Late last year, for the first time in many decades, a new SEC rule governing marketing and advertising by investment advisers took effect.  While this amendment to Advisers Act Rule 206(4)-1 (the “Marketing Rule”), which became effective on November 4, 2022, applies only to SEC-registered investment advisers (“RIAs”), exempt reporting advisers (“ERAs”) should consider using the Marketing Rule as a “lodestar” to inform their own approach to marketing and promotion of their private funds. 

Accordingly, we recommend that ERAs review the Marketing Rule for two reasons.  First, as your business grows, you may “outgrow” your ERA status and become a registered investment adviser which is fully subject to the new rule.  Second, the SEC examination staff is increasing the attention it pays to private fund sponsors and oversight over ERAs could increase over time.  

This alert focuses on three actions related to the Marketing Rule that ERAs could take as a matter of prudence from a regulatory and business standpoint.

Recommendations for ERAs: 

Keeping, and Using, Net Performance Data

The Marketing Rule requires that any time an adviser presents gross performance data, it must also present net performance data that is reasonably comparable.  Additionally, any such performance data must be presented over specified periods.  Because the Marketing Rule requires advisers have a reasonable basis for believing they can support statements of fact, including performance data, ERAs should produce and retain records of performance data.  These records should be sufficient to substantiate performance data in both gross and net formats across the required periods of time, akin to those required of RIAs.

Including Marketing Restrictions in Service-Provider Agreements

The Marketing Rule defines “advertisement” to include both direct and indirect communication from the adviser to prospective clients, private fund investors or existing clients offering new advisory services.  Indirect communications include those provided through intermediaries, consultants and related parties.  

Under the anti-fraud prohibitions of the Marketing Rule, advertisements may not include untrue statements or omissions, unsubstantiated material statements, misleading implications or inferences, omissions of material risk factors, or anything that could be materially misleading. An adviser should have policies and procedures designed to ensure that its communications with prospective and existing limited partners comply with these standards.

Of particular note, the solicitation of private fund investors through a placement agent falls under the definition of advertisement and will be considered an endorsement unless the promoter falls under one of the exemptions (e.g., being an affiliate of the adviser or a registered broker dealer).  Because an adviser is responsible for communications and advertisements made by a placement agent, advisers should implement policies to ensure any communication or advertisement made by a placement agent or service provider complies with the Marketing Rule, and include provisions in the applicable placement agent agreement addressing the Marketing Rule’s restrictions.  

Presenting a Complete Picture of the Fund

The Marketing Rule requires advertisements to include sufficient information and disclosures to present an accurate and complete picture of the adviser, its services and its performance.  Advisers should not cherry pick information or present data without context, and should consider the nature and sophistication of the audience of an advertisement.  Following the Marketing Rule’s guidelines on presenting information in a fair and balanced manner will prevent violations of the anti-fraud provisions of the Advisers Act which do apply to ERAs.