The Marketing Rule: How it Will Affect Your Business

Overview

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On December 22, 2020, the Securities and Exchange Commission (SEC) adopted reforms under the Investment Advisers Act of 1940 to modernize rules describing how Registered Investment Advisers (RIAs) advertise. The amendments created a single rule, the Marketing Rule, that goes into effect on November 4, 2022. The Marketing Rule defines ‘advertising’ as any direct or indirect communication a RIA makes to offer their advisory services to prospective or current clients, with some exceptions, such as for one-on-one communications. In general, the Marketing Rule prohibits certain practices such as making untrue statements or omitting material facts, discussing public benefits without covering corresponding risks, or giving out materially misleading information.

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Prior to November 4, 2022, RIAs need to assess whether they need to update or revise their written policies and procedures to ensure (i) they are reasonably designed to prevent violations of the Marketing Rule; and (ii) their policies and procedures align with their actual marketing practices. In addition, the Advisers Act Rule 204-2 (Books and Records Rule) requires RIAs to make and keep certain records such as internal working papers, performance-related information, and documentation for oral advertisements, testimonials, and endorsements.

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Below, we discuss what the Marketing Rule does, its impact on RIAs, and practical steps to prepare.

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What Does the Marketing Rule Do?

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The Marketing Rule accomplishes three main objectives:

1. Expands the scope of communications that are considered “advertisements”
2. Allows for the use of testimonials, endorsements, third-party ratings, and hypothetical performance in advertisements, subject to the rule’s principles-based framework
3. Allows for the solicitation of prospective investors in private funds in exchange for compensation which includes both cash and non-cash compensation

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Initial Marketing Rule Exam Initiatives

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The SEC communicated the initial Marketing Rule exam initiatives in a recent risk alert. After November 4, 2022, the SEC Staff plans to  conduct a series of national exam initiatives (outlined below) and a broad review of compliance with the Marketing Rule through the regular examination process.

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Marketing Rule Policies and Procedures: Staff will review whether RIAs have adopted and implemented written policies and procedures that are reasonably designed to prevent violations of the Marketing Rule.

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Substantiation Requirement: Staff will review whether RIAs have a reasonable basis for believing that they will be able to substantiate material statements of fact in advertisements. For example, the RIA will need to provide ‘proof’ for the public statement.

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Performance Advertising Requirements: Staff will review whether RIAs are in compliance with performance advertising requirements, including the prohibitions on including the following in an advertisement:

• Gross performance, unless the advertisement also presents net performance with equal prominence
• Any statement that the SEC has approved or reviewed any calculation or presentation of performance results
• Performance results of a subset of investments extracted from a portfolio unless the advertisement provides the performance results of the entire portfolio
• Hypothetical performance unless the RIA implements policies and procedures designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience; the RIA provides certain additional disclosures
• Predecessor performance unless the personnel primarily responsible for achieving the prior performance manage accounts at the RIA and the accounts that were managed by that personnel at the predecessor RIA are sufficiently similar to the accounts that they manage at the current RIA

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What Steps Should Registered Investment Advisers Take Now to Prepare

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With the Marketing Rule going into effect next month, RIAs should take certain steps now to prepare.

• Review the RIA’s marketing and advertising policies and procedures to ensure they comply with the new Marketing Rule
• Review marketing materials and advertisements to ensure they comply with the Marketing Rule. Documents that should be reviewed include marketing presentations, factsheets, advertisements, and other public-facing advertisements
• Communicate to and train employees on how the Marketing Rule will affect their current day-to-day responsibilities and educate them on how to comply with the various compliance requirements

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How Petra Can Help

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Petra Funds Group is a global fund services company that offers private investment funds a wide range of comprehensive regulatory compliance services, including:

• Development of policies and procedures
• Review new regulations and identify potential compliance implications for RIAs
• Conduct marketing material reviews
• Perform social media reviews
• Conduct firm-wide compliance training
• Additional regulatory compliance services as outlined on our website.

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Begin the discussion with Petra’s Managing Director of Compliance, Louis Sweeney, to understand the impact the Marketing Rule will have on your business.