The Air is Out of the Marketing Rule Balloon

More than a year after the SEC’s Marketing Rule¹ first took effect, the “hoped for” modernization and flexibility offered by the Marketing Rule has fallen short and instead has presented new challenges mirroring those under the old advertising rule, according to a first-of-its-kind Marketing Rule Survey conducted by Seward & Kissel LLP, the leading law firm to the investment management and private fund industry. The survey also reveals the Rule, like others recently enacted by the SEC, adds a substantial compliance burden to investment advisers. The full report is available here.

“I’ve definitely observed a shift in how advisers speak to me about the Marketing Rule,” noted Paul Miller, Seward & Kissel Investment Management Group partner and co-lead author of the survey. “Initially, there was strong support for modernizing the Rule and a cautious optimism about the potential benefits to advisers of those efforts. 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.”

Adopted in December 2020, the Marketing Rule was widely expected to have a significant impact on advertising by SEC-registered investment advisers. But the Seward & Kissel survey of more than 120 investment advisers—administered after the one-year anniversary of the Rule’s November 2022 compliance date—finds little actual change in adviser practices in certain areas and a decrease in advertising activity in other areas.

For example, prior to the Rule, investment advisers were prohibited from using past specific recommendations in advertisements unless the use fit within regulatory guidance. With the Marketing Rule, the SEC introduced principles-based restrictions permitting references to specific investment advice that are presented in a “fair and balanced” manner. However, such change has had little impact on advisers.

More than 70% of survey respondents indicated that the Rule has had no impact on their use of references to specific investment advice in advertisements or they do not use such references, while a mere 3% of respondents indicated that they use such references more under the Rule than under the old rule.

As for impact areas, 70% of respondents cited performance advertising as being most affected. Specifically, advisers have found gross vs. net performance presentations to be the most challenging, followed by extracted performance and hypothetical performance presentations.

The survey also explores patterns across different asset classes, finding 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 and co-lead author of the survey. “But target returns create new challenges under the Marketing Rule.”

Contrary to some predictions, there is no sign of a renaissance in social media use by investment advisers. A staggering 86% of survey respondents reported no change in their use of social media under the Marketing Rule.

In addition, the survey found that the Marketing Rule has created substantial work for fund managers, with 34% of respondents committing at least 50 hours to Marketing Rule compliance.

Other key findings of the Seward & Kissel Marketing Rule Survey include:

• In some cases, Marketing Rule compliance efforts have reduced access to information through investor letters. 7% of respondents said they removed prior investor letters from public access, and 5% said they redacted portions of past letters. 40% added disclosures to conform to Marketing Rule requirements.
• Extracted performance presentations have continued to present challenges for 54% of closed-end advisers (private equity & private credit), compared to 45% of open-end/hedge fund advisers, 47% of registered fund/mutual fund advisers, and only 37% of SMA advisers.

Miller and Bresler, who conducted the Seward & Kissel Marketing Rule Survey, are available to speak to the media. The complete report can be accessed here.

About Seward & Kissel LLP

Seward & Kissel LLP, founded in 1890, is a leading U.S. law firm with an international reputation for excellence. The firm is particularly well known for its private fund and investment management work, and this year, is celebrating its 75^th anniversary of advising the investment management industry. In addition, Preqin recently identified Seward & Kissel as the top U.S. law firm based on number of hedge funds serviced.

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¹ Rule 206(4)-1 under the Investment Advisers Act of 1940.

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