I. Background
On November 4, 2019, the Securities and Exchange Commission (the “SEC”) proposed amendments (the “proposal”) to Rule 206(4)-1 (the “Advertising Rule”) and Rule 206(4)-3 (the “Solicitation Rule”) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) for SEC-registered investment advisers (“advisers”).1 This memorandum highlights certain notable aspects of the proposal.
II. Advertising Rule Proposal
Proposed amendments to the Advertising Rule would:
- Replace the per se prohibitions of the Advertising Rule with a principles-based approach under which an advertisement may not, among other things, (i) include any untrue statements or omissions; (ii) include any unsubstantiated material claim or statement; (iii) include any untrue or misleading implications or inferences to be drawn about a material fact relating to the adviser; (iv) discuss or imply any potential benefits of the adviser’s services or methods of operation without discussing any associated material risks or limitations; or (v) be materially misleading;
- Expand and modernize the definition of “advertisement” to mean “any communication disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser’s investment advisory services or that seeks to obtain or retain one or more investment advisory clients or investors in any pooled investment vehicle advised by the investment adviser;”
- Permit the use of:
- Past specific recommendations, or specific investment advice, provided they are presented in a fair and balanced manner;
- Testimonials and endorsements, and third-party ratings, subject to certain conditions; and
- Hypothetical performance,2 related performance and extracted performance, subject to certain conditions;
- Establish additional requirements for advertisements based on whether an advertisement is directed to “Retail Persons” or “Non-Retail Persons;”3
- Require, prior to dissemination, a designated employee of the adviser to review and approve an advertisement as consistent with the requirements of the Advertising Rule; and
- Amend Form ADV to provide additional information regarding an adviser’s advertising practices.4
III. Solicitation Rule Proposal
Proposed amendments to the Solicitation Rule would:
- Expand the current rule to cover solicitation arrangements involving all forms of compensation, not just cash;
- Cover soliciting or referring existing or prospective private fund investors;5
- Eliminate the requirement for an adviser to receive a signed and dated acknowledgment of the client’s receipt of the adviser’s Form ADV brochure and solicitor’s written disclosure statement;
- Eliminate the requirement that the solicitor deliver to solicited clients a current copy of the adviser’s Form ADV brochure; and
- Require the adviser to have a reasonable basis for believing that the solicitor has complied with the solicitation agreement.
IV. S&K Observations
The proposed amendments to the Advertising Rule and Solicitation Rule are subject to a public comment period.6 Seward & Kissel will continue to monitor and keep our clients informed of any developments regarding the proposal.
______________________________________________________
1 Investment Adviser Advertisements; Compensation for Solicitations, Release No. IA-5407 (Nov. 4, 2019) available at https://www.sec.gov/rules/proposed/2019/ia-5407.pdf.
2 The proposal would require an adviser to adopt policies and procedures reasonably designed to ensure that hypothetical performance is disseminated only to persons for whom it is relevant to their financial situation and investment objectives. The proposal would also require an adviser to provide additional information so that recipients are able to understand the criteria used, assumptions made, and limitations and risks of using the hypothetical performance.
3 The proposal would define Non-Retail Persons as any clients and fund investors that are “qualified purchasers” or “knowledgeable employees,” as such terms are defined in the Investment Company Act of 1940. All other persons would be defined as Retail Persons. Advertisements directed to Retail Persons, or “Retail Advertisements,” would be required to show net performance results with at least equal prominence as gross performance results. Performance results in Retail Advertisements would be required to be presented for one-, five-, and ten-year periods.
4 The proposal also includes amendments to Advisers Act rule 204-2, the books and records rule, relating to advertisements and the solicitation of clients.
5 The proposal would change the current view of the SEC staff that the Solicitation Rule does not apply to arrangements for payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser. See Mayer Brown LLP, SEC Staff No-Action Letter (Jul. 28, 2008).
6 Comments on the proposal must be submitted to the SEC on or before the date that is 60 days after publication of the proposing release in the Federal Register.
