SEC Adopts Changes to Marketing and Cash Solicitation Rule Frameworks

SEC Adopts Changes to Marketing and Cash Solicitation Rule Frameworks

In late 2022, SEC registered investment advisers will be required to comply with new marketing and client solicitation rule-making, adopted today. The SEC adopted amendments to Rule 206(4)-1 that merge existing marketing and cash solicitation rules under the Investment Advisers Act of 1940 – rules that had originally been adopted in 1961 and 1979, respectively. The new rule-making will lead to the elimination of scores of no-action letters that the industry previously relied upon as the basis for performance advertising, and the use of third-party rankings and endorsements. The rule-making also has corresponding amendments to the Books and Records Rule, and amends Form ADV with additional questions about RIAs’ marketing activities.

By adopting new rules, the SEC continues its efforts to “modernize” numerous rules that had not been updated in decades. The SEC has used the word “modernize” six times in its recent press release titles, including the announcement of rule changes covering marketing and cash solicitation rules (12.22.20), the market infrastructure covering equity market data (12.9.20), fund valuation practices (12.3.20), the framework for securities offerings (11.24.20), financial disclosures (11.19.20), and derivatives use by registered funds and BDC’s (10.28.20). In today’s press release, Chairman Jay Clayton stated:  “’The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology[.]  This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors. The new rule provides for an extended compliance period intended to provide advisers with a sufficient transition period, including to enable consultation with the Commission’s expert staff.’”

Some highlights of changes in the marketing rules include:

  • Testimonials will be permitted with appropriate disclosures. 
  • Gross performance presentations will no longer be permitted in one-on-one settings. 
  • Performance information will be subjected to a new standardized set of requirements.   

General prohibitions under new Rule 206(4)-1(a) are:

An advertisement may not:

(1) 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;

(2) 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;

(3) 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;

(4) 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;

(5) 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;

(6) Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; or

(7) Otherwise be materially misleading.

We will all be writing new policies and procedures, and new disclosures, over the next more than a year and a half.  The Compliance Date is 18 months after the Effective Date of the rules.  The Effective Date is 60 days after publication in the Federal Register.  No need to panic now, but lots of work ahead. For more information on this new rule, please contact our regulatory experts.


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