Author Archives: thesecuritieslitigator

About thesecuritieslitigator

I am a securities and commercial litigation attorney located in Boston with years of experience representing companies and individuals in securities, white collar, and civil litigation.

A Brand New Ballgame for SEC Adviser Advertising

The SEC, in an effort to bring the existing adviser marketing and cash solicitation rules into the 21st century, has approved a new rule (“Rule”) that opens a much wider playing field for advisers’ marketing campaigns. Subject to certain limitations, investment advisers are now permitted to advertise and post third-party content “to accommodate the continual evolution and interplay of technology and advice.”

“Advertisement”. Advertising now includes two concepts. First, advertising encompasses communications that offer the adviser’s services to prospective clients or private fund investors, or new services to existing clients. Second, advertising now includes any endorsement or testimonial for which the adviser provides cash or non-cash (e.g., reduced advisory fees) to a promoter.

General Prohibitions. The Rule contains a general prohibition against materially false or misleading information and against unsubstantiated claims. It also prohibits discussing results, upside, or benefits without providing a “fair and balanced” presentation of risks and limitations. Critically, it bars advisers from cherry-picking performance results or time periods in a manner that is not fair and balanced. In addition, advisers may not provide gross performance unless the ad also presents net performance. For additional prohibitions, see the link below.

Testimonials / Endorsements (“T/E’s”). Advisers are no longer required to take the painstaking effort of getting individual disclosure acknowledgements from each investor. However, the ad itself must disclose whether the person giving the T/E (“promoter”) is a client and whether the promoter is compensated, whether in cash or otherwise. An adviser using a T/E must oversee the ad under the marketing rule and enter into a written agreement with the promoter, unless the promoter is an affiliate of the adviser or the comp is $1,000 or less.

Other Changes.

Ratings. Before posting a 3d party rating, an adviser must have a reasonable basis to believe that any questionnaire or survey used in the preparation of the third-party rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses and is not designed or prepared to produce any predetermined result. There are additional disclosures and criteria pertaining to the rating that must be satisfied.

Books and Records. The Commission amended Form ADV to, among other things, require additional information regarding marketing practices.

Effective Date/Compliance Safe Harbor. The Rule will be effective 60 days after publication in the Federal Register, probably March or April 2021. However, the SEC is giving advisers 18 months post-effective date to get into compliance. Advisers should start implementation in a prompt and comprehensive fashion in the near term to ensure compliance when OCIE comes around.

For additional information, please see the link below and the Rule itself:


Advisers Should Review Their Employment Agreements and Policies for Restrictions on Employee Reporting to SEC

SEC Rule 21F-17, spun out of Dodd-Frank, prohibits any person or entity under SEC jurisdiction from taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” In 2015-16, the SEC brought several enforcement actions against investment adviser firms whose employment agreements (e.g., offer letters, confidentiality agreements, and severance agreements) either required the employee to waive his or her whistleblower rights or more subtlety impeded that ability, e.g., by stating that an employee must report a possible violation internally to compliance or management before reporting out to the SEC.

Since those actions, OCIE followed up with a risk alert stating that it will review advisers’ “compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities law violations may raise concerns under Rule 21F-17.” This means that no internal document is safe from  review for what the SEC may deem restrictive reporting language. Accordingly, advisers should take a second look at all employment agreements as well as internal policies (e.g., Code of Ethics) containing confidentiality language. Those sections should clearly provide that an employee may directly report out to the SEC (without prior notice to the firm) if the employee believes that there is a possible securities law violation.