As a manager of one or more "private" pooled investment vehicles, you may not have paid much attention to your marketing activities under the mistaken impression that you are not subject to provisions of law governing marketing activities because you do not engage in general solicitations or general advertisements. Such customary activities may include obvious marketing activities, such as preparing and disseminating to potential investors a "slide show" or brochure describing your operations and performance, and entering into a third party marketing agreement to attract new capital. Customary marketing activities also may include less obvious activities, such as providing current or potential investors with a quarterly (or other periodic) letter. Managers sometimes expend considerable time and expense on preparing a private placement memorandum, but do not focus on the entirety of the presentation. This article is meant to call attention to certain relevant rules and best practices governing the marketing practices of investment advisers registered with the Securities and Exchange Commission (the "SEC") as well as non-registered advisers.
Federally Registered Investment Advisers
Advertising In General. As a manager of one or more "private" pooled investment vehicles, you should be familiar with prohibitions against general solicitations and general advertisements that govern such vehicles. As a federally registered investment adviser, however, you must also be familiar with Section 206 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"). Section 206 of the Advisers Act generally prohibits any act, practice or course of business that is fraudulent, deceptive or manipulative. The SEC has devoted substantial attention to the effect of Section 206 of the Advisers Act on marketing practices through "no-action" letters issued by the SEC and through Rule 206(4)-1 under the Advisers Act (which governs advertisements by federally registered investment advisers).
Rule 206(4)-1: Generally . Rule 206(4)-1 under the Advisers Act contains a broad definition of "advertisements," and is generally construed to cover documents customarily disseminated to existing investors and potential investors. Thus, materials that could be considered "advertisements" should be reviewed for compliance prior to distribution.
Rule 206(4)-1: Antifraud . Rule 206(4)-1(a)(5) under the Advisers Act generally prohibits an investment adviser from using any advertisement that contains an untrue statement of material fact or is otherwise false or misleading. Whether an advertisement is false and/or misleading depends upon the specific facts and circumstances surrounding the advertisement and its dissemination, including the form and content of the advertisement, the implications or inferences arising out of the advertisement in its total context, and the sophistication of the investor or prospective investor. This facts and circumstances analysis is specific to each advertisement, although it may be guided by information contained in SEC "no-action" letters and enforcement actions. Rule 206(4)-1, however, provides that each of the following activities, among other things, if included in an advertisement, constitutes a fraudulent, deceptive, or manipulative act, practice, or course of business:
testimonials of any kind concerning the adviser or any advice, analysis, report or other service rendered by such adviser;
past specific recommendations (unless the advertisement sets out or offers to furnish a list of all recommendations made by such adviser within the prior year); and
representations that any graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell them, or can be used to assist any person in making his own decisions as to which securities to buy or sell or when to buy or sell them.
The prohibitions above are not necessarily intuitive. For example, the distribution to prospective clients of your quarterly investor letter may violate the prohibition on giving past specific recommendations if you discuss securities that you have bought and sold, unless there is compliance with certain conditions.
Past Performance . The SEC has devoted a great deal of attention to the use of model and actual performance results (including the performance results of predecessor entities) in advertising. The use of past performance in advertising often entails a detailed and complex analysis as to whether the form and content of the performance results presented cause the advertisement to be false and/or misleading under Rule 206(4)-1(a)(5). The SEC has not adopted standard performance advertising requirements. And the use of performance advertising tends to vary greatly among advisers. For these reasons, advisers often voluntarily adhere to performance presentation standards issued by the Association for Investment Management and Research (AIMR). Whether or not you choose to voluntarily adhere to specific performance presentation standards, you must fully disclose all material conditions and fees affecting performance, prominently and fully, including variations of such conditions and fees over time, when using past performance in advertising. In addition, when using prior performance from predecessor funds in advertising, care must be taken to ensure that such advertisements meet the particular guidance governing the use of predecessor fund performance results (including whether the adviser may use such performance results in advertisements at all).
Marketing Agreements And Arrangements. Rule 206(4)-3 under the Advisers Act governs cash payments (directly or indirectly) for client solicitations. Rule 206(4)-3 applies to all cash payment arrangements, including internal compensation systems (for example, bonuses) that award affiliates or employees of the adviser for client solicitations. As a result, all third party marketing agreements and relationships entered into by an adviser that is required to be federally registered (including solicitor relationships with employees) must adhere to the following three general requirements:
the adviser must be federally registered as an investment adviser;
the solicitor cannot have been convicted of certain felonies or misdemeanors and cannot be subject to an order under Section 203(e) of the Advisers Act; and
the cash fee must be paid pursuant to a written agreement to which the adviser is a party (and which agreement must be maintained as part of the advisers books and records).
In addition, the written agreement must (i) describe the solicitation activities to be engaged in by the solicitor and the compensation to be received therefore, (ii) contain an undertaking by the solicitor to perform his duties under the agreement in a manner consistent with the instructions of the adviser and the provisions of the Advisers Act and the rules thereunder, and (iii) require that the solicitor, at the time of any solicitation activities for which compensation is paid or to be paid by the adviser, provide the client with certain required information and disclosures. The adviser must obtain a signed and dated acknowledgement of receipt from an investor of this separate written disclosure document prior to or at the time of entering into an advisory contract (i.e., in the case of a private investment fund, prior to executing a subscription agreement and accepting a capital contribution from such investor).
Press Releases, Interviews, Seminars And Other Miscellaneous Activities. Many activities commonly engaged in by investment advisers, such as press releases, interviews and participation in industry seminars, can raise difficult questions with respect to whether such activities constitute advertising. You should approach these activities cautiously and consult counsel before engaging in any such activities to ensure that they do not run afoul of applicable laws, rules and regulations governing marketing activities.
Unregistered Investment Advisers
Like any manager of one or more "private" pooled investment vehicles, whether federally registered as an investment adviser or not, you should be familiar with the prohibitions against general solicitations and general advertisements that govern such vehicles. In addition, the general prohibitions of Section 206 of the Advisers Act (prohibiting fraudulent, deceptive or manipulative activities), as discussed above, apply to unregistered investment advisers to the same extent as they apply to federally registered investment advisers. As a result, the information provided above serves as guidelines for "best practices" of unregistered investment advisers, including the recommended cautious approach to activities such as press releases, interviews and participation in industry seminars.
Steven J. Tsimbinos is a Member of Lowenstein Sandler PC, Roseland, New Jersey, and, in addition, a member of the firm's Corporate Department and Investment Management, Mergers and Acquisitions and Corporate Finance Practice Groups, as well as the Tech Group. Scott H. Moss is an Associate at the firm and a member of the Corporate Department and Investment Management Practice Group.