The Securities and Exchange Commission ("SEC") recently reminded SEC registered investment advisers of the upcoming compliance date (November 4, 2022) for the revised investment adviser advertising rule, and provided a list of related upcoming examination target topics.
On September 19, 2022, the SEC's Division of Examinations issued a Risk Alert regarding the upcoming November 4, 2022, final compliance date for the new advertising rule (the "New Rule"). The New Rule results from amendments to the current Advisers Act advertising rule (206(4)-1) and the rescinding of the cash solicitation rule (206(4)-3).
The Risk Alert warns that SEC staff examinations will focus on, among other things, the following areas:
- The adoption and implementation of written policies and procedures that are reasonably designed to prevent violations of the New Rule that include objective and testable means.
- Compliance with the requirement that advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
- Compliance with performance advertising requirements, including prohibitions on the inclusion of the following:
- Gross performance information without including net performance.
- Performance results without specifying the time period (not applicable to private funds).
- Any statement that the SEC has approved or reviewed any calculation or presentation of performance results.
- Performance from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as the portfolio being offered in the advertisement.
- Extracted performance unless the specified conditions are met.
- Hypothetical performance unless the specified conditions are met.
- Predecessor performance unless the specified conditions are met.
- Compliance with the requirements of the books and records rule adopted in connection with the New Rule.
To prepare for the upcoming compliance date, advisers should review and update their policies and procedures, assess which items qualify as advertisements, and determine whether advertisements comply with the New Rule's requirements, and review placement agent procedures and disclosures. A few areas that deserve special attention include the ability to substantiate on demand, testimonials and endorsements, third-party ratings, net performance requirements, extracted performance, hypothetical performance (including targets and projections), and performance reporting periods (for clients other than private funds).
