How does the new SEC Marketing Rule impact my RIA Firm?

Learn more the SEC Marketing Rule impacts your RIA firm and how you can stay compliant.

On December 22, 2020, the Securities and Exchange Commission (“SEC”) finalized changes to the Investment Advisers Act of 1940 to adopt a modernized registered investment adviser ("RIA") marketing ruleThe new rule creates a single rule to replace the current Advertising (Rule 206(4)-1) and Cash Solicitation (Rule 206(4)-3) rules. New related amendments to the Books and Records Rule (Rule 204-2) and Form ADV were also finalized.

The Form ADV will now require RIA firms to provide additional information related to their marketing practices to assist the facilitation of the SEC’s examination and enforcement capabilities.

Which RIA Firms the New Rule Applies to and When it Takes Effect

The new rule becomes effective 60 days from its official publication. However, SEC-registered RIA firms will have 18 months after the rule becomes effective to comply. As of right now, this new rule only applies to SEC-registered, not state-registered investment advisers. This may change if individual states adopt their own updated advertising rules in the future.

Main Takeaways for RIA Firms:

  • Updated Definition of an Advertisement
    • “First, the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions.”
    • “Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).”
  • What is Prohibited When Utilizing an Advertisement for Marketing Purposes
    • Include any untrue statement of a material fact, or omit to state a material fact
      necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading;
    • Include a material statement of fact that the adviser does not have a reasonable basis
      for believing it will be able to substantiate upon demand by the Commission;
    • Include information that would reasonably be likely to cause an untrue or misleading
      implication or inference to be drawn concerning a material fact relating to the investment adviser;
    • Discuss any potential benefits to clients or investors connected with or resulting from
      the investment adviser’s services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits;
    • Include a reference to specific investment advice provided by the investment adviser
      where such investment advice is not presented in a manner that is fair and balanced;
    • Include or exclude performance results, or present performance time periods, in a
      manner that is not fair and balanced; or
    • Otherwise be materially misleading.
  • What is Required When Utilizing Testimonials and Endorsements for Marketing Purposes - The new rule allows for the use of testimonials and endorsements after meeting specific requirements. The rule defines an "endorsement" as "any statement by a person other than a current client or investor in a private fund advised by the investment adviser that:"
    • (i) Indicates approval, support, or recommendation of the investment adviser or its supervised persons or describes that person’s experience with the investment adviser or its supervised persons,
    • (ii) Directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or
    • (iii) Refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser.

We highly recommend that the Chief Compliance Officer (“CCO”) and all advisory firm principals review the SEC's finalized marketing ruleInvestment adviser regulatory compliance issues related to advertising are frequent and the firm’s CCO needs to establish and implement the proper policies and procedures to ensure proper compliance.