Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues. Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.
Earlier this week, the SEC proposed a new investment adviser advertising rule that would dramatically alter current adviser marketing practices. Proposed Rule 206(4)-1 changes the definition of “advertising,” applies different standards to retail-directed advertisements, allows testimonials, and requires a responsible employee to review and approve all materials. The Release is over 500 pages, so we offer a summary of the most significant changes in the proposed rule. Please note, however, that this proposal still has to go through a lengthy comment process before the law actually changes.
The 10 Most Significant Changes in the Proposed Adviser Advertising Rule
- Expanded Definition of “Advertisement”. The proposed rule applies to “any communication, disseminated by any means.” This definition includes all digital and social media communications.
- Includes Private Funds. The definition of “advertisement” includes communications intended to obtain investors for a pooled investment vehicle (other than a registered fund) advised by the investment adviser.
- Gross Performance Allowed. The proposed rule allows the use of gross performance for non-retail accounts if the adviser includes the fees and expenses that would be deducted to determine net performance.
- Performance Periods. Retail advertisements (see below) must include one, five, and ten-year (or life if shorter) performance numbers.
- Extracted Performance Restricted. A presentation of a subset of portfolio performance must include (or offer to provide) the results of all portfolio investments.
- Higher Standards for Retail Advertisements. A retail advertisement is a communication directed to anybody other than a qualified purchaser (Investment Company Act Section 2(a)(51)) and a knowledgeable employee (Investment Company Act Rule 3c-5). For example, an adviser can only show gross performance if it also shows net performance.
- Practically Outlaws Hypothetical Performance. The disclosure requirements for the use of hypothetical performance are so stringent that the rule essentially outlaws the use of such information.
- Testimonials Permitted. For the first time, advisers could use client testimonials so long as significant disclosure is included. This will facilitate social media comments and likes.
- Designated Reviewer. A designated employee (presumably the Chief Compliance Officer) must review and approve all advertisements.
- Compliance and Recordkeeping. The new rule requires advisers to enhance policies and procedures to ensure the accuracy of any marketing claims, comply with the new Rule’s requirements, and maintain supporting documentation.