SEC Marketing Rule Falling Short of Expectations — Evening Brief – 06.17.24
When the Securities and Exchange Commission enacted its Marketing Rule in November 2022, there was concern, but also hope for modernization and greater freedom.
However, more than a year later, a survey of SEC-registered investment advisors conducted by the law firm Seward & Kissel LLP discovered new obstacles for RIAs and revealed that the rule has fallen short of the “hoped-for” benefits.
The regulation, not to be confused with the newer Private Fund Advisor Rule, which was recently overturned in court, has created new issues by imposing a significant compliance burden. According to the survey, the new regulation required a significant amount of work from fund managers, with 34% spending at least 50 hours to Marketing regulation compliance.
The survey of over 120 investment advisors found little change in practices in certain areas and a decrease in advertising activity in other areas.
Over 70% of respondents said the rule had no effect on their use of references to specific investment advice in advertisements, or that they did not use such references at all, while only 3% said they used such references more under the Marketing Rule than under the previous rule.
“Initially, there was strong support for modernizing the Rule and a cautious optimism about the potential benefits to advisers of those efforts,” noted Paul Miller, Seward & Kissel Investment Management Group partner. “But more than a year in, I mainly hear disappointment over what many view as a missed opportunity and uncertainty about what new guidance may emanate from the regulator.”
Overall, 70% of respondents said performance advertising was the most affected. Specifically, advisors judged gross vs net performance presentations to be the most difficult, followed by extracted performance and hypothetical performance presentations.
The firm found that private credit managers have faced more challenges in complying with various performance advertising requirements compared to their peers who advise private equity funds, hedge funds, registered funds, and separately managed accounts.
Private credit funds frequently advertise with target returns, which is a more predictable metric than with respect to other asset classes, said Daniel Bresler, partner in Seward & Kissel’s Investment Management Group, who added that target returns create new challenges under the Marketing Rule.
Some things remain constant, though, with 86% of survey respondents indicating no change in their use of social media under the Marketing Rule. However, 7% of respondents claimed they removed prior investor letters from public view, while 5% said they redacted portions of previous letters. Meanwhile, 40% of responders included disclosures to meet Marketing Rule requirements.
Extracted performance presentations have continued to present challenges for 54% of closed-end advisors (private equity and private credit), compared with 45% of open-end/hedge fund advisors, 47% of registered fund/mutual fund advisors, and only 37% of SMA advisors.