White Paper: Implications of New SEC Marketing Rule for Private Fund Sponsors
The SEC recently adopted a new marketing rule that will significantly impact the advertising and solicitation practices of SEC-registered investment advisers that sponsor private funds (
Sponsors). In this White Paper, we identify the main benefits and burdens of the new rule, and we then provide an in-depth analysis of what the rule will mean for Sponsors and how it will affect their fundraising and related activities.
Benefits
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Burdens
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- The new rule provides:
- principle-based standards for marketing, rather than bright-line rules
- clarity regarding the use of targeted and projected returns
- more flexibility around the use of social media
- more latitude to present case studies that reference performance
- a consolidated, single-source regulatory framework
- Sponsors can present investor testimonials in marketing materials and websites, subject to conditions
- The rule does not apply to one-on-one communications with prospective private fund investors or to marketing materials for 3(c)(5)(C) funds
- The SEC provides an 18-month transition period—compliance required by late 2022
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- The new rule calls for new marketing policies and procedures to implement, more training of IR personnel and more prominently placed disclosures
- While beneficial, principle-based standards can require difficult judgment calls
- The rule’s requirements regarding targeted and projected returns, while providing Sponsors with helpful clarity, create new compliance burdens for Sponsors that present such returns
- The rule imposes:
- new due diligence requirements for third-party ratings presented in marketing materials
- a new substantiation burden for material statements of fact made in marketing materials
- new compliance considerations for:
- webcast recordings
- scripted oral presentations
- one-on-one emails
- portfolio company executive statements
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The new marketing rule replaces the existing “advertising rule” and “cash solicitation rule” that apply to SEC-registered investment advisers (RIAs) under the Advisers Act. This White Paper analyzes the new marketing rule using the following outline:
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A Two-Prong Advertisement Definition. The new definition of “advertisement” contains two alternative prongs by which a communication will constitute an “advertisement”: one that captures communications traditionally covered by the advertising rule and another that governs compensated “testimonials” and “endorsements” (defined to include the solicitation activities currently covered by the cash solicitation rule).
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Requirements for Testimonials and Endorsements. The rule imposes new disclosure, oversight and disqualification requirements on the use of testimonials and endorsements in advertisements.
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Principles-Based General Prohibitions. A set of principles-based general prohibitions will apply to all advertisements.
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Requirements Relating to Third-Party Ratings. An RIA that includes a third-party rating in an advertisement must disclose certain information about the rating and satisfy certain criteria pertaining to the rating’s preparation.
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Requirements for Presenting Performance. An RIA must meet certain requirements to display gross performance, related performance, extracted performance, hypothetical performance and predecessor performance in advertisements.
The SEC also adopted related amendments to the Advisers Act books and records rule and to Form ADV Part 1A. RIAs will need to start complying with the new marketing rule and the amended books and records rule in late 2022.