While the Marketing Rule retains the Advertising Rule’s focus on regulating “advertisements” disseminated by registered investment advisers, there are also several key changes.
On November 4, all registered investment advisers will be required to be in compliance with the U.S. Securities and Exchange Commission’s (SEC) new Marketing Rule, promulgated under the Investment Advisers Act of 1940. The Marketing Rule replaces the current Advertising Rule and Cash Solicitation Rule under the Investment Advisers Act in their entirety.
With SEC staff already probing advisers about early compliance with the Rule in recent examinations, all registered investment advisers must prepare now for the new regulations. Below we have provided a high level overview of the Marketing Rule’s key provisions and requirements, as well as several steps advisers should take now to ensure they are in compliance by the November 4 deadline.
The prior Advertising Rule contained four specific content prohibitions and a general “catch-all” provision that regulated all “advertisements” distributed by registered investment advisers. While the Marketing Rule retains the Advertising Rule’s focus on regulating “advertisements” disseminated by registered investment advisers, there are also several key changes.
Expanded Definition of “Advertisement” 
The Marketing Rule expands definition of an “advertisement” in several important ways. Advertisements are no longer limited to “written communications,” and expressly include firm websites, social media and all electronic mediums. Moreover, an “advertisement” now includes any “direct or indirect” communication made by an adviser that offers investment advisory services regarding securities.
The Marketing Rule generally retains (with certain limitations) current exclusions for one-on-one communications and also includes exemptions for extemporaneous, live, oral communications. Interestingly, the Rule clarifies that a communication to a current investor is an “advertisement” only when it offers new or additional investment advisory services with regard to securities. Reports and other communications sent to current investors that do not offer new or additional services (i.e., reference a new fund or investment vehicle) are not “advertisements” subject to the Marketing Rule.
Investment Performance Restrictions
Perhaps most notably, the Marketing Rule places significant new requirements and restrictions on the use of investment performance in advertisements.
If an advertisement shows gross investment performance, as a general rule it must also present net investment performance and give at least equal prominence to, in a format designed to facilitate comparison with, the gross performance calculated over the same time period. For private fund advisers, this will require the display of both gross and net performance when showing fund-level returns, the aggregate performance of multiple funds and/or the performance of multiple investments within a fund or a set of funds.
Moreover, all performance results other than private fund performance results must be shown for one‑, five‑ and 10‑year time periods.
Complications may arise when calculating net performance, particularly when advisers seek to aggregate the performance of multiple investments and are forced to estimate the relevant, applicable expenses. Here, advisers may use a model fee, provided that the model fee (i) reflects the highest fee the adviser has charged historically or (ii) is the highest fee charged to the intended audience of the advertisement.
In addition to this general restriction, there are specific new requirements that advertisements display related performance; extracted performance; hypothetical performance and predecessor performance. Of particular note, an adviser may not use hypothetical performance (defined broadly to include targeted or projected performance returns) unless the adviser:
- Adopts specific policies and procedures related to the use of hypothetical performance;
- Makes robust disclosures regarding the risks of using hypothetical performance; and
- Discloses the criteria and assumptions used in calculating the hypothetical performance.
Replaces Prescriptive Rules with General Principles
The Marketing Rule replaces prior specific prohibitions under the Advertising Rule and the Cash Solicitation Rule with a set of principles-based prohibitions that apply to all advertisements. In any advertisement, a registered investment adviser may not disseminate an advertisement that:
- Includes any untrue statement of a material fact;
- Includes a material statement of fact the adviser does not have a reasonable basis for believing it will be able to substantiate;
- Includes information reasonably likely to cause an untrue or misleading implication or inference;
- Discusses any potential benefits to clients without providing fair and balanced treatment of any material risks;
- Presents specific investment advice in a manner that is not fair and balanced;
- Includes or exclude performance results in a manner not fair and balanced; or
- Is otherwise materially misleading.
Note that to establish a violation of the rule, the SEC need not demonstrate an investment adviser acted with scienter; negligence alone is sufficient.
Permits Testimonials and Endorsements
The Marketing Rule eliminates the prior prohibition on testimonials and endorsements, and allows advisers to display testimonials and endorsements in advertisements, provided that certain disclosures are made with respect to the testimonial or endorsement and that the adviser adopts certain oversight and compliance policies.
So, What Should You Be Doing Now?
With the November 4 compliance date fast approaching, advisers must be able to demonstrate they are making a good faith effort to comply with the Rule. Steps that advisers should be taking now include:
- Update your website. With firm websites and social media now definitively included in the definition of “advertisements,” advisers should review their website to ensure it is in compliance.
- Update policies and procedures. Advisers must update their compliance policies and procedures to take into account the Marketing Rule’s requirements. This includes new policies (i) to determine which communications are “advertisements,” (ii) governing the use of hypothetical performance and (iii) ensuring all advertisements are reviewed prior to dissemination.
- Consider adopting endorsements and testimonials. Not all of the Marketing Rule changes are negative. With endorsements and testimonials now permitted, advisers should evaluate incorporating endorsements and testimonials into their marketing strategy.
- Review solicitor agreements. Advertisements will certainly include materials disseminated by a placement agent. Advisers should review their placement agent agreements to ensure that all materials distributed by a placement agent conforms with the Marketing Rule.
- Train staff. Firms should consider having a training session (and memorializing employee participation) so relevant advisory personnel are aware of the important changes going into effect and a record of the training session exists.
- Update marketing materials. Advertisements (particularly offering materials) should be reviewed to eliminate puffery and other statements that could prove difficult for the adviser to substantiate (i.e., “unique,” “world class,” etc.).
- Carefully review investment performance. The most significant changes from the Marketing Rule relate to restrictions on the use of investment performance information. Advisers should understand the difference between actual and hypothetical performance and have appropriate disclaimers and procedures adopted for each relevant type of performance.
- Have backup for statements of fact. Advisers will need to develop and maintain a file supporting or substantiating each statement of fact in each advertisement.
For More Information
If you have any questions about this Alert, please contact Scott Gluck, Michael C. Hardy, Nanette C. Heide, David A. Sussman, any of the attorneys in our Corporate Practice Group, any of the attorneys in our Private Investment Funds Group or the attorney in the firm with whom you regularly in contact.
Rule 206(4)-1. See, U.S. Securities and Exchange Commission, “Investment Adviser Marketing,” Final Rule, Release No. IA-5653; File No. S7-21-19.
 Like most of the Rules promulgated under the Investment Advisers Act, only investment advisers registered or required to be registered with the SEC are required to comply with the Marketing Rule. Exempt Reporting Advisers are not required to comply with the Marketing Rule.
 An “advertisement” is defined as (i) any direct or indirect communication 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 with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser, but does not include: (A) extemporaneous, live, oral communications; (B) information contained in a statutory or regulatory notice, filing or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing or other required communication; or (C) a communication that includes hypothetical performance that is provided: (1) in response to an unsolicited request for such information from a prospective or current client or investor in a private fund advised by the investment adviser; or (2) to a prospective or current investor in a private fund advised by the investment adviser in a one-on-one communication; and (ii) any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly, but does not include any information contained in a statutory or regulatory notice, filing or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing or other required communication. 17 CFR 275.206(4)-1(e)(1).
 Only “advertisements” of registered investment advisers are subject to the Marketing Rule. However, all other communications by investment advisers (including Exempt Reporting Advisers) are subject to the general anti-fraud provisions of the Investment Advisers Act.
 “Related performance” means the actual performance results of one or more related portfolios, either on a portfolio-by-portfolio basis or as a composite aggregation of all portfolios falling within stated criteria. 17 CFR 275.206(4)-1(e)(14).
 “Extracted performance” means the performance results of a subset of investments extracted from a portfolio. 17 CFR 275.206(4)-1(e)(6).
 “Hypothetical performance” means performance results that were not actually achieved by any portfolio of the investment adviser. 17 CFR 275.206(4)-1(e)(8).
 “Predecessor performance” means investment performance achieved by a group of investments consisting of an account or a private fund that was not advised at all times during the period shown by the investment adviser advertising the performance. 17 CFR 275.206(4)-1(e)(12).
 A “testimonial” is any statement by a current client or investor in a private fund advised by the investment adviser: (i) about the client or investor’s experience with the investment adviser or its supervised persons; (ii) that directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or (iii) that refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser. 17 CFR 275.206(4)-1(e)(17).
 An “endorsement” is any statement by a person other than a current client or investor in a private fund advised by the investment adviser that: (i) indicates approval, support or recommendation of the investment adviser or its supervised persons or describes that person’s experience with the investment adviser or its supervised persons; (ii) directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or (iii) refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser. 17 CFR 275.206(4)-1(e)(5).
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