Compliance Date Approaching For New Marketing Rule For Investment Advisers

Reflex

• The SEC's new trading rule requires compliance by November 4, 2022

• Investment advisers required to register with the SEC must comply with the Transaction Act, which should affect existing and future transaction material.

• Independent consultants are not subject to market regulations, but are still subject to general anti-fraud requirements.

On December 22, 2020, the Securities and Exchange Commission ("SEC") issued its decision to review and update the SEC's "Notice Rule" (as defined below under Section 206(4) of the Advisers Rule). Cash Solicitation Rule” (together with former Rule 206(4)-3 and former Rule 206(4)-1, the “Previous Regulations”) will be a single rule designed to regulate trading relationships by investment advisers.

New Rule 206(4)-1 (the "Marketing Rule") applies the prohibitions applicable to all advertising under the US Investment Advisers Act of 1940 (the "Advisers Act"). In addition, the SEC issued or modified a large number of no-action letters under the old rule, and investment advisers cannot rely on the no-action letters that have been removed.

The Marketing Standard's compliance date is 4 November 2022 (the "Implementation Date") and will apply to all applicable material distributed or published after that date (even if such material was first distributed or distributed before the date of publication). Investment advisers required to register with the SEC, including materials published in the information section prior to the effective date and available after the effective date.

Unlike its generic predecessors, the Marketing Code contains customized requirements for certain types of advertising, as detailed below.

On September 19, 2022, the SEC issued a Risk Advisory (a "Risk Alert") outlining an "all-nothing" approach to trading rule compliance, meaning that advisers must fully implement a regulation before filing . In the risk advisory, the SEC said it will focus on a number of areas to review in future Securities and Exchange Act compliance reviews, including making appropriate changes to investment adviser practices, policies and procedures, as well as their training. Monitoring, surveillance and compliance programs related to new trade regulations.

Adaptation to the new business rules

Investment advisers should review their advertising and third-party solicitation policies because the new marketing law replaces existing rules and some of the loose ends that private fund managers have traditionally relied on when advertising and soliciting third parties to advisers. and procedures and any formal marketing materials distributed to investors.

Investment advisers required to register with the SEC prior to the effective date must take the following steps to ensure compliance.

• Revise company policies and procedures to comply with new SEC requirements. Investment advisers must adopt and implement written policies and procedures reasonably designed to prevent violations of the new trading rules. SEC examiners conduct assessment inspections in objective and verifiable ways, which may include ad pre-review and approval, risk-based ad sample review, or model pre-approval.

• Review all company marketing materials that will be distributed as of the eligibility date.

• Train all employees, especially those in marketing and investor relations roles, on marketing law. Special attention must be paid to the use of social networks to ensure compliance with the marketing code.

• Update the Company's Books and Records The revised Books and Records Act (discussed and explained in detail below) requires investment advisers to keep and maintain certain records, including advertisements distributed by them or on their behalf. . (eg through placement agents). To comply with the verification requirements under the Marketing Regulation, the company must keep a backup copy of any statements of fact contained in the promotional material distributed in the format and place intended for presentation to the investor or prospective investor. When a request is made to the SEC.

• New Paragraph 5. Amend Form ADV to fill in L. Require advisers to disclose information related to advertising. Please note that this update can be completed in conjunction with the daily annual update form ADV.

An overview of the new marketing law

The SEC's new marketing rule redefines advertising and allows for marketing through new channels, while also revising existing disclosure requirements.
Definition of "Advertisement".

According to the Marketing Regulations, the concept of "advertisement" consists of two clauses:

1. Prong One advertising includes any investment advisor communicating directly or indirectly with more than one person in which the advisor provides the advisor's securities investment advisory services to clients or investors in a private fund. Provide new investment advisory services to existing clients or investors with respect to securities in private funds recommended by an investment advisor.

2. The second point of definition ("two-sided advertising") usually includes any statement or endorsement for which the consultant receives compensation. This includes person-to-person communication, such as verbal communication. Compensation includes cash and unpaid compensation directly or indirectly from the Consultant (eg, referrals, bonuses or other rewards, gifts and entertainment, and deductions for Consultant expenses).

The definition of "advertisement" in the Marketing Regulations expressly excludes i) casual direct oral communication (only excluded in the first part of the definition); ii) information contained in a statutory or regulatory notice, application or other relevant information, if such information is reasonably designed to be such notice, submission or other relevant information (both definitions excluded); and iii) a communication involving (but not limited to) a hypothetical return in response to an unsolicited inquiry from a prospective or current client or private equity investor or prospective or current private equity investor. from the first end of the definition).

Notice of performance

The Marketing Rule generally prohibits an investment adviser from including or adding to performance results in a "fair and balanced" or misleading manner. In addition, the Business Code provides specific obligations and prohibitions for the provision of performance information:

1. Gross and Net Return: Gross return is never given unless an ad produces a net return with the same selection. Meeting this requirement varies by strategy, and the ad must still meet the requirement that the ad is not materially misleading.

2. Preferred Periods: Non-private fund performance data must include performance measurement periods of one, five and 10 years (or as shorter as applicable). This requirement also applies if non-private foundation assets are included in the private foundation declaration.

3. SEC Approval – Never state or imply that the SEC has reviewed or approved performance data

4. Past performance: Avoid presenting a selection similar to the portfolio presented in the advertisement instead listing the performance results of all portfolios with investment policies, objectives and strategies, except in certain exceptional circumstances.

5. Hypothetical performance: Hypothetical performance (including target performance and strategy performance) should never be provided unless the adviser has reasonably designed and implemented performance policies and procedures to ensure that performance is consistent with the financial condition and investment objectives of the target audience. The consultant will provide additional information

6. "Trace track" or past performance: Never provide past performance unless the principal who achieved the past performance does not currently manage the advertising consultants' accounts and the accounts managed by the previous consultant's employees are similar to their accounts. Management in a consultant. In addition, the advertising consultant must clearly and legally include all relevant information in all advertisements. The investment adviser is requested to provide supporting documents for the listed past achievements. The Commercial Code contains multiple copies of certain provisions for private fund advisers. These reductions include:

• Prong One's definition of advertisement generally excludes any one-to-one communication, including hypothetical performance, to a prospective or current investor in a private fund recommended by an investment adviser and expressly excludes references to hypothetical performance . This section was created for private equity advisors because, according to the SEC, a private investor may ask questions and appreciate the limitations of this information during a one-on-one interaction. However, it should be noted that the approximate performance should actually be given one-to-one. In other words, if the communication is non-personal and repetitive material, provided to multiple investors for the purpose of soliciting investment in the Fund, it falls within the scope of the transaction rule.

• Adviser's equity portfolio and equity portfolio are not included in the definition of "estimated performance" in the Trading Rule. However, these offers are subject to other applicable requirements under the Trading Rules, including general share restrictions.

Reviews and Approvals

The Marketing Code includes the use of claims and endorsements in advertising, subject to certain conditions and disclosures. In the Marketing Regulations, "testimonial" means any statement made by an investment adviser to a current client or investor in a private fund: i) about his experience with the investment adviser or persons he supervises, ii) directly or indirectly, another client of the investment adviser and the adviser invests in the private fund recommended by the adviser.

"Endorsement" means any statement made by an Investment Adviser who is not currently an Investment Client of a Private Fund: i) the Investment Adviser's endorsement, approval or recommendation, or its subordinates or their experience; For them, ii) to directly or indirectly recruit any client or prospective client as an investment adviser or investor in a fund recommended by the adviser, or iii) instruct any client or prospective investor to introduce a client or investor in to become the recommended private fund. Investment Adviser.

The following three conditions apply to the use of certificates and endorsements.

1. Disclosure. Whether the person providing the adviser's certificate or certification is a client of the investment adviser and whether any compensation (whether in cash or otherwise) has been paid to that person. The person testifying or corroborating is required to disclose any conflict of interest as a result of the indemnity agreement and/or the consultant's relationship with such person.

2. Monitoring and compliance consulting. Investment advisers must enter into a written agreement with any person providing representation or support that sets forth the agreed scope of services and compensation terms. Investment advisers using testimonials or endorsements in advertising must have policies and procedures in place to ensure compliance with the new trading rules.

3. Disability If the Adviser knows or knows at that time that the person making the statement or representation is in breach of the Business Code, the Investment Adviser may not directly or indirectly indemnify the person for the statement or representation. For example, a person is "incompetent" under federal securities laws if they were subject to disciplinary action or had a "disabling event" ten years before testifying or testifying.

The Commercial Code provides for four exceptions to these contracts of representation and endorsement, including certain cases:

1. De minimis compensation. Certificates or endorsements awarded for total compensation (or non-monetary equivalent) of $1,000 or less in the previous 12 months are exempt from the written consent requirement.

2. Branches. A statement or endorsement by an investment adviser's partner, officer, director, employee or affiliate is exempt from the provisions of the above statements and written agreement, provided the relationship is clearly or sufficiently disclosed. Approval done.

3. Stockbrokers. In the year Under the Securities Exchange Act of 1934, stockbrokers in the United States are exempt from the exemption provisions of the Act, unless otherwise exempted by law. The client is referred to the rule for the best interest. Registered broker-dealers who retain non-retail clients are exempt from the additional disclosure requirement.

4. Rule 506(d) Concerned Persons. Under Section 506(d) of the Securities Act of 1933, a statement or representation made by a person is exempt from the inclusion provision with respect to a securities offering that does not exclude an offer under Rule 506.

Generally, all distribution agent representations are considered approvals under the new transaction rules. Investment advisers must review all existing and active distribution agent agreements to ensure they comply with the new disclosure and other requirements under the Trading Rules.

Third Party Ratings

The Marketing Code expressly permits the use of third-party ratings in advertising, provided the Adviser complies with the Marketing Code's general prohibitions and certain additional requirements. "Third-party rating" in terms of the Marketing Rule means "an investment adviser rating or rating (as defined in the Glossary of Form ADV) issued by a person who is not a related party and such person provides such rating or rating in the ordinary course of business." The consultant is required to have a reasonable basis for believing that any poll or survey used to prepare a third-party rating is accurate. A questionnaire or survey should not be designed or framed to make it easy for the participant to give positive or negative answers and to produce a predetermined result.

Advertisements containing third party ratings must clearly and distinctly state, if the Investment Adviser reasonably believes that the advertisement clearly and unequivocally states: i) the date on which the rating was issued and the time on which the rating was issued. established ii) the identity of the third party that created the ranking and compiled the table; and iii) where applicable, such compensation is provided directly or indirectly by the Consultant in connection with the acceptance or use of third party status.

General prohibitions

In addition to the specific prohibitions described above, the Commercial Code sets out seven general prohibitions on advertising by investment advisers under the Commercial Code, which take a "principles-based" approach. In particular, the Investment Advisers may not distribute any advertisement, taking into account the circumstances in which the advertisement is made:

1. This involves misrepresentation or omission of material facts

2. Contains statements of fact that cannot be verified on reasonable grounds.

3. It contains information that may lead to false or misleading results or conclusions

4. It does not provide for fair and balanced treatment of material risks or material limitations of the potential benefits of the consultant's services.

5. It does not provide specific investment advice in a fair and balanced manner.

6. It includes performance results or does not include performance results or presents the performance in an incorrect or unbalanced manner

7. Otherwise, the material is misleading

Register maintenance

In addition to the Marketing Act, the SEC has approved amendments to Advisers' Rule 204-2 (the "Books and Records Rule"), which require investment advisers to distribute certain records related to marketing materials, including all advertising. . (or distributed on your behalf, for example by a recruitment agent) and supporting documents confirming the statements of fact in such advertisements. The SEC expects the investment adviser to provide supporting information consistent with any benefits (such as "best in class" and "unique") used in promotional materials when requested.

Social networks

Investment advisers must pay particular attention to the use of social media by employees or associates and how such content can be taken into account by the investment adviser. Third-party content becomes available to the Adviser if the Adviser either implicitly or explicitly "adopts" the content (ie if the Adviser republishes a post or article about their funds or portfolio companies) or "feeds" it to its own editorial team. . Content (ie the consultant is involved in third party content development).

Investment advisers should be aware that they are just as responsible for third-party content they receive or link to as they are themselves.

A third party's use of social media for an investment advisor is subject to certain facts and circumstances. Investment advisers should consider the following:

• Adopt social media policies and procedures designed to prevent third-party content from being taken as a result of the Investment Adviser's services.

• Prohibition on certain communications that may involve an investment adviser

• Implement timely training using specific examples of social media dos and don'ts.

03 03 3021 IM Coffee Chat - New SEC Trading Rule - Redefinition of "Advertising"