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    Sep. 8, 2022

A Checklist for Advisers to Guide Compliance With the Marketing Rule

The so-called advertising rule – Rule 206(4)‑1 under the Investment Advisers Act of 1940  – became law in 1961. In recognition of the significant developments in technology and methods of communicating with current and potential investors in the ensuing 60 years, the SEC approved amendments to the advertising rule, as well as the cash solicitation rule, to modernize them and aggregate guidance from no‑action letters and enforcement actions. The resulting amended advertising rule – now referred to as the “Marketing Rule” – took effect on May 4, 2021, with investment advisers required to be in compliance by November 4, 2022. Given that advisers have had 18 months to modify their policies and procedures to comply with the Marketing Rule, they should expect the SEC to scrutinize their marketing practices soon after November 4. This article explains the key differences between the old advertising and cash solicitation rules and the new Marketing Rule; discusses the imminent compliance deadline; provides a checklist developed by Krista Zipfel, director of Focus 1 Associates LLC and a compliance consultant with more than 20 years’ experience, that advisers can use to help comply with the rule; and explores the relationship between advisers’ efforts to comply with the Marketing Rule and the SEC’s flurry of proposed rulemaking. See “Navigating the SEC’s New Marketing Rule” (Jul. 8, 2021); as well as our two-part series on the Marketing Rule: “Key Takeaways for Private Fund Managers” (Mar. 18, 2021); and “Next Steps for Legal and Compliance” (Mar. 25, 2021).

Tax Considerations for Sovereign Wealth Funds’ Investments in Hedge Funds (Part One of Two)

Sovereign wealth funds (SWFs) are an important source of capital for hedge funds. According to the Sovereign Wealth Fund Institute, the top ten largest SWFs collectively managed more than $7.1 trillion of capital as of January 2022. SWFs generally enjoy favorable tax treatment in the U.S., but that treatment is subject to specific limitations. SWFs typically require separate limited partnership agreement provisions or side letter protections to ensure fund activities do not compromise their favorable tax treatment. In a two-part guest series, Troutman Pepper attorneys Steven D. Bortnick and Morgan L. Klinzing detail critical considerations for any hedge fund manager intending to market to potential SWF investors. This first article outlines the U.S. statutory tax treatment of SWFs, as well as some of the benefits, limitations and exemptions that are available. The second article will analyze ways hedge funds can be structured to limit negative tax treatment to SWF investors from income generated from funds’ commercial activities under the tax code. See “Why and How Do Middle Eastern Sovereign Wealth Funds, Pension Funds and High Net Worth Individuals Invest in Private Funds?” (Jun. 6, 2013); and “Why and How Do Sovereign Wealth Funds Invest in Private Funds?” (Mar. 28, 2013).

SEC Investment Management Attorneys Offer a Roadmap to SEC Rulemaking and Public Comments

The SEC under Chair Gary Gensler has pursued an aggressive rulemaking agenda that has touched many aspects of the financial services industry and posed significant new challenges for private fund advisers. A recent Alternative Investment Management Association (AIMA) program offered a roadmap to the SEC rulemaking process, focusing on the importance of the public comment period; ways advisers can tailor effective comments, whether individually or through industry associations; and the opportunity to provide input to the SEC even after the end of the comment period. The program was led by Suzan Rose, senior advisor to AIMA, and featured Robert Holowka and Nathan Schuur, both Senior Counsel in the SEC Division of Investment Management, as well as Michael A. Kitson, deputy CCO and counsel at Bridgewater Associates LP. See “Deputy Director of SEC Division of Investment Management Discusses Pending Rulemaking” (May 12, 2022). See also our coverage of recent SEC rulemaking on beneficial ownership; climate risk disclosure; cyber risk management; environmental, social and governance disclosure; Form PF; private funds; securities dealers; security-based swap execution facilities; security-based swaps; and short sales.

Schwab Hit With $135‑Million Fine Over Hidden Investment Program Costs

Charles Schwab & Co., Inc., Charles Schwab Investment Advisory, Inc. and Schwab Wealth Investment Advisory, Inc. thought they had an appealing hook for their robo-advisory product, pitching it as having “no advisory fees.” According to a recently settled SEC enforcement proceeding, however, Schwab allegedly earned amounts equivalent to advisory fees by depositing preset cash allocations in their product’s investment portfolios in an affiliated bank, which made money by lending out the clients’ cash. The respondents allegedly used materially misleading advertisements for the product and failed to provide full and fair disclosure of the conflict this created, how the cash allocations were determined and the impact of those allocations on performance. They were hit with disgorgement of the profits generated by the bank on the cash balances, forced to pay a $135‑million fine and compelled to retain a compliance consultant. Although this proceeding concerned an automated advisory service, the principles about full and fair disclosure of conflicts, fees and expenses are relevant to all fund managers. This article discusses the alleged misconduct and the terms of the settlement order. See “SEC Sanctions Robo‑Adviser for Misleading Marketing and Improper Solicitation Practices” (Jun. 24, 2021); and “SEC Settles First Two Enforcement Actions Against Robo-Advisers” (Feb. 14, 2019).

Handling Evolving Post‑Pandemic Employee Privacy Issues

The coronavirus pandemic has left a rushed patchwork of problematic privacy laws, with public demands for more corporate transparency conflicting with employees’ rights to privacy and employer expectations of better visibility into the remote work environment, as well as increased safety for those in shared workspaces, panelists at a recent Practising Law Institute program said. This article shares the speakers’ insights on vaccine policies, employee monitoring, collecting diversity data and more. See “Post-Pandemic Workplace Vaccines and Testing Policy Checklist” (Oct. 21, 2021).

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