Updates
April 7, 2022

In connection with annual compliance manuals reviews and the conclusion of Form ADV season, firms should consider updating for compliance with amended Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act.

The Marketing Rule officially went into effect May 4, 2021, with an 18-month transition period – until November 4, 2022 – for investment advisers to comply. Early compliance is permitted, so long as the adviser elects to comply with the new rules in their entirety from the time of such election. Partial compliance is not permitted.

Under the Marketing Rule: (1) the definition of an “advertisement” has been expanded and now includes indirect communications (such as social media comments) and non-written communications (such as pre-recorded videos), (2) previous changes to the advertising and the cash solicitation rules under prior Rule 206(4)-3 have been merged into a single rule, (3) certain per se prohibitions that existed in the prior rules have been replaced with a set of seven principles-based general prohibitions will apply to all advertisements, and (4) related amendments to the books and records rule (Rule 204-2) and to Form ADV have been made. 

Expansion of Definition of “Advertisements”

Under the Marketing Rule, the definition of an “advertisement” has been expanded to include communications that fall into the two following buckets. 

  • Bucket 1 – Offers of New Advisory Services: The first prong includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. 
    • Exclusions: (i) extemporaneous, oral, live communications; (ii) information contained in a statutory or regulatory notice, filing, or other required communication (as long as such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication); and (iii) one-on-one communications (unless the communication includes hypothetical performance information that is not provided: (a) in response to an unsolicited investor request; or (b) to a private fund investor).

  • Bucket 2 – Endorsements and Testimonials: The second set of communications that are deemed “advertisements” includes any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly 
    • Exclusion: Any information contained in a statutory or regulatory notice, filing, or other required communication (as long as such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication).

Use of Performance Results

The Marketing Rule now explicitly applies to communications with prospective investors in private funds that rely on Section 3(c)(1) or 3(c)(7) of the Investment Company Act to avoid registration as an investment company. It prohibits the inclusion of certain performance results and places the following conditions on the inclusion of certain types of performance results in advertisements (a number of which are codifications of since-rescinded No Action Letters):

  • Presentations of gross performance must also present net performance (i) with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance, and (ii) calculated over the same period, and using the same type of return and methodology, as the gross performance.

  • Any performance results included of any portfolio or any composite aggregation of related portfolios (other than of a private fund) must include performance results of the same portfolio or composite aggregation for 1-, 5-, and 10-year periods, each presented with equal prominence and ending on a date that is no less recent than the most recent calendar year-end unless the relevant portfolio did not exist for a particular prescribed period.
    • Related performance results must include all related portfolios; provided that related performance may exclude any related portfolios if (i) the advertised performance results are not materially higher than if all related portfolios had been included, and (ii) the exclusion of any related portfolio does not alter the presentation of any applicable time periods otherwise required.

  • Extracted performance results may only be included if the advertisement also provides, or offers to provide promptly, the performance results of the total portfolio from which the performance was extracted.

  • Hypothetical performance results may only be included if the investment adviser:
    • Adopts and implements policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement;
    • Provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating such hypothetical performance; and
    • Provides (or, if the intended audience is a prospective investor in a private fund, provides, or offers to provide promptly) sufficient information to enable the intended audience to understand the risks and limitations of using such hypothetical performance in making investment decisions.
  • Predecessor performance results may only be included if:
    • The person or persons who were primarily responsible for achieving the prior performance results manage accounts at the advertising adviser;
    • The accounts managed at the predecessor investment adviser are sufficiently similar to the accounts managed at the advertising investment adviser such that the performance results would provide relevant information to clients or investors;
    • All accounts that were managed in a substantially similar manner are advertised unless the exclusion of any such account would not result in materially higher performance and the exclusion of any account does not alter the presentation of any applicable time periods otherwise prescribed under the rule.
    • The advertisement clearly and prominently includes all relevant disclosures, including that the performance results were from accounts managed at another entity.

Advertisements are strictly prohibited from including any statement, express or implied, that the calculation or presentation of performance results in the advertisement has been approved or reviewed by the SEC.

Use of Testimonials and Endorsements

Under the new Marketing Rule, investment advisers are now permitted to include testimonials (generally, a favorable statement by a client about the adviser’s services) and endorsements (generally, favorable statements by persons that are not clients, which may include, among other communications, statements by placement agents) in advertisements, subject to certain conditions. However, firms should also review applicable state law to ensure that it does not prohibit the use of testimonials and endorsements in such advertisements.

At the time an advertisement that includes a testimonial or endorsement is disseminated, the investment adviser must disclose, or must reasonably believe that the person giving the testimonial or endorsement discloses:

  • Clearly and prominently:
    • That the testimonial was given by a current client or investor (if applicable);
    • That the endorsement was given by a person other than a current client or investor (if applicable);
    • That cash or non-cash compensation was provided for the testimonial or endorsement (if applicable); and
    • A brief statement of any material conflicts of interest on the part of the person giving the testimonial or endorsement resulting from the investment adviser’s relationship with such person;
  • The material terms of any compensation arrangement, including a description of the compensation provided or to be provided, directly or indirectly, to the person for the testimonial or endorsement (if applicable); and
  • A description of any material conflicts of interest on the part of the person giving the testimonial or endorsement resulting from the investment adviser’s relationship with such person and/or any compensation arrangement.

Additionally, the advertising adviser must have (i) a reasonable basis for believing that the testimonial or endorsement complies with the requirements for testimonials and endorsements under the Marketing Rule, and (ii) a written agreement with any person giving a testimonial or endorsement in exchange for direct or indirect compensation that describes the scope of the agreed-upon activities and the terms of compensation for those activities.

Investment advisers may not compensate a person, directly or indirectly, for a testimonial or endorsement if the adviser knows, or in the exercise of reasonable care should know, that the person giving the testimonial or endorsement is an “ineligible person” at the time the testimonial or endorsement is disseminated. An “ineligible person” includes any person who is subject either to a “disqualifying [SEC] action” or to any “disqualifying event,” and, as discussed below, certain of that person’s employees and other persons associated with an ineligible person.

Use of Third-Party Ratings

Under the Marketing Rule, advertisements may not include any third-party rating, unless the investment adviser:

  • Has a reasonable basis for believing that any questionnaire or survey used in the preparation of the third-party rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result; and
  • Clearly and prominently discloses, or the investment adviser reasonably believes that the third-party rating clearly and prominently discloses:
    • The date on which the rating was given and the period of time upon which the rating was based;
    • The identity of the third party that created and tabulated the rating; and
    • If applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.

Implementation of Principles-Based Framework 

In addition to its explicit directives, the Marketing Rule implements a principles-based framework, under which advertisements are prohibited from:
including any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading

  • including a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC;
  • including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser;
  • discussing any potential benefits to clients or investors connected with or resulting from the investment adviser's services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits;
  • including a reference to specific investment advice provided by the investment adviser where such investment advice is not presented in a manner that is fair and balanced;
  • including or excluding performance results, or present performance time periods, in a manner that is not fair and balanced; or
  • including any statements that would otherwise be misleading. 


Key Takeaways

  • Comply with the new Marketing Rule no later than November 4, 2022.
  • To the extent any communications include performance results, testimonials and/or endorsements, or third-party ratings, ensure compliance with the Marketing Rule’s (i) general prohibitions and conditions; and (ii) the principle-based framework, as detailed below. 
  • Update compliance manuals and review solicitation arrangements. 
  • Following compliance with the Marketing Rule, use the updated Form ADV (and respond to additional questions).