^{Articles |} Asset Management Regulatory Update

First Quarter 2025

Table of Contents

• SEC Updates the Marketing Rule FAQs
• SEC Announces Cyber and Emerging Technologies Unit
• SEC Delays Names Rule, Form PF, and Form SHO Compliance Dates
• SEC Issues No-Action Letter and CD&Is on Rule 506(c) Offerings

SEC UPDATES THE MARKETING RULE FAQS  

The Marketing Rule (Rule 206(4)-1 under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”)) was adopted in December of 2020 and became effective on May 4, 2021.  The Marketing Rule created a single rule governing investment advisor marketing by replacing the then-existing rules on advertising and cash solicitation. The Marketing Rule regulates advisers’ marketing communications to seek to prevent fraudulent, deceptive, or manipulative practices in marketing and advertisements.

Since the Marketing Rule’s adoption, many investment advisors have had interpretative questions about compliance with the rule. In response, the Securities and Exchange Commission (the “SEC”) staff (the “Staff”) provided from time to time responses to frequently asked questions (“FAQs”) about the rule. The Staff continues to update these FAQs, with the most recent update being released on March 19, 2025. These Staff’s interpretations and clarifications are not binding on the SEC, nor do they modify the existing obligations and statutes; they are only intended to assist investment advisers in navigating the Marketing Rule.

Extracted Performance

When displaying extracted performance (defined in the Advisers Act as the performance results of a subset of investments extracted from a portfolio), the Marketing Rule generally requires the net performance of one investment or a group of investments from a private fund or other portfolio to be shown alongside the gross performance. However, the Staff has indicated that they would not recommend enforcement, and advisers may present gross performance alone, if the following conditions are met:

• the extracted performance is clearly identified as gross performance;
• the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
• the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance; and
• the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance is calculated.

Portfolio or Investment Characteristics

The Staff has recognized that calculating net versions of portfolio characteristics such as yield and volatility can be impractical. Accordingly, the Staff has advised that it would not recommend enforcement if an adviser presents gross characteristics without net equivalents, provided they follow the following specific disclosure and comparison requirements:

• the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
• the characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
• the total portfolio’s gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the gross characteristic; and
• the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated.

Compliance with General Prohibitions of Rule 206(4)-1(a) and Sections 206(1) and 206(2) of the Advisers Act

The Staff reiterated that advertisements must still comply with the general prohibitions of the Marketing Rule itself and Sections 206(1) and 206(2) of the Advisers Act (which make it unlawful for an investment adviser to (i) employ a scheme to defraud clients or (ii) engage in a transaction or practice which operates as a fraud or deceit to clients, in each case through the use of mail or any means of interstate commerce).

SEC ANNOUNCES CYBER AND EMERGING TECHNOLOGIES UNIT

On February 20, 2025, the SEC announced the creation of the Cyber and Emerging Technologies Unit (the “CETU”), which will focus on “combatting cyber-related misconduct and to protect retail investors from bad actors in the emerging technologies space.” The CETU will replace the SEC’s current Crypto Assets and Cyber Unit.

The Press Release announcing the CETU’s formation included that the CETU will combat misconduct related to securities transactions in the following priority areas:

• Fraud committed using emerging technologies, such as artificial intelligence and machine learning;
• Use of social media, the dark web, or false websites to perpetrate fraud;
• Hacking to obtain material nonpublic information;
• Takeovers of retail brokerage accounts;
• Fraud involving blockchain technology and crypto assets;
• Regulated entities’ compliance with cybersecurity rules and regulations; and
• Public issuer fraudulent disclosure relating to cybersecurity.

SEC DELAYS NAMES RULE, FORM PF, AND FORM SHO COMPLIANCE DATES

Names Rule

On March 14, 2025, the SEC announced a six-month extension of the compliance date for amendments to Rule 35d-1 under the Investment Company Act of 1940 (the “1940 Act”) and related Form N-PORT reporting requirements (collectively, the “Names Rule Amendments”). The compliance date was extended from December 11, 2025 to June 11, 2026 for fund groups with net assets of $1 billion or more as of the end of their most recent fiscal year, and from June 11, 2026 to December 11, 2026 for fund groups with less than $1 billion in net assets as of the end of their most recent fiscal year.

Continuously offered funds, including open-end funds, generally update their prospectuses annually to comply with the requirement of the Securities Act of 1933 (the “Securities Act”) that information in a fund’s registration statement is no more than sixteen months old. Under the original compliance date requirements, if a fund’s annual update to its registration statement was due prior to the initial compliance date, the fund would have to either (i) comply early to include accurate disclosure regarding the fund’s 80% investment policy in that annual amendment, or (ii) incur the cost of an off-cycle amendment on or before the compliance date. Consequently, the SEC modified the operation of the compliance date to allow for existing open-end funds to comply with the Names Rule Amendments at the time of the effective date of its first annual prospectus update on or following the applicable compliance date.

Existing closed-end funds that rely on Rule 8b-16(b) will be required to be in compliance at the time of the transmittal of its first annual report to shareholders on or following the applicable compliance date. Existing business development companies not engaged in continuous offerings will be required to be in compliance at the time of the filing of its first annual report on Form 10-k on or following the compliance date.

Form PF

On January 29, the SEC and Commodity Futures Trading Commission (the “CFTC”) announced that the original March 12, 2025 compliance date for the amendments to Form PF adopted on February 8, 2024 (the “Form PF Amendments”) was extended to June 12, 2025.

SEC-registered investment advisers with private funds generally file reports on Form PF, a confidential form, and advisers that are also registered with the CFTC as commodity pool operators or commodity trading advisers, at different times depending on the types of private funds they advise and their assets under management, including on an annual or quarterly basis. Some advisers file on a quarterly basis for quarterly reporting funds and then subsequently amend that filing to report about their annual reporting funds. The Form PF Amendments include different questions and require reported data to be computed differently than under the current Form PF requirements.

As the original compliance date was after the fourth quarter of 2024 filing deadline for many quarterly funds, but before the 2024 annual filing deadline for many annual reporting funds, the SEC’s final rule extending the compliance date (the “Form PF Extension”) noted that the original compliance date would cause additional burdens on certain advisers if 2024 data is reported on both versions of Form PF. The Form PF Extension included, as an example, that many private fund advisers with annual and quarterly filing obligations would have to submit 2024 data on the two different versions of Form PF (submitting an initial filing on the current Form PF to report data for the fourth fiscal quarter of 2024 for their quarterly reporting funds, and then submitting an amendment on the Final Form PF for their annual reporting funds with 2024 fiscal year data). As a result, the SEC determined to extend the compliance deadline to mitigate the administrative and technological burdens and costs associated with the original compliance date.

Form SHO

On February 7, 2025, the SEC announced a temporary extension from compliance with Rule 13f-2 under the Securities Exchange Act of 1934 (“Rule 13f-2”) and from reporting on Form SHO. As a result, filings on initial Form SHO reports from institutional investment managers that exceed certain thresholds will be due by February 17, 2026 for the January 2026 reporting period. The original compliance date was January 2, 2025, with institutional investment managers reporting information for the January 2025 reporting period.

Under Rule 13f-2, institutional investment managers that exceed certain thresholds are required to file Form SHO within 14 calendar days of the end of each calendar month to disclose information regarding certain equity securities. The SEC will then publish, on an aggregated basis, certain information regarding equity securities reported by institutional investment managers on Form SHO. The SEC provided the temporary exemption to allow institutional investment managers time to complete implementation of systems builds and to test and work with the Staff to address any operational and compliance questions regarding Form SHO reporting.

SEC ISSUES NO-ACTION LETTER AND CD&IS ON RULE 506(c) OFFERINGS

On March 12, 2025, the SEC’s Division of Corporation Finance issued a no-action letter (the “No Action Letter”) on the investor verification requirements for issuers relying on Rule 506(c) of Regulation D of the Securities Act. On the same day, the SEC published two new Compliance and Disclosure Interpretations (“C&DIs”) related to questions surrounding the investor verification requirement of Rule 506(c).

Regulation D under the Securities Act contains several safe harbors for private offerings under Section 4(a)(2), which exempts from the Securities Act’s registration requirements “transactions by an issuer not involving any public offering.” Before its amendment in 2013 pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”), the Rule 506 safe harbor permitted sales to an unlimited number of “accredited investors” and up to 35 non-accredited investor purchasers as long as the issuer satisfies enumerated conditions, including refraining from engaging in general solicitation and advertising. Under the JOBS Act amendments, the SEC bifurcated the Rule 506 exemption into Rule 506(b) and Rule 506(c). The old version of the Rule (prohibiting general solicitation or advertising) was preserved as Rule 506(b), and Rule 506(c) was adopted to contain the modifications required by the JOBS Act. Accordingly, Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that (i) all purchasers in the offering are accredited investors; (ii) the issuer takes “reasonable steps” to verify purchasers’ accredited investor status and (iii) certain other conditions in Regulation D are satisfied. Rule 506(b) does not have a specific verification requirement.

Rule 506(c)(2)(ii) includes a list of “non-exclusive and non-mandatory” steps an issuer might take to satisfy the investor verification requirement, including reviewing tax documents, brokerage or bank statements, or obtaining written confirmations or representations from certain third parties (e.g., an attorney, accountant, broker or investment adviser). However, these methods are examples of “safe harbor” procedures, and the issuer is not required to employ any specific steps to verify accredited investor status.  

The “reasonable steps” verification activities outside the safe harbor can present operational challenges, increased administrative burdens, and leave uncertainties as to whether sufficient steps to verify investors were taken. As a result, Rule 506(c) has been limited in application despite its potential to access a much wider audience for capital raising through general solicitation.

The new guidance issued by the SEC Staff in the No Action Letter provides a potentially useful alternative Rule 506(c) verification process that issuers must undertake to verify a purchaser’s accredited investor status. In the No Action Letter, the SEC agreed that, when accepting investments from certain types of investors, absent an issuer’s knowledge of contrary facts, an issuer may reasonably conclude that it has taken “reasonable steps” to verify the investor’s accreditation if:

• Investors must make a minimum investment of at least $200,000 for natural persons and at least $1,000,000 for legal entities;
• The issuer obtains written representations from investors confirming the following:
  • The investor is an accredited investor under Rule 501(a); and
  • The investment is not financed by third parties for the specific purpose of making the investment; and
• The issuer does not have actual knowledge contradicting these representations.

In connection with the No Action Letter, the Staff also published two new C&DIs.

New C&DI Question 256.35 addresses what other methods an issuer can use that will satisfy the requirement to take reasonable steps to verify accredited investor status if the issuer does not undertake the safe-harbor steps described under Rule 506(c)(2)(ii). The SEC Staff responds by reiterating its existing guidance in that the determination of what steps are reasonable is based on an objective, “principles-based” analysis of the particular facts and circumstances but notes that the factors that issuers should consider under this facts and circumstances analysis, among others are: “(i) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (ii) the amount and type of information that the issuer has about the purchaser; and (iii) the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.”

New C&DI Question 256.36 addresses whether the terms of a Rule 506(c) offering, in particular a high minimum investment requirement, would be enough to satisfy the verification requirement where the issuer (i) has no actual knowledge that any purchaser is not an accredited investor and (ii) has confirmed with each purchaser that its investment is not being financed, in whole or in part, by a third party. In addition to reiterating the existing guidance noted above, the SEC Staff responds by citing the No Action Letter and language from Rule 506(c)’s adopting release, which states that if a purchaser can meet a high investment amount requirement, “the likelihood of that purchaser satisfying the definition of an accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.”

UPCOMING CONFERENCES

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© 2025, Davis Graham & Stubbs LLP. All rights reserved. This newsletter does not constitute legal advice. The views expressed in this newsletter are the views of the authors and not necessarily the views of the firm. Please consult with your legal counsel for specific advice and/or information.

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