Compliance with the new Sec marketing rule

As the Nov. 4 deadline approaches, a recent Wall Street Journal article highlighted for the investment advisory community one of the areas of the SEC’s new marketing rule (NMR) that poses a significant regulatory risk, even though the rule itself and the corresponding guidance provided by the SEC staff suffers from a lack of clarity and specificity. With respect to the presentation of net performance at the agreement or transaction level, particularly for client investments that have not yet been monetized or realized, the requirements of the NMR are subject to interpretation. To increase the risk, Kroll expects SEC staff to begin investigations or reviews shortly to determine whether advisers are complying with the rule’s requirements.

For investor communications that are considered “advertisements” under the NMR, the rule generally prohibits the adviser from presenting gross performance unless net performance is presented “side by side” or otherwise with equal prominence. , and other terms, including material accuracy. and documentary support. In another complex layer relating to the determination of net performance, the NMR requires that net performance be calculated over the same period and using the same methodology as gross performance. Assumptions and assumptions must be fully and fairly disclosed. The complexity of determining net performance at the deal or transaction level is particularly difficult for private equity fund managers, especially when dealing with unrealized investments with longer “tails”. long. Given the uncertainties of the rule requirements, some advisers struggle to devise viable and compliant solutions for reporting net performance based on the particular set of facts and circumstances of their investments.

Kroll’s experts have designed the following framework to help advisers provide what we believe to be a credible basis for demonstrating to regulators that the adviser has in place reasonable, risk-based policies, procedures and disclosures regarding its presentation of net performance.

NMR Compliance Action Items

  • Calculate and display net performance whenever gross performance is included in qualified advertising, whenever possible
  • Coordinate with fund accounting staff to memorize methodologies used to allocate transaction-level expenses and associated net performance calculations
  • Design and implement risk-based and appropriate compliance policies and procedures regarding the calculation, testing and documentation of all performance determinations
  • Evaluate the documents and confirm that the net performance is presented “side by side with the gross performance or with equal importance”.
  • Determine whether performance figures are fairly presented, not misleading and materially accurate, taking into account the sophistication of the target investor
  • Clearly disclose methodology, assumptions, limitations and assumptions (if any)
  • Confirm and maintain documentary support for the material accuracy of all performance figures and other material statements
  • Promptly disclose any changes in methodology, assumptions, time periods, etc.
  • Review and update as necessary performance figures in historical marketing materials that may still be accessible to actual or potential investors, including materials in data rooms, DDQs, company websites or used by third-party marketers
  • Confirm consistency of performance figures and disclosures in all investor correspondence that are considered advertisements
  • Provide training to relevant staff, including those in finance, marketing, investor relations and portfolio management functions
  • Update the ADV form

Kroll experts will help you

Kroll’s team of compliance experts can help advisers navigate the complexities of the SEC’s new marketing rule. Among other complex nuances of the rule, advisors should contact Kroll for confidential assistance regarding the following:

  • Independent assessment of material accuracy of performance figures and methodologies
  • Review of materials that may be considered advertising or marketing
  • Develop, implement and periodically test the adequacy of risk-based compliance policies and procedures
  • Comply with the provisions of the books and records of the federal securities laws
  • Training of key company personnel and supervisors
  • Monitoring social media and web platforms for marketing and advertising statements that may be attributable to the advisor
  • Respond to SEC review and enforcement requests

How can Kroll’s Financial Services Regulatory and Compliance team help you?

Kroll’s team of compliance experts can help you navigate the new options and requirements of the SEC’s marketing rules and help you prepare for the fast approaching November deadline. We will develop and update bespoke compliant and practical policies and procedures for your business, address any implementation issues, train your employees and help you draft appropriate and customized disclaimers to prepare for the measures. applications and follow-up examinations of the SEC.

To learn more about the new marketing rule and to prepare your business for these upcoming changes, contact one of our experts.

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About Marilyn Perkins

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