Key Takeaways:

• The Massachusetts Securities Division has issued guidance for investment advisers registered in the Commonwealth of Massachusetts regarding the updated advertising rule’s requirements.
• The related changes to the record keeping rule have implications for the policies and procedures of state-registered investment advisors.

On November 4, 2022, the U.S. Securities and Exchange Commission (the “SEC”) began enforcing its updated advertising requirements for federally registered advisers. Those rules, described in greater detail here, represented a significant change to the rules and regulations governing the marketing and solicitation of investment advisory services. In December 2022, the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth issued guidance for advisers registered in the Commonwealth of Massachusetts to remind them of their obligations under the Massachusetts Uniform Securities Act, Mass. Gen. Laws c. 110A, and the regulations promulgated thereunder at 950 Mass. Code Regs. 10.00 – 14.413 (the “Regulations”).

The guidance reiterated that advertisements in Massachusetts are subject to the requirements of the Marketing Rule, as well as additional restrictions under the Regulations. Those additional restrictions require advisers to:

• ensure that any advertised content does not misrepresent the qualifications of the adviser, its representatives, or any employees; the nature of the advisory services being offered; or the fees charged for such services;
• make their table of fees for services available and easily accessible (to the extent an adviser maintains a website available to the public or to the advisers’ clients); and
• establish and maintain a system to supervise the activities of its investment adviser representatives and other employees to ensure compliance with the Act and Regulations.

Furthermore, advisers in Massachusetts must refrain from:

• providing a report or recommendation to any client prepared by someone other than the adviser without disclosing that fact;
• guaranteeing a client that a specific result will be achieved as a result of the advice rendered; and
• disclosing the identity, affairs, or investments of any client to any third party unless required by law to do so, or unless otherwise consented to by the client.

The guidance also noted that advisers in Massachusetts are subject to the requirements of Rule 204-2 of the Advisers’ Act (“Rule 204-2”). Rule 204-2 was amended by the SEC in connection with its revisions to the Marketing Rule. The changes to Rule 204-2 correspond to the changes ushered in by the Marketing Rule and are generally designed to assist the SEC staff with their investigations. As a result:

• Advisers are required to make and keep records of all advertisements they disseminate. If an adviser provides an advertisement orally, the adviser may satisfy this requirement by retaining a copy of any written or recorded materials used by the adviser in connection with the oral advertisement. If an advertisement contains a compensated oral testimonial or endorsement, the adviser may make and keep a record of the disclosures provided to investors rather than a recording of the advertisement.
• Advisers must maintain accounts, books, internal working papers, and other documents necessary to form the basis for or demonstrate the calculation of the performance or rate of return of any portfolios. If the adviser has displayed hypothetical performance, the adviser is required to retain the supporting records, including copies of all information provided or offered pursuant to the hypothetical performance provisions of Marketing Rule.
• Advisers are required to make and keep records of who the “intended audience” is pursuant to the hypothetical performance and model fee provisions of the Marketing Rule.
• Advisers must make and keep a record of all written communications received and copies of all written communications sent relating to predecessor performance.
• Advisers must also make and keep any communication or other documents related to its determination that it has a reasonable basis for believing that a testimonial, endorsement or third-party rating complies with the new Marketing Rule.
• Advisers that have used a third-party questionnaire or survey in the preparation of its advertisements will be required to keep a copy of such questionnaire or survey to the extent it is available to them.

As discussed above, the adoption of the Marketing Rule represents a significant change in the rules and regulations governing the marketing and solicitation of investment advisory services and will affect advisers on the state level as well.