- Marketing Rule Compliance Checklist for Agreements with Private Fund Placement Agents
- Testimonial & Endorsement Requirements for the Offering of Interests in a Private Fund By Placement Agent Type
- Application of the Marketing Rule to Placement Agents of Private Funds
- Requirements Relating Generally to the Marketing Rule (Including the General Prohibitions)
- Requirements under the Testimonial and Endorsement Framework
- Extraterritorial Application
This article focuses on how the new Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) affects the relationships between investment advisers registered with the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) and placement agents for private funds, including the contractual agreements.
This article first presents a checklist for agreements with placement agents for private funds to support the private fund adviser’s compliance with the Marketing Rule and a chart of the applicability of the “testimonial” and “endorsement” requirements for the offering of interests in a private fund broken down by placement agent type.
The article then presents a longer discussion of each of the relevant requirements under the Marketing Rule for placement agents of private funds.
Marketing Rule Compliance Checklist for Agreements with Private Fund Placement Agents
Note: This chart does not apply to affiliated persons of the private fund adviser (including affiliated placement agents) if the affiliation is readily apparent to or is disclosed to the investor at the time of the communication.
|Contractual Provision||Universe of Placement Agents|
|Sets out the scope of the actions to be undertaken by the placement agent and the terms of the compensation to be paid to the promoter.||All.|
|Compliance with the Marketing Rule with respect to content of the communications by the placement agent and its officers, employees and other associated persons as “advertisements” under the Marketing Rule (including the general prohibitions), which may include, as appropriate, (i) representations as to compliance with the Marketing Rule (with appropriate materiality, knowledge and other qualifiers), (ii) adherence to agreed-upon scripts, guidelines, and restrictions, and/or (iii) adoption by the placement agent of, and compliance with, related policies and procedures, including training, monitoring and testing.||Not applicable to:
|Compliance with “clear and prominent disclosure” requirements under the Marketing Rule, including, if appropriate, agreement upon the form of the disclosure, timing of the disclosure, and the communications in which the disclosure should be included (note: this may also be captured with the placement agent’s policies and procedures discussed above).||Not applicable to:
|Status of the placement agent and any other person receiving direct or indirect compensation under the agreement as an “ineligible person” under the Marketing Rule and ongoing monitoring (and, if appropriate, certification from the placement agent) of such status.||Not applicable to compensation received directly or indirectly by:
|Retention and sharing of records required by Marketing Rule, including all communications that are “advertisements” and supporting documentation, such as substantiation for all statements of material fact by the placement agent or its personnel contained in communications that are “advertisements” (note: in order to satisfy the Recordkeeping Rule the communication must be through a method that enables record retention).||All.|
|Additional provisions to satisfy the oversight requirements, including, for example:
Testimonial & Endorsement Requirements for the Offering of Interests in a Private Fund By Placement Agent Type
|Clear and prominent disclosures||Additional disclosures||Written agreement||Disqualification of Recipients of Compensation|
|Affiliated SEC-registered broker-dealers (and registered representatives)1||N/A||N/A||N/A||
Persons: Yes (unless subject to Rule 506(d))
|Soliciting institutional investors||Yes||N/A||Yes||
Persons: Yes (unless subject to Rule 506(d))
|Soliciting retail investors subject to Regulation BI||N/A||N/A||Yes||
Persons: Yes (unless subject to Rule 506(d))
|Soliciting retail investors not subject to Regulation BI||Yes||Yes||Yes||
Persons: Yes (unless subject to Rule 506(d))
|Non-U.S., unregistered placement agent|
|Under Regulation D under the Securities Act||Yes||Yes||Yes||Persons: Yes (unless subject to Rule 506(d))|
|Under Regulation S under the Securities Act||Yes||Yes||Yes||Yes|
|Unregistered solicitor||Yes||Yes||Yes||Persons: Yes (unless subject to Rule 506(d))|
Application of the Marketing Rule to Placement Agents of Private Funds
The Marketing Rule smashes together concepts under the old Rule 206(4)-1 (the “Advertising Rule”) and the old Rule 206(4)-3 (the “Cash Solicitation Rule”) and then expands on those concepts to areas that were previously not governed by those rules, including, in particular, the solicitation of investors in private funds.
The Marketing Rule introduces a new “testimonial” and “endorsement” framework that encompasses a range of activities, including, among other things, the solicitation of investors into private funds by placement agents. The terms “testimonial” and “endorsement” go far beyond their commonly understood definitions to cover a potentially very large universe of communications by the placement agent with investors. Further, by defining an “advertisement” to include a paid “testimonial” or “endorsement,” all of the requirements of the Marketing Rule (including the general prohibitions) apply to those communications and not just the specific requirements with respect to “testimonial” and “endorsement.”
In addition, the new “adoption” and “entanglement” framework will affect which communications by placement agents (including material disseminated by placement agents) are considered “advertisements” of the private fund adviser itself.
Finally, the Marketing Rule imposes substantial oversight and recordkeeping obligations on the investment adviser with respect the placement agent’s communications that are “testimonials,” “endorsements” or otherwise “advertisements.”
(a) Testimonials and Endorsements
The Marketing Rule introduces and expands on two important types of communications: “testimonials” and “endorsements.”
|“Testimonial” includes any statement by a current investor:||“Endorsement” includes any statement by a person that is not a current investor:|
|(1) About the investor’s experience with the investment adviser or its supervised persons;||(1) That indicates approval, support, or recommendation of the investment adviser or its supervised persons or describes that person’s experience with the investment adviser or its supervised persons;|
|(2) That directly or indirectly solicits any current or prospective investor to be an investor in a private fund advised by the investment adviser; or||(2) That directly or indirectly solicits any current or prospective investor to be an investor in a private fund advised by an investment adviser; or|
|That refers any current or prospective investor to be an investor in a private fund advised by the investment adviser.||(3) That refers any current or prospective investor to be an investor in a private fund advised by the investment adviser.|
The content of a “testimonial” or an “endorsement” is not limited to those concerning the investment adviser but also includes those concerning supervised persons of the investment adviser.
The definition of “testimonial” and “endorsement” also include statements regarding an adviser’s (or supervised person’s) qualities, expertise or capabilities in other contexts if an investor would likely perceive them as relevant to the adviser’s investment advisory services. The SEC stated that this could include statements regarding trustworthiness, diligence or judgment.
The Marketing Rule does not include a definition of “solicit” or “refer” but in other contexts, the SEC has interpreted “solicit” very broadly.1
Communications including Testimonials and Endorsements where there is compensation are captured by the Marketing Rule in two ways: (i) such communications are themselves “advertisements” under the Marketing Rule (and subject to all of the requirements of the Marketing Rule) and (ii) such communications are subject to specific requirements relating to disclosure, oversight and disqualification. We expand on these concepts with respect to placement agents for private funds below.
(b) Adoption and Entanglement
In addition, communications by placement agents may be captured as “indirect” advertisements of the SEC-registered adviser under the “adoption” and “entanglement” theory. Any third-party materials that meet either the “adoption” or “entanglement” standard would result in the adviser being liable for such third-party content under the Marketing Rule to the same extent as the adviser’s own content.
|“Adoption” involves any situation where the investment adviser explicitly or implicitly endorses or approves of the information.||
“Entanglement” involves any situation where the investment adviser is materially involved in the preparation of the information disseminated by a third party.
In determining the level of “entanglement,” an adviser should consider whether the adviser provided information, the level of involvement of the adviser in drafting, and the adviser’s level of editing authority.
“Entanglement” does not include:
Therefore, any materials distributed by the placement agents (or information contained in such materials) with respect to which the adviser was “entangled” would be “advertisements” of the adviser. In addition, any materials prepared by the placement agents (or information contained in such materials) that are “adopted” by the adviser would also be “advertisements” of the adviser.
(2) Requirements Relating Generally to the Marketing Rule (Including the General Prohibitions)
All paid Testimonials and Endorsements are themselves Advertisements and are subject to all of the Marketing Rule, including the general prohibitions. In addition, unpaid Testimonials and Endorsements that are Advertisements of the adviser (e.g., because they meet either the “adoption” or “entanglement” standard) are also subject to all of the Marketing Rule, including the general prohibitions.
This means that:
- A Testimonial and Endorsement cannot be false or misleading, whether by (i) including an untrue statement of a material fact, (ii) omitting a material fact, (iii) being likely to cause an untrue or misleading implication or inference concerning a material fact, or (iv) otherwise being materially misleading;
- The adviser must have a reasonable basis for believing it can substantiate any material statement of fact in a Testimonial and Endorsement; and
- The Testimonial and Endorsement must present in a fair and balanced manner (i) any potential benefits with the associated material risks and limitations, (ii) any specific investment advice, and (iii) any performance results.2
Therefore, the SEC has stated that an adviser may not use a promoter’s testimonial or endorsement that the adviser knows or reasonably should know to be fraudulent, misleading, or untrue.
The SEC also highlighted there may be material facts concerning the client or investor relationship that need to be disclosed to make a Testimonial not misleading. Specifically, the SEC highlighted that, if a testimonial is made by a former client or investor from a long time ago, then the testimonial should include disclosure on that time period. The same concern could exist for a client or investor who is very recent and, in turn, only has a very short experience with the investment adviser.
Note: This means that there may be additional disclosure requirements beyond the specific disclosures required under the Testimonial and Endorsement framework discussed below.
In addition, the SEC is concerned with the potential “cherry picking” of Testimonials and Endorsements. The SEC stated an adviser needs to consider “the context and totality of information presented such that it would not reasonably be likely to cause any misleading implication or inference.” The SEC stated that the Marketing Rule does not require an equal number of positive and negative Testimonials. However, the SEC also stated that general disclaimer language would not be sufficient — for example, one could not simply add a footnote stating “these results may not be typical of all investors.” The SEC suggests that one approach would be to include a disclaimer that the Testimonial was not representative and then provide a link (or other means of accessing) all or a representative sample of the testimonials about the adviser. The assumption behind this SEC suggestion is that there exists a representative sample of Testimonials about the adviser (and also a mechanism to determine that the sample is representative).
One must assume this “cherry picking” concern with respect to the identity of the promoter does not apply with respect to a placement agent, since the context of a placement agent engagement would suggest that the opinions of a placement agent are not representative of the opinions of all placement agents.
Furthermore, the investment adviser will need to be able to substantiate any material statements of fact made in a Testimonial or Endorsement — i.e., any material statement of fact by a promoter will require that the adviser be able to substantiate their statement.
Finally, these Testimonials and Endorsement need to satisfy the specific requirements under the Marketing Rule relating to (i) third-party ratings and (ii) performance presentation. The specific elements of those requirements is beyond the scope of this article. However, placement agents should be careful about referencing third party ratings, rankings or rewards or in displaying or communicating any performance information without the approval of the applicable private fund adviser.
(3) Requirements under the Testimonial and Endorsement Framework
In addition to the general prohibitions discussed above, any Testimonials and Endorsements (including solicitations), including both paid and unpaid, are required to be subject to the following specific requirements (with certain exceptions): (i) certain “clear and prominent” disclosures, (ii) certain additional disclosures concerning compensation and conflicts of interest, (iii) a written agreement, (iv) oversight and (v) disqualification.
(a) Clear and Prominent Disclosures
- That the Testimonial was given by a current investor, or the Endorsement was given by a person that is not a current investor, as applicable;
- Whether any compensation (i.e., cash, non-cash, or any economic benefit) was provided for the Testimonial or Endorsement, as applicable; and
- A brief statement of any material conflicts of interest on the part of the person giving the Testimonial or Endorsement resulting from the investment adviser’s relationship with the person.
Exceptions from this requirement are available for:
- Affiliates, partners, officers, directors or employees of the adviser or the affiliates if affiliation is clear (e.g., same or similar name or same brand) or expressly stated; and
- SEC-registered broker-dealers if the Testimonial or Endorsement is in accordance with “Regulation Best Interest” (Rule 15l-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
These disclosures are expected to be succinct but still “promote their salience and impact.”
For an oral Testimonial or Endorsement, these disclosures should be provided at the same time as it is disseminated.
While the assessment of whether a person is a “current” investor or not is technically based on the person’s status as of the dissemination of the Testimonial or Endorsement, the SEC stated that a former investor may be considered a “current” investor for purposes of this requirement depending on the facts and circumstances, particularly if the communication reflects the investor’s recent prior experience. Furthermore, as noted above, the SEC also suggested that the period of time since the person has been an investor may be a material fact that needs to be disclosed. Therefore, in certain circumstances, it may be advisable to include the relevant time period that the person was an investor (or similar information) connected with the clear and prominent disclosures discussed herein.
Another consideration for a placement agent would be not just whether the placement agent itself is, or has been, an investor in any private fund advised by the private fund adviser but also whether any of its employees (particularly, any of the employees who are making the communications containing the Testimonial or Endorsement) is, or has been, an investor in any private fund advised by the private fund adviser.
Finally, it should be noted that there is no requirement that the person’s name be disclosed in connection with the Testimonial or Endorsement. However, withholding the name cannot be used in a fashion that might make the Testimonial or Endorsement misleading under the general prohibitions of the Marketing Rule. Therefore, a placement agent would not necessarily need to share the name of which employees are “current” investors, unless the facts and circumstances of the solicitation dictate otherwise.
(b) Additional Disclosures
The adviser must provide additional disclosures with respect to:
- The material terms of any compensation agreement (including a description of the compensation); and
- A description of any material conflicts of interest on the part of the person giving the Testimonial or Endorsement.
(i) Disclosure on Material Terms of Compensation
With respect to the compensation, the following rules apply:
- Covers both direct and indirect compensation (e.g., compensation is paid to an affiliate or employer);
- Disclose if the promoter’s expenses are reimbursed by the adviser;
- If a specific amount of cash compensation is paid, then the specific amount must be disclosed;
- If the compensation is based on a percentage and/or a time period, then such percentage and/or time period must be disclosed;
- If the investor would pay increased advisory fees and the amount of the increased fees is known or could be reasonably obtained, the amount of such increased fees must be disclosed;
- If there is a directed brokerage arrangement, then the material terms of this arrangement (including brief description of the compensation) must be disclosed, including the range of commissions that the firm charges for investors directed to it by the adviser and, if applicable, any associated thresholds must be disclosed;
- If the value of the non-cash compensation is readily ascertainable, then the amount of such value must be disclosed; and
- If the compensation is payable upon dissemination or deferred or contingent on a future event (e.g., an investor’s continuation or renewal of its advisory relationship, agreement or investment), then such terms must be disclosed.
Terms of the compensation that are immaterial do not need to be disclosed including (a) detailed information on the calculation of the compensation, (b) compensation arrangement for services or other items other than for the promoter’s testimonial or endorsement, and (c) compensation arrangements for other promoters.
(ii) Disclosure on Material Conflicts of Interest
The SEC is looking primarily for an “explicit disclosure that the promoter, due to such compensation, has an incentive to recommend the adviser, resulting in a material conflict of interest” — i.e., the disclosure should include this as a plain statement (“[Placement Agent] has received compensation from [Investment Adviser] and, therefore, has a conflict of interest with respect to marketing an investment in [Fund] because it has an incentive to market [Fund] as a result of this compensation.”).
An adviser should also consider whether there are any other material conflicts of interest that could affect the credibility of the Testimonial or Endorsement. For example, these could include conflicts associated with proprietary products, payments from third parties, and compensation arrangements. The materiality standard is met if an investor would consider a particular conflict of interest with respect to a promoter to be material to his or her decision to investment in the private fund of the adviser.
(c) Written Agreement
As noted below, provisions of the written agreement should be included to support the adviser’s reasonable belief that the Testimonial or Endorsement is satisfying the Marketing Rule, including, for example, that the required disclosures are being made. However, since the Testimonial or Endorsement would need to be in compliance with the general prohibitions of the Marketing Rule, the provisions should not be limited to compliance with the Testimonial and Endorsement framework.
Furthermore, as noted below, the investment adviser is also required to maintain any Testimonials or Endorsements that are Advertisements in their books and records under Rule 204-2 under the Advisers Act (the “Recordkeeping Rule”), as well as certain supporting materials relating to such Testimonials and Endorsements.
Taken together this suggests that a written agreement with a promoter should include provisions that cover:
- The scope of actions to be undertaken by the promoter;
- The terms of the compensation to be paid to the promoter;
- Provisions to support the investment adviser’s requirement to develop a reasonable belief that the actions by the promoter are in compliance with the Marketing Rule, both with respect to the general prohibitions and the specific disclosure requirements of the Testimonial and Endorsement framework, including:
- Representations as to compliance with the Marketing Rule or agreed-upon scripts, guidelines, restrictions and/or policies and procedures; and
- Additional provisions to satisfy the oversight requirements, including, for example, the right to
review the promoter’s policies and procedures (and associated internal or external reviews and testing relating to such policies and procedures), sampling of communications with investors, agreed upon disclosures and scripts relating to investor communications, pre-review of investment communications, and limitations or guidelines on the content of communications with investors.
- The disqualification provisions under the Marketing Rule (including monitoring and notification); and
- The maintenance and provision of the records required by the investment adviser to comply with the Recordkeeping Rule.
Exceptions from this requirement are available for:
- Affiliates, partners, officers, directors or employees of the adviser or the affiliates if affiliation is clear;
- SEC-registered broker-dealers if the Testimonial or Endorsement is in accordance with Regulation Best Interest; and
- SEC-registered broker-dealers if the Testimonial or Endorsement is provided to a person that is not a “retail customer” under Regulation Best Interest.
The adviser must have a reasonable basis for believing that a Testimonial or Endorsement stated or disseminated by another person complies with these requirements. There are no exceptions to this requirement. The SEC also has stated that provisions in the written agreement are not by themselves sufficient to meet the oversight requirement. Therefore, an adviser cannot rely solely on representations from a promoter that it is complying with the Marketing Rule.
Content. The investment adviser should have a reasonable belief that the content of the Testimonial or Endorsement is compliant with the Marketing Rule, including that the disclosures satisfy both (i) the general prohibitions of the Marketing Rule (as well as the requirements relating to third-party ratings and performance presentations) and (ii) the standards of the Testimonial and Endorsement framework discussed above (including, if applicable, the clear and prominent standard). This could include: (i) requiring the promoter to only use disclosures or scripts provided by the adviser (or as agreed upon between the promoter and the adviser), (ii) the pre-review of Testimonials or Endorsements, and/or guidelines or limitations on the content of those statements (e.g., do’s and don’ts sheets).
Delivery. The investment adviser should have a reasonable belief that the required disclosures (both with respect to the general prohibitions and the Testimonial and Endorsement framework) are being delivered to investors in the required form and at the required time. This could include: (i) an acknowledgement of receipt by the investor, (ii) other documentation confirming delivery to investors, and/or (iii) periodic inquiries of a sample of investors solicited or referred by the promoter either by reaching out directly to investors or by reviewing a promoter’s records of their communications.
Policies and Procedures. Although not specifically required by the Marketing Rule, an investment adviser should consider adopting policies and procedures covering the oversight requirement, including the methods for developing a reasonable belief that the Testimonials and Endorsements are compliant with the Marketing Rule.
In addition, an investment adviser should also consider in which circumstances it should require a promoter to adopt policies and procedures (and review such policies and procedures to determine that they are reasonably designed to ensure that the promoter is complying with its obligations under the agreement with the investment adviser with respect to the Marketing Rule). These policies and procedures could cover: (i) the compliance of the communications with the content requirements of the Marketing Rule and/or compliance with any agreed-upon scripts, forms, guidelines or restrictions, the compliance of the communications with the delivery requirements of the Marketing Rule, monitoring (e.g., ongoing certifications) and notification of changes to the status as an ineligible person of both the placement agent and applicable personnel, (iv) training of appropriate personnel, and (v) monitoring and testing of compliance with the policies and procedures.
The adviser may not compensate a person, directly or indirectly, for a Testimonial or Endorsement if the adviser knows, or in the exercise of reasonable care should know, that the person giving the Testimonial or Endorsement is an Ineligible Person at the time the Testimonial or Endorsement is disseminated. “Ineligible Person” means a person who is subject either to a “disqualifying Commission action” or to any “disqualifying event” in the last 10 years.
The moment of disqualification is at the moment the Testimonial or Endorsement is disseminated and not either (i) the closing date of the fund or (ii) the time of the payment to the promoter.
The SEC stated that an investment adviser may continue to pay a promoter trailing compensation if the adviser did not know, or have reason to know, of the disqualification event at the time of dissemination. This suggests that an adviser may continue to pay this compensation even where it later determines that the promoter was actually an ineligible person at the time of the dissemination. However, since it would be best practice to receive representations in the contract relating to the promoter’s status as an ineligible person, there may be contractual effects of that later discovery of ineligibility.
The other important point would be that a promoter who became an ineligible person after the date of dissemination would be permitted to continue to receive trailing compensation for solicitation activities (and other Testimonials and Endorsements) prior to the disqualifying event. A contractual question could arise where the promoter engaged in certain solicitation activities with respect to certain investors but was disqualified prior to the closing of those investors into the private fund. Based on language of the rule itself, the adviser would not be prohibited from paying the promoter for those activities, so long as the promoter ceased to engage in such solicitation activities after the disqualifying event.
Exceptions from this requirements are available for:
- Uncompensated Testimonials and Endorsements (or with de minimis compensation); and
- A SEC-registered broker-dealer that is not subject to statutory disqualification (as defined under Section 3(a)(39) of the Exchange Act); and
- A person covered by Rule 506(d) under the Securities Act (“Rule 506(d)”) with respect to a Rule 506 Regulation D securities offering and whose involvement would not disqualify the offering under that rule.
Note: “De minimis” means $1,000 (or the equivalent value of non-cash compensation) during the preceding 12 months.
(ii) Monitoring of Disqualification
The adviser will need to monitor eligibility of promoters at a frequency that it determines constitutes the exercise of reasonable care based on the facts and circumstances, including, for example, the risks that the person could become an ineligible person and the impact of other screening and compliance mechanisms in place. If the Testimonial or Endorsement is publicly available (e.g., on the website), then the inquiry of the promoter’s disqualification status would have to occur at least annually. If there is no information or other indicators suggesting a disqualification, then the investment adviser may be able to rely on questionnaires or certifications and, if applicable, contractual representations, covenants and undertakings.
(iii) Ineligible person
Ineligible person covers not only the person who is subject to a disqualifying Commission action or a disqualifying event but also
- Any employee, officer, or director of an ineligible person and any other individuals with similar status or functions within the scope of association with the ineligible person;
- Any general partners of an ineligible person formed as a partnership; and
- Any elected managers of an ineligible person formed as a limited liability company.
A legal entity that is not itself an ineligible person does not become an ineligible person if one of its employees, officers, directors, any other persons of similar status or function, general partners or elected managers is an ineligible person. The receipt by such an ineligible employee, officer, director, other person, general partner or elected manager of indirect compensation for a Testimonial or Endorsement would be prohibited under the Marketing Rule. The SEC stated that this would include either (i) a receipt of a share of the profits the entity receives from the Testimonial or Endorsement or (ii) a bonus tied to the entity’s overall profits without setting aside revenue from such testimonials and endorsements.
Also the ineligibility of an ineligible employee, officer, director, other person of indirect compensation, general partner or elected manager as result of their association with an ineligible person only applies “within the scope of that association.” This means that a person associated with two different firms could be ineligible to receive compensation with respect to his or her activities for the firm that is an ineligible person but could be eligible to receive compensation with respect to his or her activities for a firm that is not an ineligible person.
Therefore, when engaging a placement agent that is a legal entity (that is not itself a general partner of a limited partnership or an elected manager of a limited liability company), an investment adviser would need to ensure that (i) the placement agent itself is not an ineligible person and (ii) no person receiving indirect compensation under the agreement for the applicable Testimonial or Endorsement is an ineligible person.
(iv) Disqualifying actions and events
A “disqualifying Commission action” means an SEC opinion or order barring, suspending, or prohibiting the person from acting in any capacity under the U.S. federal securities laws.
A “disqualifying event” is any of the following events that occurred within 10 years prior to the person disseminating an Endorsement or Testimonial:
- A conviction by a court of competent jurisdiction within the United States of any felony or misdemeanor involving conduct described in Advisers Act Section 203(e)(2)(A) through (D);i
- A conviction by a court of competent jurisdiction within the United States of engaging in, any of the conduct specified in Advisers Act Section 203(e)(1),ii (5),iii or (6);iv
- The entry of any final order by a U.S. state securities commission (or any agency or officer performing like functions), a U.S. state authority that supervises or examines banks, savings associations, or credit unions, a U.S. state insurance commission (or any agency or office performing like functions), an appropriate U.S. federal banking agency, the National Credit Union Administration, the U.S. Commodity Futures Trading Commission or a self-regulatory organization (as defined in the Form ADV Glossary of Terms), of the type described in Advisers Act Section 203(e)(9);v
- The entry of an order, judgment or decree described in Advisers Act Section 203(e)(4),vi and still in effect, by any court of competent jurisdiction within the United States; and
- An SEC order that a person cease and desist from committing or causing a violation or future violation of:
- Any scienter-based anti-fraud provision of the Federal securities laws, including without limitation section 17(a)(1) of the Securities Act of 1933, section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, section 15(c)(1) of the Securities Exchange Act of 1934, and section 206(1) of the Advisers Act, or any other rule or regulation thereunder; or
- Section 5 of the Securities Act of 1933;
A disqualifying event does not include an event described above with respect to a person that is also subject to:
- An order pursuant to section 9(c) of the Investment Company Act of 1940 with respect to such event; or
- An SEC opinion or order with respect to such event that is not a disqualifying Commission action;
Provided that for each applicable type of order or opinion of this section:
- The person is in compliance with the terms of the order or opinion, including, but not limited to, the payment of disgorgement, prejudgment interest, civil or administrative penalties, and fines; and
- For a period of 10 years following the date of each order or opinion, the advertisement containing the testimonial or endorsement must include a statement that the person providing the testimonial or endorsement is subject to a SEC order or opinion regarding one or more disciplinary action(s), and include the order or opinion or a link to the order or opinion on the SEC’s website.
The following events would not trigger the disqualification events:
- Pre-effective date (May 4, 2021) conduct unless it would have disqualified under the Cash Solicitation Rule; and
- Any disqualification under the Cash Solicitation Rule for which the person had received relief under an SEC staff no-action letter.
An investment adviser is required to maintain records of all Advertisements that they disseminate. This means that each communication of a promoter that is a paid Testimonial or Endorsement (which each are Advertisements) must be maintained as a record by the investment adviser. For an oral Advertisement, the investment adviser must maintain either (i) a recording or (ii) a copy of any written or recorded materials used by the person in connection with the oral Advertisement, including the required disclosures (including copies of such disclosures if provided separately).
An investment adviser is also required to maintain the following records relating to an Advertisement: (i) documentation substantiating material statements of facts, (ii) documentation of the due diligence relating to third-party ratings, rankings or awards (e.g., a copy of the underlying questionnaire or survey), (iii) documentation relating to performance presentations, and (iv) documentation of the “intended audience” if the Advertisement includes hypothetical performance.3
The Recordkeeping Rule requires that certain books and records (including copies of Advertisements or the disclosures with respect to oral Advertisements) are required to be maintained and preserved in “an easily accessible place” for five years and for the first two years also in an “appropriate office of the investment adviser.” This means, for example, that copies of the Advertisements maintained solely at the office of a placement agent may not satisfy the Recordkeeping Rule — i.e., a private fund adviser may not be able to rely on the recordkeeping of the placement agent to satisfy the adviser’s obligations under the Recordkeeping Rule.
The question that will arise is how a placement agent should transfer these records (particularly, e-mails, text messages, etc.) to the investment adviser for their records. Most investment advisers satisfy the requirements to maintain certain e-mails (or similar communications) that might fall within certain categories of the Recordkeeping Rule by capturing all of the e-mails within the requirements of the Recordkeeping Rule. However, this approach also captures many e-mails that do not fall within the requirements of the Recordkeeping Rule. Unaffiliated broker-dealers or placement agents are unlikely to be willing to take such an approach with respect to the e-mails (or other communications) that might be Advertisements under the Marketing Rule, so there will need to be a different approach to sorting out such e-mails. The SEC has permitted the storage of required records (including e-mails) at cloud storage or with a third-party vendor if the adviser can promptly produce records in accordance with the Recordkeeping Rule. Depending on future SEC staff guidance, it may be possible that the investment adviser and placement agent may be able to organize, for example, restricted access to the service provider who stores the e-mail or other communications of the placement agent in a manner that complies with the Recordkeeping Rule.
Finally, this recordkeeping requirement means that any communication by a placement agent or its personnel must be using methods that permits the records retention. Similar to the existing issues faced by broker-dealers and investment advisers under the Advisers Act and the Exchange Act, the investment adviser must ensure that the placement agent is not communicating “advertisements” through methods that do not permit the retention of the record of that communication.4 To this end, SEC-registered broker-dealers and SEC-registered investment advisers who are subject to substantially similar recordkeeping requirement will be familiar with these types of policies on limiting the form of communications. However, non-U.S. placement agents may not face similar requirements under their applicable non-U.S. law and so may not have the internal compliance structure necessary to comply with these requirements.
(5) Extraterritorial Application
The SEC has confirmed that many of the substantive provisions of the Advisers Act (including the Marketing Rule) do not apply to an SEC-registered investment adviser whose principal place of business is outside of the United States (a “non-U.S. SEC-registered investment adviser”) with respect to their clients who are not U.S. persons (“non-U.S. clients”), including funds organized outside of the United States (“non-U.S. funds”) with U.S. investors. This means that a placement agent engaged by a non-U.S. SEC-registered investment adviser with respect to its non-U.S. funds may not be required to comply with the requirements of the Marketing Rule described herein. However, any such non-U.S. SEC-registered investment adviser would need to include appropriate disclosure on the fact that the Advisers Act does not apply with respect to any reference or disclosure to its SEC registration status. Non-U.S. private fund advisers should consider reviewing their fund documentation and other materials to add this disclosure if they are interested in avoiding the requirements of the Marketing Rule.
However, this extraterritorial limitation does not apply to:
- A U.S. SEC-registered investment adviser, regardless of whether the U.S. or non-U.S. placement agent is soliciting for a U.S. or non-U.S. fund; and
- A U.S. private fund, regardless of whether the U.S. or non-U.S. placement agent is soliciting for (i) the U.S. private fund itself, (ii) a U.S. or non-U.S. feeder fund of the U.S. private fund, or (iii) other U.S. or non-U.S. vehicle that is “formed for the purpose” of investing, directly or indirectly, in a U.S. private fund.
This means, for example, that a non-U.S. placement agent soliciting for a non-U.S. fund (with a U.S. SEC-registered investment adviser) or a non-U.S. feeder fund of a U.S. fund under Regulation S of the Securities Act would still be subject to the requirements of the Marketing Rule. Since such non-U.S. placement agent agreements have limited provisions with respect to compliance with U.S. federal securities laws, the requirements of the Marketing Rule will create a significant change in the applicability of the U.S. securities laws to those relationships.
 A communication distributed by a U.S. registered broker-dealer are also subject to requirements set forth under the FINRA Rules, including FINRA Rule 2210. Many of the requirements under the Marketing Rule purport to follow similar requirements as FINRA Rule 2210; however, guidance with respect to FINRA Rule 2210 “are not controlling or authoritative interpretations with respect to” the Marketing Rule.
 Note that due to restrictions on the use of projected performance under the FINRA Rules, a U.S. broker-dealer may not be permitted to distribute certain communications involving “hypothetical performance” (as understood of the Marketing Rule).
 See SEC Press Release, JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges, (Dec. 17, 2021), available at https://www.sec.gov/news/press-release/2021-262 (regarding usage of text messages, WhatsApp and personal e-mail accounts).
i Such conduct is any conduct that:
(A) Involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, any substantially equivalent activity however denominated by the laws of the relevant foreign government, or conspiracy to commit any such offense;
(B) Arises out of the conduct of the business of a broker, dealer, municipal securities dealer, investment adviser, bank, insurance company, government securities broker, government securities dealer, fiduciary, transfer agent, credit rating agency, foreign person performing a function substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Exchange Act [7 U.S.C. 1 et seq.] or any substantially equivalent statute or regulation;
(C) Involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities or substantially equivalent activity however denominated by the laws of the relevant foreign government; or
(D) Involves the violation of section 152, 1341, 1342, or 1343 or chapter 25 or 47 of title 18, or a violation of substantially equivalent foreign statute.
ii Such conduct includes any conduct where the person “has willfully made or caused to be made in any application for registration or report required to be filed with the Commission under this subchapter, or in any proceeding before the Commission with respect to registration, any statement which was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, or has omitted to state in any such application or report any material fact which is required to be stated therein.”
iii Such conduct is any conduct where the person “has willfully violated any provision of the Securities Act of 1933 [15 U.S.C. 77a et seq.], the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.], subchapter I of this chapter, this subchapter, the Commodity Exchange Act [7 U.S.C. 1 et seq.], or the rules or regulations under any such statutes or any rule of the Municipal Securities Rulemaking Board, or is unable to comply with any such provision.”
iv Such conduct is any conduct where the person “has willfully aided, abetted, counseled, commanded, induced, or procured the violation by any other person of any provision of the Securities Act of 1933 [15 U.S.C. 77a et seq.], the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.], subchapter I of this chapter, this subchapter, the Commodity Exchange Act [7 U.S.C. 1 et seq.], the rules or regulations under any of such statutes, or the rules of the Municipal Securities Rulemaking Board, or has failed reasonably to supervise, with a view to preventing violations of the provisions of such statutes, rules and regulations, another person who commits such a violation, if such other person is subject to his supervision. For the purposes of this paragraph no person shall be deemed to have failed reasonably to supervise any person, if —
(A) there have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and
(B) such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system were not being complied with.”
v Such order is any order that “(A) bars such person from association with an entity regulated by such commission, authority, agency, or officer, or from engaging in the business of securities, insurance, banking, savings association activities, or credit union activities; or (B) constitutes a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct.”
vi This covers any “order, judgment, or decree of any court of competent jurisdiction, including any foreign court of competent jurisdiction, from acting as an investment adviser, underwriter, broker, dealer, municipal securities dealer, government securities broker, government securities dealer, transfer agent, credit rating agency, foreign person performing a function substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Exchange Act [7 U.S.C. 1 et seq.] or any substantially equivalent statute or regulation, or as an affiliated person or employee of any investment company, bank, insurance company, foreign entity substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Exchange Act or any substantially equivalent statute or regulation, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security.”
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