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SEC marketing investment communication

 In December 2020, the SEC adopted amendments to modernize and consolidate the original regulations that govern ‘40 Act funds. What has changed, and how does it impact communications from investment advisors?

 

Why:

The streamlined regulations are intended to reflect changes to the investment landscape, including the use of the internet and social media for advertising.

When:

The Investment Advisor Marketing Rule rules were published in the Federal Register on March 5, 2021, and became effective on May 5, 2021. While companies may start following the new guidelines immediately, they must be in compliance by November 4, 2022.

What:

The amendment combines the prior Advertisement Rule and the Cash Solicitation Rule and includes any direct or indirect client communications. The Rule uses a single standard and no longer classifies between “retail” and “non-retail” persons.

In addition to prohibiting misleading comments and ensuring firms can substantiate any claims made, the major changes are:

  • Private funds (including hedge funds ) are now included in the regulation
  • Gross performance needs to be accompanied by net performance, regardless of client type
    • Gross and net performance must be of equal prominence and calculated over the same period
  • Hypothetical performance may only be presented if:
    • performance is relevant to the likely financial situation and investment objectives of the intended audience
  • Performance for 1, 5, and 10-year periods must be shown (or since inception if other periods are not available) as of the most recent calendar year end
    • Not applicable to private funds
  • Predecessor performance can be used provided that the manager responsible is managing the advertised account
    • Disclosure is clear and notes that performance was at another entity
    • Account is sufficiently similar to predecessor account
  • Testimonials and endorsements are allowed but must have disclosures including whether the promoter is a client and whether they were compensated, and some of these disclosures must be “clear and prominent”
    • If an endorser is paid, this must be stated
    • If an advisor deletes negative comments on social media but leaves positive feedback, this is considered advertising
  • Third-party ratings are allowed with proper disclosure, including the identity of the third party, the date the rating was given and any compensation provided
  • Statements relaying that the SEC has reviewed or approved of any performance results should not be included

What if:

Can a company start adopting some of the rules before others?  No. If a firm begins to adapt to one of the requirements, it will need to comply with all the rules.

What Now:

With the implementation of the Marketing Rule, the SEC will withdraw dozens of SEC staff no-action letters. These letters have provided a compliance framework for marketing by investment advisers for decades.

 

To find out how Copylab can guide you through these regulations and provide an innovative solution, get in touch.

 

Evamarie