SEC Advertising Rules
For the first time in over 60 years, the SEC has introduced proposals to amend the rules governing advertising and cash solicitation for investment advisers.
MFA believes the rules, as proposed, would significantly infringe on advisers ability to effectively communicate with their investors. MFA has identified issues with the current proposal and offered alternatives that would more appropriately address the SEC’s concerns and not hinder the flow of information between investors and advisers.
MFA’s main concerns with the current proposal include:
- Definition of “Advertisement” – To narrow the proposed definition of “advertisement” to: (i) exclude communications addressed to a single person; (ii) eliminate the “by or on behalf of” standard; (iii) eliminate the term “promote; and (iv) carve out certain important investment adviser communications, such as market commentary, offering documents, risk reports, portfolio updates, and client or investor newsletters).
- Pre-Use Review and Approval Mandate – To eliminate the requirement that the investment adviser review and approve all advertisements prior to use, and instead allow an investment adviser to reasonably design its policies and procedures to maintain compliance with applicable rules.
- General Prohibitions – To eliminate the proposed seven variations on the otherwise straightforward concept that an “advertisement” should not be misleading, and instead continue to use the simpler and clearer anti-fraud standard from the current advertising rule, which would create a true principles-based regulatory approach.
- Definition of “Non-Retail Person – To Continue to classify qualified purchasers and knowledgeable employees as non-retail persons, and classify accredited investors and qualified clients are non-retail persons (instead of as retail persons as is the case in the proposal).
- Use of Hypothetical Performance Information – To adopt a more flexible approach to the use of “hypothetical performance” information that would allow investment advisers to scale the scope of required disclosures to the risk profile of the type of “hypothetical performance” information used. As drafted, the proposal defines “hypothetical performance” broadly to include various different types of performance information that have disparate uses, risk profiles, and complexities (g., back-tested, model, target, and projected performance), and then imposes the same regulatory requirements on these varied types of information.
- Expansion of the Solicitation Rule to Non-Cash Compensation – Not to expand the scope of the rule to apply to non-cash compensation, and instead, allow non-cash consideration to remain subject to the flexible protections afforded by various anti-fraud rules, whether under the Advisers Act, applicable broker-dealer rules, or similar laws and regulations.
- Expansion of the Solicitation Rule to Private Funds – To codify the Mayer-Brown no-action letter’s sensible approach in any final version of the solicitation rule, rather than reverse the Mayer Brown no-action letter and expand the proposed solicitation rule to solicitation of investors for private funds.