition, it is important for firms to understand what is still included:

  • One-on-one communication
    • Must be customized to the recipient and non-duplicative. For example if the first page of a document is customized to an individual client but the rest of the document contains charts and descriptions of a strategy that will be sent to other clients, those pages should be treated as an advertisement and be reviewed for the new rule and properly disclosed.
    • Responses to Unsolicited Requests – Responding to a client’s unsolicited request or question would be a one-on-one communication since it is customized to that unique request.
  • Hypothetical Performance – If the one-on-one includes hypothetical performances, it is an advertisement, unless used in response to an unsolicited request or used by an adviser to private funds to communicate to a private fund investor in a one-on-one communication.
  • Indirect Communication – An adviser is responsible for ensuring that its ads comply with the rule regardless of who creates or disseminates the ads.  Indirect communication would include statements by consultants, other advisers (e.g. fund of funds or feeder funds structure) and promoters.
  • Offer of New or Additional Services – Routine communication to existing clients and investors is not an advertisement so long as there is no offer of new or additional services.  This excludes account statements and other communications in the ordinary course of business.  Including an offer of new or additional services would qualify any such communication an advertisement.

Specific Exclusions to the definition of advertisement

  • Extemporaneous, Live, Oral Communication – Extemporaneous, live, oral communication is excluded from the definition of an ad. Any prepared remarks, prepared slides or other materials are still advertisements. For example, presenting a session at a continuing education event with prepared slides would be an ad, a recording of that presentation online would be an ad, but a live question and answer or panel discussion with no prepared statements would not be an ad.
  • Notices, Filings or Required Communication – Information contained in a statutory or regulatory notice, filing, or other required communication is excluded from the definition of an ad provided that such information is reasonably designed to satisfy the requirements of such notice, filing or required communication.

What does this mean for me?

Although relief from certain restrictions are offered by the new rule, 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.  Our next Flash Report in this series will focus on the scope of Prong Two advertisements promoting a firm through testimonials or endorsements.

Fairview Investment Services provides ongoing, full-service compliance support for investment advisers, including comprehensive marketing and advertising review. Contact Fairview Investment Services at info@fairviewinvest.com for additional information about maintaining your compliance program in an ever-changing regulatory environment.

By | 2022-05-02T21:30:38-04:00 Apr 21st, 2022|Fairview® Flash Reports|

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