Page 42 - Investment Advisor - Jan/Feb 2021

use specific examples to illustrate their Crovitz noted that there are “no more vate fund investors, Crovitz explained.
investment process. The new, 400-plus- per se prohibitions.” “There may be some pretty significant
page rule provides advisers with plenty For instance, “the final rule permits impacts for private fund adviser com-
of new opportunities, as well as new past specific recommendations and pliance programs. For example, while
requirements, some of which may be testimonials,” Crovitz explained. “In the presentation of past specific perfor-
challenging or require more clarity.” addition, the final rule includes sen- mance is now more principles-based,
The SEC also is expanding the books sible principles-based prohibitions. And which should be a welcome change to
and records rule to reflect the final unlike the proposal, the final rule does private equity advisers, the final rule also
marketing rule. Investment advisors not generally apply to communications includes a flat prohibition on showing
“must make and keep records of all to one person nor does it require pre-use gross performance without side-by-side
advertisements they disseminate,” IAA review of advertisements. Overall, it’s a net performance,” according to Crovitz.
explained. “If an adviser’s disclosures vast improvement.” One aspect that may not stand out
with respect to a testimonial or but is worth paying attention to
endorsement are not included in The SEC adopted ‘a broad as advisers plan updates to their
the advertisement, then the adviser compliance programs is the amend-
must retain copies of such disclo- definition of hypothetical ments to Form ADV.
sures provided to investors.” performance, including “The final rule requires advis-
Registered investment advisors ers to disclose additional informa-
will have 18 months after the effec- targeted performance, such tion about their use of certain types
tive date (60 days after publication of advertisements and advertising
in the Federal Register) to comply as a statement that an practices. Advisers should be aware
with the amendments. investment adviser aims to that the Division of Examinations
Advisors, Barr said, “have much will be mining this data to prepare
to learn and put into practice dur- match the performance of a for examinations of advisers.
ing the rule’s 18-month implemen- particular index.’ Max Schatzow, a member
tation period.” of Stark & Stark’s Investment
However, in early January, the
rule had yet to show up in the fed- —Sara Crovitz, Stradely Ronon Management & Securities Group in
Lawrenceville, NJ, said in a Twitter
eral register. string that the new definition of
However, some aspects of the final advertisement “is much broader and
LONG-NEEDED MODERNIZATION rules are not as welcome, Crovitz opined. includes all direct or indirect communi-
As the IAA explained, the “Adver- “Even though advertisements gener- cations (a) made to more than 1 person
tisement” definition contains “two ally are subject to the principles-based (but includes most 1-on-1s if it contains
prongs” to now include advertising prohibitions, presentations of perfor- hypothetical performance) & (b) testi-
and solicitation. mance also are subject to some new pre- monials and endorsements.”
“The first prong captures traditional scriptive requirements,” she said. The advertisement definition “spe-
advertising with certain exclusions (most For instance, most advertisements cifically excludes: (A) Extemporaneous,
one- on-one communications and extem- that include performance “will have to live, oral communications (think
poraneous, live, oral communications),” use specific time periods to show that unscripted speeches); (B) Info con-
IAA explained. “The second prong covers performance,” according to Crovitz. tained in a statutory/regulatory filings;
compensated testimonials and endorse- Also, the SEC adopted “a broad defi- or (C) certain unsolicited responses to
ments (including directed brokerage, nition of hypothetical performance, requests for hypothetical performance,”
awards or other prizes, and reduced advi- including targeted performance, such as a Schatzow tweeted.
sory fees), and includes a similar scope of statement that an investment adviser aims As to testmionials/endorsements,
activity as traditional solicitations under to match the performance of a particular Schatzow tweeted that advisors must
the current solicitation rule.” index,” she said. “While targeted per- “disclose, or reasonably believe the person
However, the new rule extends to formance is not subject to the same risk giving the testimonial/endorsement dis-
non-cash as well as cash compensation. of investor confusion, it is subject to the closes that cash/non-cash compensation
“Generally, the final marketing rule same detailed conditions and disclosures was provided, a statement of conflict of
reflects a good and long-needed mod- as for other hypothetical performance.” interest, and terms of compensation.”
ernization of the very old advertising and The final rule explicitly subjects pri-
solicitation rules,” added Sara Crovitz, vate fund advisors to the marketing rules Washington Bureau Chief Melanie Waddell can
partner at Stradely Ronon in Washington. with regard to communications to pri- be reached at [email protected].

40 INVESTMENT ADVISOR JANUARY/FEBRUARY 2021 | ThinkAdvisor.com