The Securities and Exchange Commission’s new advertising rule makes notable changes to investment fund and business development company compliance obligations. The SEC under Chair Gary Gensler has been proposing and adopting new rules at a rapid rate, with investment management a particular focus.
Although compliance with most aspects of the new rule must begin by July 24, 2024, compliance with the final rule amendments that address representations of fees and expenses that could be materially misleading began on the rule’s effective date of Jan. 24, 2023.
The Commission adopted final rule amendments to its advertising rules on Oct. 26, 2022 as part of a larger package that also updated and streamlined the annual and semi-annual reports made by mutual funds and exchange-traded funds (ETFs). The new ad rules affect how fee information is presented in fund advertisements by all investment companies covered by the SEC’s ad rules (e.g., open-end funds such as mutual funds and ETFs, closed-end funds, and business development companies).
In the final adopted rules, the SEC noted that marketing to investors by investment companies has increasingly become cost-centric. Funds are often described as being “no-expense” or “zero-expense"—even though investors may incur other investment costs by investing their money in a given fund. The Commission expressed concern that in a variety of situations, unless given appropriate explanations or limitations, investors could be misled to incorrectly believe that there were no expenses associated with their investment.
The most consequential of the amended rules—rule 156 (investment company sales literature)—focuses on protecting investors by specifically addressing practices that could lead to materially misleading representations about fees and charges. Those changes look to remedy situations where disclosures regarding the fund’s fees and expenses omit statements necessary to make the disclosures not misleading.
Other amended rules include Securities Act rule 482 (advertising) and rule 433 (free writing prospectus), and rule 34b-1 (supplemental sales literature) of the Investment Company Act of 1940.
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