On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) announced that it finalized a new rule which changes the framework that governs investment advisers’ marketing and advertising, as well as changes to the cash solicitation rule.

This modernized single rule is meant to account for decades worth of advancements that have occurred since the 1970’s when current rules were adopted. Changes in technology, investor expectations and preferences, and greater diversity within the investment advisory industry all are factors that underscore the necessity for this rule change.

“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,” says SEC Chairman Jay Clayton.

This rule is meant to provide a more principles-based provisions to replace the broadly drawn limitations and prescriptive or duplicative elements found in the current rules.

The new rule provides new definitions, restrictions, and requirements which include the following:

• A new definition of advertisements has been established. The new definition is two-pronged and includes any direct or indirect communication that an investment adviser makes that either: offers the adviser’s investment advisory services with regard to prospective clients or private fund investors; or (ii) offers new services with regard to securities to current clients or private fund investors. In addition, information an adviser provides that contains any endorsement or testimonial will generally be considered advertisements.
• Endorsements and testimonials will be permitted if the adviser satisfies certain disclosure, oversight, and disqualification provisions.
• Prohibitions on untrue statements of material facts, material statements of fact that the adviser does not have a reasonable basis for believing to be true; including information that would reasonably be likely to lead to a an untrue or misleading implication or inference drawn; discussing any potential benefits without providing fair and balanced treatment of any material risk; creating a performance track record that is misleading; and including any information that is otherwise misleading.
• Performance presentation will now have more requirements as to information that will need to be provided and/or disclosed, especially when using hypothetical or predecessor performance.
• Changes to the cash solicitation rule will now apply solicitors engaged for private fund investors.
• Amendments to the Form ADV.

The above only highlights some of the larger implications of the rule. Greyline is in the process of conducting a complete review of the 400-page rule and will provide a more extensive summary along with how it will impact the industry. In short, the marketing rule appears to codify no-action guidance and remains, in many ways, consistent with the previous framework (no false statements, performance cannot be misleading, sufficient disclosure, etc.).

The new rule has an 18-month transition period and compliance date. The full press release and rule can be found here.