Risk Alert for Marketing Rule

The SEC’s Division of Examinations has recently issued a risk alert regarding the revised Marketing Rule (Rule 206(4)-1). The compliance date for the Marketing Rule is November 4, 2022 (Compliance Date). As of the Compliance Date, investment advisers may no longer choose to comply with the previous advertising and cash solicitation rules. Registered investment advisers, if they haven’t already, should be reviewing the compliance policies to ensure compliance with this new rule.

This risk alert highlights some of the items that the SEC will be reviewing in connection with any future exams. These include:

• Marketing Rule Policies and Procedures – Staff will review whether investment advisers have implemented policies and procedures that address the marketing rule. They noted that, “they should include objective and testable means reasonably designed to prevent violations of the final rule in the advertisements the adviser disseminates.”
• Substantiation Requirements – The staff will review whether investment advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
• “Performance Advertising Requirements” – The staff will review whether investment advisers are in compliance with performance advertising requirements in the Marketing Rule, including the prohibitions on including the following in an advertisement:
  • gross performance, unless the advertisement also presents net performance;
  • any performance results, unless they are provided for specific time periods (not applicable to the performance of private funds);
  • any statement that the Commission 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 investment 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 advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
  • hypothetical performance, unless the adviser adopts and implements 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. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement.

As always, contact me or any of the Rimon Investment Management lawyers if you have any questions.

Attorney Advertising. This document is not intended to be and is not considered to be legal advice. Transmission of this document is not intended to create, and receipt does not establish, an attorney-client relationship.

Geoffrey Perusse counsels businesses in connection with private capital raising, private fund formation, investment activities, securities regulation and compliance matters. Geoff represents sponsors and managers of private funds across asset classes, including real estate, private equity, debt, venture capital and hedge funds, with respect to the structuring, formation and operation of the funds, including regulatory and compliance matters arising under the Investment Advisers Act of 1940, the Securities Act of 1933, and the Investment Company Act of 1940. Read more here.