On November 4, 2022, the amended Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”) goes into effect. The new Marketing Rule amends and merges two previous rules, the “advertising rule” (the former Rule 206(4)-1) and the “solicitation rule” (the former Rule 206(4)-3), into one overarching rule that regulates the marketing of investment advisers. In addition, Rule 204(2) “Books and Records” as well as Form ADV have been amended to address the changes. This memorandum will specifically address the impact of the New Marketing Rule on broker dealers marketing investments to potential investors.
Under the new Marketing Rule, solicitations by third parties (of which broker dealers are a subset) of investors are considered “endorsements” of the investment adviser and qualify as advertisements under the rule. The Marketing Rule requires that these endorsements made by promoters come with certain disclosures by either the investment adviser or the promoter to provide additional transparency to potential investors. While the rule requires most third-party endorsements to contain five categories of disclosures, the new rule exempts SEC registered broker dealers from two of the disclosures and only requires broker dealers to make three disclosures.
What disclosures need to be made?
Section 206(4)-1(b)(1) requires that broker dealers clearly and prominently disclose that:
1. the endorsement was being made by someone that wasn’t a current client or investor;
2. cash or non-cash compensation was provided for the endorsement; and
3. a brief statement of any material conflicts of interest on the part of the person giving the endorsement resulting from the investment adviser’s relationship with the person.
One important exemption to the application of this rule is that it does not apply to the solicitation by broker dealers of retail investors covered under Regulation BI (which has its own disclosure requirements).
What communications are included?
In the Adopting Release to the Marketing Rule, the SEC made it clear that the disclosures are also required for both oral and one-on-one communications of broker dealers. In this instance the requirements for broker dealers are stricter than for the investment advisers themselves which do not apply to oral and one-on-one communications.
How should the disclosures be made?
The disclosures need to be made concurrently with the endorsement. In addition, the disclosures need to be included in the body of the endorsement to meet the “clearly and prominently” standard such that the disclosures will be read at the same time as the endorsement. Hyperlinks will not suffice. There is one leniency provided for in the adopting release; oral endorsements can be accompanied by oral disclosures, and they need not be in writing as long as they are delivered during the same conversation as the endorsement.
Investment advisers must enter into a written agreement with the promoter, except where the promoter is an affiliate, or the promoter receives de minimis compensation. We assume our clients have always signed engagement letters with investment advisers before beginning work but now you should be aware that the engagement letters are required by the Rule.
Firms must tailor its compliance program in terms of its own advertising practices to prevent violations from occurring and adopt policies and procedures that address the accuracy of its disclosures.
We at Integrated Solutions are available to help broker-dealers navigate compliance with the new Marketing Rule. Please reach out to us for our guidance or assistance in reviewing marketing activities, updating WSPs, or addressing any other concerns regarding the rule.