The Quick, 3-Step Approach to Addressing the SEC’s New Marketing Rule

Sep 8, 2021

2 min read

Many private fund advisers aren’t expected to adopt the new Investment Adviser Marketing Rule,  which is intended to modernize the rules governing the advertising and cash solicitation practices of SEC registered investment advisers, in the next few months. The primary reason for procrastination given by those going that route is that the SEC will likely publish additional information around the implementation of the marketing rule, which came into effect in May with a compliance date of November 2022. Still, it’s not too early to prepare a plan of action and those that start making changes now won’t end up tangled in red tape this time next year.

Curtis Flippen, a senior director on Foreside’s Investment Adviser Compliance Services team, believes IR professionals can expect the Marketing Rule to be high-up on the SEC’s examination priorities for 2023 and recommends that firms start preparing about three to six months in advance of rule adoption (depending on the size of the firm).  He argues that preparation can be a relatively efficient and painless process for those who take his three-step approach:

Step 1 - Risk Assessment

The risk assessment should focus on marketing, advertising and soliciting. This risk assessment will then create the basis for new policies and procedures taking account the major changes from the new rule.

“You're identifying any compliance risks and conflicts of interest in your existing process that may require adjustments because of the new statutory requirements,” Flippen said. “You want to compare the new statutory requirements and the Marketing Rule against your existing policy and procedure. You want to see what you're currently doing, and then you want to find out where there's a gap.”

Step 2 - Policy and Procedures Updates

The main changes to policies and procedures will likely center around targeted and projected performance, which is now considered hypothetical performance (also includes model and backtested performance results). Fund advisors are required to specifically describe the criteria used and the assumptions made that lead to that projected performance.

Client endorsements and testimonials are now subject to new disclosure requirements. “The way you go about raising capital relies heavily on reputation and relationships…so that is an important one to understand,” he said.

The solicitation rule is now part of the Marketing Rule so to any extent a private fund solicits fund investors through a placement agent, it also needs to combine the solicitation rules under the new marketing set of rules.

Step 3 - Final Vetting and Training

The final step should be focused on vetting the review of the rules with a compliance consulting firm or outside counsel or through a firm’s internal vetting process. Before implementation, a firm also should train all stakeholders including the creators and reviewers of marketing materials to ensure everyone is on the same page..