With the November 4 deadline looming, a recent Wall Street Journal article highlighted to the investment adviser community one of the areas of the SEC’s New Marketing Rule (NMR) that poses 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. When it comes to the presentation of Net Performance at the deal or transaction level—especially for client investments that have not yet been monetized or realized—the NMR’s requirements are open to interpretation. To heighten the risk, Kroll expects that the SEC staff will shortly commence inquiries or examinations to determine whether advisers are in compliance with the requirements of the rule.
For investor communications that are deemed to be “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, along with other conditions including material accuracy and documentary support. In another complex layer relating to the determination of Net Performance, the NMR requires that Net Performance must be calculated over the same time period and using the same methodology as gross performance. Assumptions and hypotheticals must be fully and fairly disclosed. The complexities of determining Net Performance at the deal or transaction level are particularly difficult for private equity fund managers, especially when unrealized investments with longer “tails” are involved. Given the uncertainties of the rule’s requirements, some advisers are struggling to devise workable, compliant solutions to present Net Performance based on the particular set of facts and circumstances of their investments.
Kroll's experts have devised the following framework to assist advisers in providing what we believe is a credible basis to demonstrate to the regulators that the adviser has implemented risk-based and reasonable policies, procedures and disclosures regarding their presentation of Net Performance.
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, advisers should contact Kroll for confidential assistance with the following:
Kroll’s team of compliance experts can help you navigate the SEC’s new Marketing Rule options and requirements and help you prepare for the rapidly approaching November deadline. We will develop and update tailored policies and procedures that are compliant and practical for your firm, address any implementation concerns, train your employees and assist with crafting appropriate and customized disclaimers to prepare you for the SEC's follow-up enforcement actions and exams.
To learn more about the new Marketing Rule and to prepare your firm for these upcoming changes, contact one of our experts.
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