SEC ADOPTS MODERNIZED MARKETING RULE FOR INVESTMENT ADVISERS - 05 January 2021

The SEC’s new merged rule on adviser marketing communications replaces rules on advertising and cash solicitation that were adopted in 1961 and 1979, respectively, while the Rule 144 proposal seeks to ensure that holders of market-adjustable securities are not acting as conduits for unregistered sales.

Rules that govern investment adviser advertisements and payments to solicitors are set to be modernized now that the SEC has finalized reforms under the Advisers Act. The amendments reduce the existing rules to a single rule designed to prevent fraud and provide investors with the information necessary to make informed decisions in choosing investment advisers and advisory services (Investment Adviser Marketing, Release No. IA-5653, December 22, 2020).

Separately, the SEC has proposed to amend Securities Act Rule 144 to revise the holding period determination for securities acquired upon the conversion or exchange of certain "market-adjustable securities." The proposed amendment seeks to close a loophole and reduce the risk of unregistered distributions in Rule 144 sales of these securities by mandating that the required holding period under the rule would not begin until the securities are acquired upon the conversion or exchange of the market-adjustable security. The Commission also voted to propose amendments to update and simplify the Form 144 filing requirements (Rule 144 Holding Period and Form 144 Filings, Release No. 33-10911, December 22, 2020).

Adviser marketing. The new single rule adopted by the SEC, designed to regulate investment advisers’ marketing communications, will replace the current advertising and cash solicitation rules, Advisers Act Rule 206(4)-1 and Rule 206(4)-3. Related amendments were also made to Rule 204-2, the books and records rule, and Form ADV, the investment adviser registration form. Third-party ratings included in advertisements will require specific disclosures to prevent them from being misleading while testimonials and endorsements will be permitted, subject to certain conditions. No-action letters and other guidance addressing the advertising and cash solicitation rules will be withdrawn if they no longer apply or are incorporated into the final rule.

Specifically, the amended definition of "advertisement" captures traditional communication covered by the advertising rule and solicitation activities covered by the previous cash solicitation rule. Prohibited advertising practices include those that are materially false or misleading, statements which the adviser does not have a reasonable basis for believing, or investment advice that is not presented in a fair and balanced manner. Among other things, the rule also prohibits advertisements which include certain performance metrics if corresponding information is not provided as well.

"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," said Chairman Jay Clayton. "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."

Effective date. The amendments will be effective 60 days after publication in the Federal Register. Advisers will have 18 months after the effective date to comply with the amendments.

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