USA Law and Practice Contributed by: Scott Naidech, Basil Godellas, Olga Loy and Beth Kramer, Winston & Strawn
solicitation or general advertising in connection with the offering. “Bad Actor” Disqualification The SEC has adopted certain “bad actor” disqualifica - tion provisions for Rule 506 of Regulation D under the Securities Act. As a result of the Rule 506 (d) bad actor disqualification, an offering of securities is disqualified from relying on Rule 506 (b) and 506 (c) of Regulation D if the issuer or any other person covered by Rule 506 (d) has a relevant criminal conviction, regulatory or court order or other “disqualifying event”. The final rule provides an exception from disqualifi - cation when the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The steps an issuer should take to exercise reasonable care will vary depending on particular facts and cir - cumstances. SEC’s Marketing Rule The SEC’s Marketing Rule (effective as of November 2022) applies to RIAs and was established to modern - ise rules governing advertisements and payments to solicitors and to comprehensively regulate marketing communications. Exempt reporting advisers are sub - ject to the Advisers Act anti-fraud rule. As defined under the Marketing Rule, an “advertise - ment” includes any direct or indirect communication an investment adviser makes that: (i) offers advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions. The definition also generally includes any endorsement or testimo - nial for which an adviser provides cash and non-cash compensation directly or indirectly (eg, directed bro - kerage, awards or other prizes, and reduced advisory fees). The Marketing Rule generally prohibits:
• making untrue statements of a material fact (or omissions thereof); • making material statements of fact without a rea - sonable basis (or the ability to substantiate such statements upon demand by the SEC); • discussing potential benefits without providing fair and balanced treatment of associated material risks or limitations; • referencing specific investment advice provided by the adviser that is not presented in a fair and bal - anced manner; • including or excluding performance results, or pre - senting performance time periods, in a manner that is not fair and balanced; and • including information that is otherwise materially misleading. The Marketing Rule also prohibits the use of testimo - nials and endorsements in an advertisement, unless the adviser satisfies certain disclosure, oversight, and disqualification provisions, including: • clear and prominent disclosure of whether the person giving the testimonial or endorsement (the “promoter”) is a client or is being compensated (together with additional disclosures regarding compensation and conflicts of interest); and • adviser compliance and oversight of such testimo - nial or endorsement’s compliance with the market - ing rule. The rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides disclo - sures and satisfies certain criteria pertaining to the preparation of the rating. Finally, the rule generally prohibits including in any advertisement: • gross performance, unless the advertisement also presents net performance; • any statement that the SEC has approved or reviewed any presentation of performance results; • performance results from fewer than all portfo - lios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions;
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