A s a manager of one or more private marketing practices of - PDF document

G Investment Management Alert April 2006 Compliance Reminder: Marketing Practices for Fund Managers A s a manager of one or more “private” marketing practices of investment advisers pooled investment vehicles, you may not registered with the Securities and Exchange have paid much attention to your Commission (the “SEC”), as well as non- marketing activities under the mistaken impression registered advisers. Please contact a member of that you are not subject to provisions of law Lowenstein Sandler’s Investment Management governing marketing activities because you do not Group if you have any questions regarding the engage in general solicitations or general information detailed below or if you would like advertising. Managers of “private” pooled further guidance. investment vehicles, however, customarily engage Federally Registered Investment Advisers in marketing activities that are subject to Advertising in General. As a manager of one or regulation, even though such activities do not more “private” pooled investment vehicles, you involve general solicitations or general should be familiar with prohibitions against advertisements. Such customary activities may general solicitations and general advertisements include obvious marketing activities such as that govern such vehicles. As a federally registered preparing and disseminating to potential investors investment adviser, however, you must also be a “slide show” or brochure describing your familiar with Section 206 of the Investment operations and performance, and entering into a Advisers Act of 1940, as amended (the “Advisers third party marketing agreement to attract new Act”). Section 206 of the Advisers Act generally capital. Customary marketing activities also may prohibits any act, practice or course of business include less obvious activities such as providing that is fraudulent, deceptive or manipulative. The current or potential investors with a quarterly (or SEC has devoted substantial attention to the other periodic) letter. Managers sometimes expend effect of Section 206 of the Advisers Act on considerable time and expense on preparing a marketing practices through “no-action” letters private placement memorandum, but do not focus issued by the SEC and through Rule 206(4)-1 on the entirety of the presentation. This Client under the Advisers Act (which governs Alert is provided to you as a reminder of certain advertisements by federally registered investment advisers). relevant rules and best practices governing the This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G Rule 206(4)-1 - Generally. Rule 206(4)-1 under or other device can, in and of itself, be used to the Advisers Act contains a broad definition of determine which securities to buy or sell, or “advertisements,” and is generally construed to when to buy or sell them, or can be used to cover documents customarily disseminated to assist any person in making his own decisions existing investors and potential investors. Thus, as to which securities to buy or sell or when to materials that could be considered buy or sell them. “advertisements” should be reviewed for The prohibitions above are not necessarily compliance prior to distribution. intuitive. For example, the distribution to Rule 206(4)-1 - Antifraud. Rule 206(4)-1(a)(5) prospective clients of your quarterly investor letter under the Advisers Act generally prohibits an may violate the prohibition on giving past specific investment adviser from using any advertisement recommendations if you discuss securities that you that contains an untrue statement of material fact have bought and sold, unless there is compliance or is otherwise false or misleading. Whether an with certain conditions. advertisement is false and/or misleading depends Past Performance. The SEC has devoted a great upon the specific facts and circumstances deal of attention to the use of model and actual surrounding the advertisement and its performance results (including the performance dissemination, including the form and content of results of predecessor entities) in advertising. The the advertisement, the implications or inferences use of past performance in advertising often entails arising out of the advertisement in its total a detailed and complex analysis as to whether the context, and the sophistication of the investor or form and content of the performance results prospective investor. This facts and circumstances presented cause the advertisement to be false analysis is specific to each advertisement, although and/or misleading under Rule 206(4)-1(a)(5). it may be guided by information contained in SEC The SEC has not adopted standard performance “no-action” letters and enforcement actions. Rule advertising requirements, and the use of 206(4)-1, however, provides that each of the performance advertising tends to vary greatly following activities, among other things, if among advisers. For these reasons, advisers often included in an advertisement, constitutes a voluntarily adhere to performance presentation fraudulent, deceptive, or manipulative act, standards issued by the Association for Investment practice, or course of business: Management and Research (AIMR). Whether or • testimonials of any kind concerning the not you chose to voluntarily adhere to specific adviser or any advice, analysis, report or other performance presentation standards, you must fully service rendered by such adviser; disclose all material conditions and fees affecting performance, prominently and fully, including • past specific recommendations (unless the variations of such conditions and fees over time, advertisement sets out or offers to furnish a when using past performance in advertising. In list of all recommendations made by such addition, when using prior performance from adviser within the prior year); and predecessor funds in advertising, care must be • representations that any graph, chart, formula taken to ensure that such advertisements meet the

G particular guidance governing the use of (iii) require that the solicitor, at the time of any predecessor fund performance results (including solicitation activities for which compensation is whether the adviser may use such performance paid or to be paid by the adviser, provide the client results in advertisements at all). with certain required information and disclosures. The adviser must obtain a signed and dated Marketing Agreements and Arrangements. Rule acknowledgment of receipt from an investor of this 206(4)-3 under the Advisers Act governs cash separate written disclosure document prior to or at payments (directly or indirectly) for client the time of entering into an advisory contract (i.e., solicitations. Rule 206(4)-3 applies to all cash in the case of a private investment fund, prior to payment arrangements, including internal executing a subscription agreement and accepting compensation systems (for example, bonuses) that a capital contribution from such investor). award affiliates or employees of the adviser for client solicitations. As a result, all third party Press Releases, Interviews, Seminars and other marketing agreements and relationships entered Miscellaneous Activities. Many activities commonly into by an adviser that is required to be federally engaged in by investment advisers, such as press registered (including solicitor relationships with releases, interviews and participation in industry employees) must adhere to the following three seminars, can raise difficult questions with respect general requirements: to whether such activities constitute advertising. You should approach these activities cautiously • the adviser must be federally registered as an and consult counsel before engaging in any such investment adviser; activities to ensure that they do not run afoul of • the solicitor cannot have been convicted of applicable laws, rules and regulations governing certain felonies or misdemeanors and cannot marketing activities. be subject to an order under Section 203(e) of Unregistered Investment Advisers the Advisers Act; and Like any manager of one or more “private” • the cash fee must be paid pursuant to a pooled investment vehicles, whether federally written agreement to which the adviser is a registered as an investment adviser or not, you party (and which agreement must be should be familiar with the prohibitions against maintained as part of the advisers books and general solicitations and general advertisements records). that govern such vehicles. In addition, the general In addition, the written agreement must (i) prohibitions of Section 206 of the Advisers Act describe the solicitation activities to be engaged in (prohibiting fraudulent, deceptive or manipulative by the solicitor and the compensation to be activities), as discussed above, apply to received therefore, (ii) contain an undertaking by unregistered investment advisers to the same the solicitor to perform his duties under the extent as they apply to federally registered agreement in a manner consistent with the investment advisers. As a result, the information instructions of the adviser and the provisions of provided above serves as guidelines for “best the Advisers Act and the rules thereunder, and practices” of unregistered investment advisers,