Emerging Growth / Venture Capital

How the Overhaul of Investment Advisor Advertising and Solicitation Rules Affects Private Fund Advisors

David Weaver
July 28, 2021

The SEC published its revised investment advisor advertising and solicitation rules, effective May 1, 2021. These revised rules, which provide guidance for the Investment Advisers Act of 1940, will undoubtedly have a serious impact on private fund advisors.

The previous investment advisor marketing rule was a guidepost to private fund managers for years, but these managers are now subject to tougher restrictions under the new rule. In this article we have summarized some of the main changes and how they will impact private fund investors.

Defining “Advertisement” Under the New Rule

The amended definition of advertisement under the revised investment advisor marketing rule has two prongs. The first prong addresses the kinds of communications that have always been covered by the advertising rule. The second prong addresses solicitation activities that were not previously covered by the advertisement rule. Solicitation activities were previously addressed by the cash solicitation rule.

Defining “Advertisement”: Prong 1

The first prong of the rule defines advertisement as:

“any direct or indirect communication an investment adviser makes to more than one person, or to one or more persons if the communication includes hypothetical performance, that offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser.”

This definition, alongside amendments to the rule, means that an investment advisor cannot make untrue statements of material fact or omit material facts to any investor or prospective investor in the pooled investment vehicle.

Also under this definition, private funds and their advisors are subject to higher expectations for disclosure, content, and presentations as described in the general prohibitions. These increased guardrails around marketing will result in more precision and uniformity in private fund marketing.

Performance Presentations & Requirements

One example of a practical application of this revised rule is that advisors to private funds must show net performance information in performance presentations. Broadly speaking performance presentations must include certain required communications. For example, if gross performance is shown, it must be accompanied by an equally prominent statement of net performance. Both net and gross performance must be calculated over the same period of time using the same methodology and return type.

In addition to ensuring disclosure of net performance, there are several specific guidelines around demonstrating performance.

Other Performance Portfolios:

For example, advisors may show the performance of portfolios with substantially similar investment policies, objectives, and strategies as those of the services offered in the promotional materials. However, all related portfolios must be included in the performance presentation to address intentional selection concerns. Criteria used to define the related portfolios must also be disclosed.

Extracted Performance:

Another category used to make comparisons is extracted performance. The SEC prohibits private fund advisors from showing the performance of only a subset of investments from a portfolio without also providing the results of the whole portfolio from which the data was extracted.

The SEC emphasizes the requirement that the extracted performance must be from a single portfolio. Advisors cannot extract performance data from multiple portfolios. Again, this is designed to mitigate intentional selection or cherry-picking concerns. The advisor must also disclose that the performance data only represents a portion of the portfolio’s investments and include all investments that fall within the represented selection criteria.

Predecessor Performance:

The third category to make comparisons is predecessor performance. Under this category, the advisor may show performance not generated by the advisor advertising it. This is permissible as long as:

  • the person primarily responsible for achieving the prior performance manages accounts at the advertising advisor.
  • the accounts are both sufficiently and substantially similar such that the performance results would provide relevant information to clients.
  • the advertisement discloses that the performance results were from accounts managed at another entity.

Reasonable basis for believing statements of material fact that can be substantiated. There is no flexibility on this point.

Hypothetical Performance

The fourth category of performance is hypothetical performance. Hypothetical performance can be used to provide performance results that were not actually achieved by any portfolio of the investment advisor. This includes performance derived from model portfolios.

Performance that is tested by the application of a strategy to data from prior time periods when the strategy was not previously used, targeted, or projected performance returns with respect to any portfolio or to investment advisory services with regard to securities offered in the advertisement.

However, hypothetical presentations present a high risk of misleading advertising recipients. In many cases, this type of prediction can be optimized through hindsight, and the absence of an actual client or the analysis of actual money underlying the performance means that there is no real reflection of actual losses or consequences in case of a bad investment or excessive risk.

These types of advertisements containing hypothetical performance should only be distributed to clients who have access to resources to independently analyze this information and who have the financial expertise to understand the risks of these types of presentations.

Using Case Studies

Another marketing tactic is the use of case studies. There are many criteria to consider when determining what case studies to use, including:

  • choosing truly representative examples, not outliers;
  • describing typical investments;
  • determining the purpose of the case study;
  • analyzing whether it is for performance or investment/risk management process; and
  • determining whether the presentation information is fair and balanced.

Private funds should primarily focus on disclosing and retaining all documentation for assertions made.

Defining “Advertisement”: Prong 2

The second prong of the rule defines advertisement as “any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly.” This prong of the new definition covers private fund finders receiving all types of compensation.


Undoubtedly, the revised SEC marketing rule, and in particular the revised definition of “advertisement”, has heightened advertising standards for private fund advisors. In addition to imposing a strict duty on advisors to include all relevant disclosures, the amendment has essentially collapsed pooled investment vehicles. Most importantly, it  treats an advisor’s relationship to investors in the pool the same as an advisor’s relationship with clients.

Overall, amendments to this rule have changed the way that private fund advisors can solicit clients, and marketing to clients must adapt to fit new SEC guidelines.