Understanding the New SEC Marketing Rule

The SEC regulates marketing material for investment advisors to protect investors and maintain the integrity of the financial markets. By doing so, they help prevent misleading, fraudulent, or manipulative financial advertisements that could deceive or harm potential investors. For example, imagine an advertisement that only highlights the success stories of certain investments but conveniently ignores the ones that performed poorly. This is known as "cherry-picking" and can give potential investors a false sense of security about the advisor's overall performance. Another example is when an advisor presents "gross performance" (returns before fees and expenses) without showing the "net performance" (returns after fees and expenses), creating an illusion of higher returns than what the investor would actually receive. The SEC’s new rule is intended to require investment advisors to present more accurate, transparent, and balanced information so as to help potential investors make better-informed financial decisions. In a notable move, the U.S. Securities and Exchange Commission (SEC) implemented a new marketing rule, “Modernized Marketing Rule for Investment Advisers” on November 4, 2022, revamping regulations surrounding investment adviser advertising and the use of placement agents. This modernized rule replaces an outdated predecessor and untangles a complex web of no-action letters, streamlining the regulatory landscape and setting new standards for investment service sales. We spoke with Ira Kustin, a partner at the law firm Paul Hastings, to delve into the most significant changes ushered in by these revised rules. ► http://www.talksonlaw.com for more legal explainers and interviews with the titans of law.