In particular, investment advisers should be aware of the requirements of the marketing rules regarding the presentation of certain performances in an advertisement. Below is a high-level summary of the types of returns that require new, updated or improved information from funds and their advisors. Policies and procedures relating to the use of hypothetical returns should specify how the advisor restricts advertising to the target audience and determines whether the hypothetical return is relevant to the likely financial situation and investment objectives of that audience. In making this decision, private fund advisors should consider their experience in raising funds from investors. For example, their experience might suggest that previous investors have evaluated a certain type of hypothetical return to evaluate the advisor`s investment strategy and process. New consultants can rely on other resources such as questionnaires, surveys, interviews and academic research. [1] A “private fund” is defined as an issuer that would be an investment company but for the exemptions in section 3(c)(1) or 3(c)(7) of the Investment Companies Act of 1940. In particular, this definition does not include many real estate funds, including those based on Section 3(c)(5)(C). With respect to changes to the marketing rule, the SEC also adopted amendments to the book and records rule. In addition, the SEC amended Form ADV to require consultants to provide additional information about their marketing practices.
On the 22nd. The SEC`s marketing rule adopted in December 2020 explicitly applies to certain communications with private fund investors and not just to clients who are advisors to a registered investment adviser (RIA). Given that many of these disclosures now fall under the definition of “advertising,” the rule will have a significant impact on the marketing efforts of private fund advisors. An SEC risk warning found that more than 36 percent of investment advisers registered with the commission manage private funds. [1] In December 2020, the Securities and Exchange Commission passed significant reforms under the Investment Advisers Act of 1940 to modernize the rules governing the recruitment of investment advisers and payments to lawyers. These changes resulted in a single rule, Rule 206(4)-1 (the marketing rule), which replaced the previous rules for advertising and cash advertising. As a reminder, the United States In late 2020, the Securities and Exchange Commission (the “SEC”) adopted new rules (the “Marketing Rules”) governing the solicitation of investment advisors and the use of lawyers/placement agents. Marketing rules must be met by November 4, 2022. The purpose of this summary is to provide a brief overview of the issues that investment advisors should be aware of prior to this important deadline.
The marketing rule only applies to communications that meet the definition of an advertisement that covers two types of communications. The expanded definition of advertising now explicitly includes communications to private fund investors, although market practice generally subjects such communications to the current disclosure rule. Below is a general summary of some notable changes and action points designed to help private fund advisors prepare and implement the new rule. Advertising the return of private funds must comply with gross and net fee requirements. Unlike other performance disclosure requirements, private fund advisors are not required to provide one-, five- and ten-year returns. The SEC did not impose this requirement because presenting a very recent performance would be misleading in some cases. Nevertheless, private fund advisors cannot choose periods of positive return because the advertising would not be fair and balanced. Departing significantly from the previous advertising rule, the amended marketing rule gives consultants the flexibility to highlight previous specific recommendations, provided they are presented in a fair and balanced manner. iii Such conduct is any conduct in which the person “wilfully violates any provision of the Securities Act of 1933 [15 U.S.C.
77a et seq.], the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.], subchapter I of this chapter, this subchapter, the Commodity Exchange Act [7 U.S.C. 1 et seq.] or the rules or regulations cannot comply with this regulation or any rule of the Municipal Securities Rulemaking Board. Private equity firms are working to adapt to new rules for marketing funds to potential investors and expect a boost from regulators to check compliance when the policy goes into effect next month. In a reversal of previous SEC guidelines, the marketing rule now encompasses the relationship of a private fund advisor with an investment agent. As a result, private fund advisors must comply with the disclosure, monitoring and disqualification provisions of the marketing rule when hiring an placement agent or similar SQ search tool.