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Investment Adviser Marketing - Past Proposals are Not Necessarily Indicative of Future Adoptions

Dec. 22, 2020

Last year, the Commission unanimously supported a recommendation from our expert staff to modernize the Commission’s regulatory framework for investment adviser marketing.[1] While there are many elements of today’s final rule that reflect improvements to the outdated and patchwork advertising regime,[2] there are also numerous provisions and guidance throughout the Release that retreat from commonsense elements that we proposed last year. Thus, today’s unanimous vote does not reflect a consensus about how best to protect investors from the risks of misleading adviser marketing, but rather our support of many of the rule’s provisions coupled with a concern that the final rule not shift even further from the wisdom of the proposal.  

The staff in the Division of Investment Management deserves a great deal of credit for their tireless efforts on today’s rule.[3] We support the good work and recommendations they made, such as modernizing the advertising definition to reflect changes in technology, modes of communications, and investor preferences.[4] We also support the more holistic approach to the presentation of adviser performance.[5] In the end, however, the rule reflects a determination by a majority of the Commission to eliminate important safeguards for investors.

Review of Advertisements

The final rule abandons last year’s proposal to require advisers to review advertisements for compliance purposes before using those advertisements.[6] Pre-review is the best and most logical way to reduce the risk of advisers’ using advertisements that could mislead clients and prospective clients. Moreover, the fact that pre-review is well-established in the broker-dealer context demonstrates that such a requirement is feasible.[7] However, certain commenters strongly objected to the proposal’s pre-review requirement.[8] In the context of the proposal’s expansive definition of advertisement, those concerns were better-founded. The final rule, however, reflects a number of changes that would have substantially reduced the burden associated with a pre-use review requirement.[9]

Notwithstanding the changes that would make pre-review more feasible, the Commission has abandoned the requirement entirely. Instead, it defers to advisers to create and implement their own procedures to comply with the rule.[10] This despite the fact that just last month, the Division of Examinations (née OCIE)[11] specifically identified a pattern of compliance deficiencies relating to advisers’ adoption, implementation, and maintenance of compliance policies and procedures relating to advertisements.[12] The decision on this aspect of the rule is a missed opportunity to promote better compliance in this critical area, and will likely place advertisements on the list of examination and enforcement priorities for years to come.

Hypothetical Performance

Hypothetical performance can be a useful tool for certain investors who understand the risks and limitations associated with such advertisements. As the name suggests, hypothetical performance does not reflect investments actually managed or results actually achieved. As a result, hypothetical performance can pose a heightened risk of misleading investors because they can be readily optimized through hindsight.[13] That is why, under the advertising rule, advisers are required to ensure that hypothetical performance is accompanied by sufficient information about the assumptions and criteria used so that recipients may fully understand the relative import of the data, as well as the risks and limitations of relying on it.[14]

While the proposal would have required that all hypothetical performance comply with these reasonable conditions to provide context,[15] the final rule includes unjustifiable carve-outs for communications containing hypothetical performance in response to unsolicited requests from retail investors and all one-on-one communications with prospective or current investors in private funds. This will leave many investors, including retail investors, particularly vulnerable to being misled by performance advertisements. Advisers are now expressly permitted to provide hypothetical performance presentations to retail investors upon request without providing the context required by the advertising rule.[16] In addition, an investor’s request need not be in writing, so this carve-out may be subject to abuse with little opportunity to examine for compliance. While retail investors should not be prevented from receiving hypothetical performance, the rules should be calibrated to require advisers to provide sufficient context for them to assess its value.

For private fund investors, the Release takes an even more hands-off approach, allowing advisers to provide hypothetical performance without the context the rule otherwise requires, even absent any investor request.[17] Advisers may therefore actively tout performance results that they never achieved without having to provide basic disclosure about the performance presentation to enable investors to assess the risks and limitations of relying on it.[18] This will include individual accredited investors who meet so-called “wealth” thresholds that are almost 40 years out of date.[19] The continued refusal to modernize these thresholds endangers more and more Main Street investors every day. The view that these investors should fend for themselves imposes Wall Street risks on Main Street residents.

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This rule makes a number of improvements in an area that is of paramount importance to investors – ensuring that their fiduciaries provide honest, clear and contextualized information about the complex services they provide. While we hope that our concerns about the loss of certain safeguards will not prove prescient, we believe it will be important for the Commission to closely monitor industry implementation of the rule to consider whether additional revisions or protections may be warranted going forward. 


[1]  See Investment Adviser Advertisements; Compensation for Solicitations, Investment Advisers Act Release No. 5407 (proposed Nov. 4, 2019) (“Proposing Release”).

[2] See Investment Adviser Marketing, Investment Advisers Act Release No. 5653 (adopted Dec. 22, 2020) (“Adopting Release”). The final rule regulates investment adviser advertising and solicitation activity through a single rule: the marketing rule.

[3] In particular, we would like to thank the following individuals in the Division of Investment Management: Dalia Blass, Sarah ten Siethoff, Melissa Gainor, Thoreau Bartmann, Melissa Roverts Harke, Juliet Han, Emily Rowland, Aaron Russ, and Christine Schleppegrell.

[4] See Adopting Release at 6-12, 85, 277.

[5] See id. at 163-164.

[6] See id. at 237-241.

[7] See Financial Industry Regulatory Authority, Rule 2210 (requiring, among other things, an appropriately qualified registered principal of the member to approve each retail communication before the earlier of its use or filing with FINRA's Advertising Regulation Department).

[8] See Adopting Release at 237-238.

[9] For example, the final rule’s definition of advertisement does not include communications designed to retain existing investors. See id. at 12-13.

[10] See id. at 238-239 (“[W]e are not adopting the proposed internal review and approval requirement. Instead, we believe an adviser’s existing obligations under the compliance rule will allow an adviser to tailor its compliance program to its own advertising practices to prevent violations from occurring, detect violations that have occurred, and correct promptly any violations that have occurred…. Advisers can establish such an objective and testable compliance policies and procedures through a variety of tools.”).

[11] See Chairman Jay Clayton, Commissioners Hester M. Peirce, Elad L. Roisman, Allison H. Lee, & Caroline A. Crenshaw, Statement on the Renaming of the Office of Compliance Inspections and Examinations to the Division of Examinations (Dec. 17, 2020).  

[12] See Office of Compliance Inspections and Examinations, Risk Alert OCIE Observations: Investment Adviser Compliance Programs (Nov. 19, 2020). OCIE staff observed advisers that did not implement or perform actions required by their written policies and procedures, including reviewing advertising materials. Id. OCIE staff also observed deficiencies or weaknesses with establishing, implementing, or appropriately tailoring their written policies and procedures with regard to marketing, including the prevention of the use of misleading marketing presentations, including on websites, and the oversight of the use and accuracy of performance advertising. Id. See also Office of Compliance Inspections and Examinations, Risk Alert: The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers (Sept. 14, 2017) (“OCIE staff observed advisers that did not appear to have compliance policies and procedures reasonably designed to prevent deficient advertising practices. For example, the staff observed advisers that did not have, or did not implement, policies and procedures pertaining to the following issues: the process for reviewing and approving advertising materials prior to their publication or dissemination; when using composites, determining the parameters for which accounts were included or excluded from performance calculations; and confirming the accuracy of performance results in compliance with the Advertising Rule.”).

[13] The Commission has brought several enforcement actions against advisers for misleading hypothetical performance advertisements. See, e.g., In re Sterling Global Strategies, LLC., Investment Advisers Act Release No. 5085 (Dec. 20, 2018); In re F-Squared Investments, Inc., Investment Advisers Act Release No. 3988 (Dec. 22, 2014); In re Virtus Investment Advisers, Inc., Investment Advisers Act Release No. 4266 (Nov. 16, 2015); In re Alpha Fiduciary, Inc., and Arthur T. Doglione, Investment Advisers Act Release No. 4283 (Nov. 30, 2015); In re Massachusetts Financial Services (MFS) Company, Investment Advisers Act Release No. 4999 (Aug. 31, 2018); In re Arlington Capital Management, Inc., and Joseph F. LoPresti, Investment Advisers Act Release No. 4885 (Apr. 16, 2018); In re Raymond J. Lucia Companies, Inc., and Raymond J. Lucia, Sr., Investment Advisers Act Release No. 3456 (September 5, 2012). In addition, OCIE staff has observed hypothetical performance advertisements that staff believe contain misleading performance results. See Office of Compliance Inspections and Examinations, Risk Alert: The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers (Sept. 14, 2017).

[14] See Adopting Release at 200-204.

[15] See Proposing Release at 159-160 (“The proposed rule therefore would condition the presentation of hypothetical performance on the adviser adopting policies and procedures reasonably designed to ensure that it is disseminated only to persons for which it is relevant to their financial situation and investment objectives, and would further require the adviser to provide additional information about the hypothetical performance that is tailored to the audience receiving it, such that the recipient has sufficient information to understand the criteria, assumptions, risks, and limitations. We believe these conditions will result in the dissemination of hypothetical performance only to those investors who have access to the resources necessary to independently analyze this information, including by modifying the assumptions to test their effect on results, and who have the financial expertise to understand the risks and limitations of these types of presentations.”). See also Proposing Release at 47 (“[B]ecause of the specific concerns raised by hypothetical performance, communications to any person that contain hypothetical performance would not qualify for the unsolicited request exclusion to the extent it contains such results. Instead, communications with hypothetical performance must be presented in accordance with the requirements…”).

[16] See Adopting Release at n. 22 (“Hypothetical performance information that is provided in response to an unsolicited investor request or to a private fund investor in a one-on-one communication is excluded from the first prong of the definition of advertisement.”).

[17] Id.

[18] The Commission rightly includes the communications of private fund advisers in this rule. Investors who rely on the advice and counsel of an investment adviser, whether directly or through a pooled investment vehicle, deserve the protections of the Commission’s rules, including those relating to advertisements. See Final Rule: Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, Investment Advisers Act Release No. 2628 at 4 (Aug. 3, 2007) (explaining that Rule 206(4)-8, which applies to both registered and unregistered investment advisers, “clarifies that an adviser’s duty to refrain from fraudulent conduct under the federal securities laws extends to the relationship with ultimate investors and that the Commission may bring enforcement actions under the Advisers Act against investment advisers who defraud investors or prospective investors in those pooled investment vehicles”).

[19] See Commissioners Allison Herren Lee & Caroline A. Crenshaw, Joint Statement on the Failure to Modernize the Accredited Investor Definition (Aug. 26, 2020).

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