As previously noted, the Securities and Exchange Commission (“SEC”) adopted reforms under the Investment Advisers Act of 1940 (“Act”) to modernize rules that govern investment adviser advertisements and payments to solicitors (collectively the “Marketing Rule”). It is the intent of the SEC to provide a rule with principles-based provisions, designed to accommodate the continual evolution and interplay of technology and advice. Those principal-based provisions start with the amended definition of “advertisement”.
To that end, the amended definition of “advertisement” contains two prongs: one that captures communications traditionally covered by the Marketing Rule, and another that governs solicitation activities previously covered by the cash solicitation rule. With respect to this discussion, we will be focusing on the first prong of the definition.
The first prong of an advertisement 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 private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors.
Direct or Indirect Communications
As noted above, the first prong of the amended Marketing Rule’s definition of advertisement includes an adviser’s direct or indirect communications. To that end, it includes all communications that investment advisers use to offer their advisory services with regards to securities, whether made directly, or indirectly through communications by third parties, such as consultants, intermediaries or related persons.
Indirect communications may be deemed to be advertising because they are generally statements provided by the adviser, for dissemination by the third party. Whether a particular communication is a communication made by the adviser, is a facts and circumstances determination. Where the adviser has participated in the creation or dissemination of an advertisement, or where an adviser has authorized a communication, the communication would be a communication of the adviser.
Adoption and Entanglement
Depending on the particular facts and circumstances, third-party information also may be attributable to an adviser under the first prong of the Marketing Rule. Whether the third-party information is attributable to the adviser will require an analysis of the facts and circumstances to determine (i) whether the adviser has explicitly or implicitly endorsed or approved the information after its publication (adoption) or (ii) the extent to which the adviser has involved itself in the preparation of the information (entanglement). In any event, an adviser “adopts” third-party information when it explicitly or implicitly endorses or approves the information. In those situations, an adviser is liable for such third-party content under the Marketing Rule, just as it would be liable for content it produced itself.
Adaptation and entanglement have a significant impact with respect to an adviser’s use of websites or other social media. For example, an adviser might include a hyperlink in an advertisement to an independent webpage on which third-party content sits. The adviser should consider whether the hyperlinked third-party content would be attributed to the adviser. This has additional importance in that an adviser’s hyperlink to third-party content that the adviser knows, or has reason to know, contains an untrue statement of material fact or materially misleading information, would also be fraudulent or deceptive under section 206 of the Act.
Whether content posted by third parties on an adviser’s own website or social media page would be attributed to the investment adviser, also depends on the facts and circumstances surrounding the adviser’s involvement. For example, pursuant to the Marketing Rule, permitting all third parties to post public commentary to the adviser’s website or social media page would not, by itself, render such content attributable to the adviser, so long as the adviser does not selectively delete or alter the comments or their presentation, and the adviser is not involved in the preparation of the content. Thus, the amended Marketing Rule would permit the use of “like,” “share,” or “endorse” features on a third-party website or social media platform, provided the adviser is not involved in the solicitation of the posts, and does not modify or alter the presentation of such features.
Conversely, if the investment adviser takes affirmative steps to involve itself in the preparation or presentation of the comments, to endorse or approve the comments, or to edit posted comments, it is the SEC’s position that those comments would be attributed to the adviser. This would apply to the affirmative steps an adviser takes, both on its own website or social media pages, as well as on third-party websites.
With respect to social media postings to supervised persons’ own accounts, it would also be a facts and circumstances analysis relating to the adviser’s supervision and compliance efforts. Where the adviser adopts and implements policies and procedures that are reasonably designed to prevent the use of an associated person’s social media accounts for the marketing of the adviser’s advisory services, the SEC will generally not view such communication as the adviser marketing its advisory services. To address this issue, an adviser may consider either prohibiting such communications, conducting periodic training, obtaining attestations, and or periodically reviewing content that is publicly available on associated persons’ social media accounts.
To More Than One Person
One-on one communications is excluded from the definition of advertisement, unless such communications to an individual includes hypothetical performance information that is not provided: (i) in response to an unsolicited investor request or (ii) to a private fund investor. With this in mind, you should note that the definition of advertisement will capture all communications that include hypothetical performance information.
Additionally, it should be noted that the one-on-one exclusion in the definition’s first prong applies regardless of whether the adviser makes the communication to a natural person with an account or multiple natural persons representing a single entity or account. Notwithstanding that, communications that appear to be personalized to single investors and are “addressed to” only one person, but are actually widely disseminated to multiple persons through bulk emails or algorithm-based messages would be subject to the Rule, and would not result in a one-on-one communication.
Brand Content, General Educational Material, and Market Commentary
As a general rule, generic brand content, educational material, and market commentary would not meet the revised definition of an advertisement pursuant to the amanded Marketing Rule.
- Brand Content. If a communication is designed to raise the profile of the adviser generally, but does not offer any investment advisory services with regard to securities or services, the communication would not fall within the definition of advertisement. Thus, a communication that simply notes that an event is “brought to you by XYZ Advisers,” would not qualify as an advertisement, as it is not offering any advisory services.
- General Educational Information and Market Commentary. The SEC has noted that the same analysis applies for communications that are limited to providing general educational information and market commentary. Educational communications that are limited to providing general information about investing, such as information on investment vehicles, asset classes, strategies or commercial sectors do not constitute offers of an adviser’s investment advisory services, and are not subject to the Rule.
Likewise, materials that provide an adviser’s general market commentary (including during press interviews) are unlikely to offer advisory services with regard to securities. Market commentary aims to inform current and prospective investors, including private fund investors, of market and regulatory developments in the broader financial ecosystem. These materials also help current investors interpret market and regulatory shifts by providing context when reviewing investments in their portfolios, and educate investors.
Notwithstanding the above, the SEC would view an article or white paper that provides general market commentary and concludes with a description of how the adviser’s securities-related services can help prospective investors invest in the market as offering the adviser’s services. Accordingly, that portion of the white paper would be an advertisement and subject to the Marketing Rule.
The Marketing Rule generally excludes two types of communications from the first prong of the definition of advertisement: (i) extemporaneous, live, oral communications; and (ii) information required by statute or regulation.
Extemporaneous, Live, Oral Communications
The definition of advertisement does not include extemporaneous, live, oral communications, regardless of whether they are broadcast and regardless of whether they take place in a one-on-one context and involve discussion of hypothetical performance. The goal of the exclusion for live, oral communications is to avoid treating extemporaneous statements as advertisements, in light of the difficulties in ensuring that they comply with the requirements of the rule, and to avoid chilling adviser communications with investors. If remarks are extemporaneous, they cannot be simultaneously monitored for regulatory compliance, and to require otherwise may simply cause advisers to cease extemporaneous speaking to the overall detriment of investors. However, the SEC did note that communications prepared in advance can, and should be subject to the Marketing Rule. Accordingly, the final exclusion applies only to extemporaneous, live, oral communications.
Information Contained in a Statutory or Regulatory Notice
The Marketing Rule excludes from the definition of advertisement “[i]nformation contained in a statutory or regulatory notice, filing, or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication.” An example would be of information reasonably designed to satisfy the requirements of Form ADV Part 2 or Form CRS, and as such, they are not be deemed an advertisement for purposes of the Rule.
Testimonials, Endorsements and Third-Party Ratings
As we continue to build on the ramifications of the Marketing Rule, our next article will address the use of testimonials, endorsements, third-party ratings, which will be followed by a discussion of performance disclosures and the utilization of solicitors pursuant to the Marketing Rule.