Cadwalader attorneys reviewed proposals (see here and here) amending SEC Rules under the Investment Advisers Act of 1940 (the "Advisers Act") covering advertising by investment advisers and the solicitation of advisory clients and fund investments.

Proposed Amendments to Advertising Rule: The SEC proposed amendments to Advisers Act Rule 206(4)-1 ("Advertisements by investment advisers"). The attorneys stated that the amendments would:

  • broaden the definition of "advertisement" to cover all communications that promote an investment adviser's services, even if sent to a single person, subject to specific exemptions;
  • replace the current list of prohibited forms of advertisement with general prohibitions on misleading advertising practices. The proposed amendments would also adopt new requirements for advertisements that include gross, past, extracted, related or hypothetical performance; and
  • require advisers to (i) designate specific employees to review and approve advertisements before distribution, (ii) report certain advertising practices on Form ADV and (iii) comply with new recordkeeping obligations.

Proposed Amendments to Solicitation Rule: The SEC proposed amendments to Advisers Act Rule 206(4)-3 ("Cash payments for client solicitations"). According to the attorneys, the new amendments would:

  • significantly alter the scope of applicability by (i) expanding the definition of solicitors, (ii) rescinding previous guidance regarding persons engaged in solicitation activity and (iii) including within the definition of "solicitor" persons receiving non-cash compensation;
  • expand the number of regulators whose disciplinary actions against a person would be treated as disqualifying; and
  • update recordkeeping requirements under Rule 204-2 ("Books and records to be maintained by investment advisers").


Mark Highman

Proposed Amendments to Advertising Rule: The SEC proposal adopts a technology-neutral, principles-based approach to investment adviser advertising. Industry participants should carefully consider whether to submit responses.

One issue that is not specifically addressed in the Release is the degree to which the proposed rules should be harmonized more closely with equivalent FINRA standards for broker-dealer communications and NFA standards for promotional material distributed by CFTC-registered firms. These considerations are particularly relevant to SEC-registered investment advisers that are also registered with the CFTC as CPOs or CTAs, which are subject to both SEC and NFA requirements, and advisers who market interests in funds they advise through broker-dealers, in which case the sales material would be subject to both the SEC and FINRA requirements. Notably, the Release contains a wealth of material on current requirements for investment adviser advertising, which firms may consult to confirm that their current advertising practices conform to applicable SEC standards.

Proposed Amendments to Solicitation Rule: The SEC's proposal would significantly expand the scope of the solicitation rule, and will likely impact most solicitor arrangements. First, broker-dealers selling interests in private funds on behalf of private fund advisers would be brought within the scope of the rule. Second, as the proposal would include non-cash compensation, advisers would be required to disclose solicitor compensation arrangements involving directed brokerage, discounted advisory fees or cross-referrals. Third, and most significantly, the proposal would broaden the scope of events that would disqualify firms from acting as solicitors, while potentially rescinding current no-action relief from ineligible solicitor status. Finally, the statutory disqualification provisions would cause certain individuals and entities associated with a disqualified person to be ineligible solicitors. Firms should thus carefully consider the impact that the SEC proposals may have on their solicitor arrangements, and whether to submit a comment letter in response.

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