On December 22, 2020, the U.S. Securities and Exchange Commission (SEC) passed amendments to the advertising and cash solicitation rules, along with updates to other requirements for registered investment advisers. The formerly separated rules are now combined under the new Marketing Rule, Rule 206(4)-1 of the Advisers Act, made effective May 4, 2021, with a compliance date of November 4, 2022.

With less than four months until the compliance date for the new Marketing Rule, our Flash Reports will continue to cover areas RIAs will need to consider as they update their compliance program for the new regulation. This Flash Report is the seventh in that series. See the rest of our series here.

• The New Marketing Rule: Part 1 – What is an Ad?
• The New Marketing Rule Part 2 – What are Testimonials and Endorsements?
• The New Marketing Rule Part 3 – General Prohibitions
• The New Marketing Rule Part 4 – Implications for Social Media
• The New Marketing Rule Part 5 – Challenges for Performance Advertising
• The New Marketing Rule Part 6: Categories of Performance and Their Requirements

The new Marketing Rule defines third-party ratings as any rating or ranking by a) someone who is not a related person, and b) that is conducted in the ordinary course of its business. If a rating or ranking does not satisfy both criteria, it would likely be a testimonial or endorsement instead. The new rule allows firms to use third-party ratings in their marketing materials, provided that their use complies with the seven general prohibitions and provides the required disclosures.

• Disclosure Requirement: the following information must be disclosed as prominently as the third-party rating itself:
  • The date of the rating, and the time frame during which its responses were collected.
  • The name of the third party that produced the rating;
  • If applicable, that the third party was compensated for the rating.
• Due Diligence Requirement: The adviser must have a reasonable basis for believing 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 both favorable and unfavorable responses, and that the rating is not designed or prepared to produce any predetermined result.
  • Including a description of the methodology and criteria used by the third party helps demonstrate compliance with this requirement.
  • If a third party provides a copy of the questionnaire or methodology used, maintain this with your marketing records.
• General Prohibitions: The use of the third-party rating must comply with the seven general prohibitions. For example, if a firm uses a third-party rating that ranks them highly based on an outcome that is not relevant to the ad and its intended audience, the use could be prohibited. Referencing a rating or ranking based upon an aspect of the adviser’s business that has materially changed, such as a discontinued service, would be misleading even if it included the proper disclosures of date and time period. Similarly, an ad would be misleading if it indicates that the adviser is rated highly without disclosing that the rating is based solely on a criterion, such as assets under management, that may not relate to the quality of the investment advice.

Although the new rule offers relief from certain restrictions, significant compliance and operational oversight will be needed to ensure all the new requirements are fulfilled.

Fairview will continue to update you with in-depth information about the impact of these changes and how your firm may be affected. The next Flash Report in this series will focus on the requirements for recordkeeping under the new Marketing Rule.

Fairview Investment Services provides comprehensive and ongoing compliance services, including comprehensive marketing and advertising review, solicitation-related consulting, and complete examination support. Contact Fairview Investment Services for additional information about maintaining your compliance program in an ever-changing regulatory environment.