November 4, 2022 marked the deadline for compliance with amended Rule 206(4)-1 ( e "Marketing Rule")1 under the ve me Adv er Ac of 1940 ( e "Advisers Act"), mpo additional obligations on certain investment advisers registered ("RIAs") with the U.S. Securities and Exchange Commission (the "SEC") a d e r rely adv er ("Relying Advisers")2 .
In this client alert, we examine the impact of the Marketing Rule on the collateralised loan obligation ("CLO") industry, the additional implications that European CLO market participants will need to consider, and how a consensus is developing between in-scope CLO ma a er ("In-scope Managers") a d arra ba k as to Marketing Rule compliance in the context of CLO marketing activities.
Executive Summary
- In-scope Managers are now subject to an enhanced disclosure regime, ongoing diligence requirements and restrictions on the engagement of third parties marketing their advisory services.
- The majority of US-based CLO managers, and certain of their European affiliates, are impacted, with the activities of arrangers appointed to market their transactions likely to constitute "adver eme " u der e Marke Rule
- In-scope Managers are working with arrangers to agree on the contractual framework for arrangers' solicitation activities, ensuring In-scope Managers have a reasonable basis for believing any "e dor eme "3 are compliant with the Marketing Rule.
- A case-by-case analysis should be undertaken by European CLO managers to determine whether the Marketing Rule applies to their marketing activities.
- Ongoing diligence as to the eligibility of arrangers and an enhanced disclosure regime, necessitating the disclosure of the material terms of the fee structure agreed between the In-scope Manager and the arranger, is required where an arranger is not a Registered Broker-Dealer (as defined below).
- T e marke coale c arou d a 'clea o ce' approac , w ereby e "requ red d clo ure " under the Marketing Rule are provided en masse to prospective investors at the outset of marketing activities.
Applicability to CLOs
Are CLOs Private Funds?
As noted in our recent alert, New Adviser Marketing Rule – Impact on CLO Arrangers, compensated thirdpar y ol c a o , clud ol c a o of pro pec ve ve or "pr va e fu d "4 , are subject to the Marketing Rule where made on behalf of in-scope investment advisers. In the context of a CLO managed by an In-scope Manager5 , the endorsements made by the arranger to prospective investors in the CLO o e w ll erefore be cap ured u der e Marke Rule a a "adver eme "6 assuming the CLO is a "pr va e fu d". Mo CLO are "pr va e fu d " for purpo e of e rule by v r ue of e r rel a ce o e Section 3(c)(7) exemption under the U.S. Investment Company Act of 1940. 7
Although the Marketing Rule is not directly applicable to arrangers, their investor-facing role is indirectly subject to the regime, making the compliance of their communications of utmost importance to In-scope Managers. In recognition of this, arrangers and In-scope Managers need to take a collaborative approach in navigating the Marketing Rule requirements and work together in establishing an appropriate compliance framework.
Applicability to European CLOs
The applicability of the Marketing Rule to European CLOs is fact-specific and will need to be assessed on a case-by-case basis. As a starting point, the marketing activities of an arranger of a European CLO will be within scope where:
- the CLO manager is an RIA that has its principal place of business in the US ("o ore");
- the CLO manager is a Relying Adviser that, whether based in or outside the US, is treated as "o ore" for Adv er Ac purpo e ; or
- subject to certain considerations, the CLO manager delegates investment advisory functions to an affiliate onshore RIA or Relying Adviser (e.g. as a sub-adviser).
An RIA that has its principal place of business outside the US is out of scope of the Marketing Rule to the extent its activities relate solely to non-US clients. A CLO organized outside the US is considered a nonUS client for these purposes, even if it is marketed to US investors.
The Marketing Rule will de facto apply to European CLOs managed by onshore RIAs (including Relying Advisers) (each an "Onshore RIA"), rre pec ve of w e er e CLO elf marke ed e US. For European CLOs where the primary CLO manager is not an Onshore RIA but there is an element of delegation to, or sub-management by, an Onshore RIA, the application of the Marketing Rule is more nuanced. Marketing may be in scope to the extent the Onshore RIA (as opposed to, or in addition to, the primary manager) is seen as directly or indirectly providing compensation to the arranger for marketing a private fund that the Onshore RIA advises. Relevant considerations in this analysis would generally include, among other possible factors:
- the extent to which management activities and fees are, respectively, delegated and paid by the CLO manager to an Onshore RIA(s);
- the involvement (direct or indirect) of the Onshore RIA in the engagement and compensation of the arranger; and
- the degree to which the Onshore RIA, and its advisory services, is specifically referenced in the marketing/offering materials relating to the CLO.
The factors above may be indicative that the solicitation of the relevant investor is predicated, at least in part, on the advisory services of the Onshore RIA. Ultimately, each CLO manager will need to analyse the structure of their advisory services with counsel to determine whether the Marketing Rule applies to their European platform.
So what does the Marketing Rule say?
Regulation of Advertisements
As discussed in M lba k' rece Client Alert, the Marketing Rule seeks to regulate the advertising and marketing practices of RIAs under a single rule, covering both communications by investment advisers themselves and, more pertinently, certain third-party communications.
S f ca ly, w l "ex empora eou , l ve, oral commu ca o " of ve me adv er are ou de of e scope of the Marketing Rule, oral or one-on-one communications of agents of investment advisers (such as arrangers) are not excluded where that communication amounts to an endorsement or solicitation of a prospective investor to invest in a "private advised by such investment adviser and the agent ( in this case, the arranger) is compensated (directly or indirectly) for such endorsement.
Footnotes
1. 17 CFR § 275.206(4)-1.
2. Relying Advisers are a subset of RIAs that do not file a separate Form ADV registration, but rather are cluded o e re ra o of a aff l a ed "f l R A" u der a le umbrella re ra o w e SEC. Umbrella registration is permitted only when the f l R A ba ed e US ("o ore"); the SEC has said that it considers all Relying Advisers, even those based outside the US, to be "o ore" R A fully subject to the substantive provisions of the Advisers Act, including the Marketing Rule.
3. See § 275.206(4)-1(e)(5) which, in summary, defines "e dor eme " a a eme a d ca e approval, support or recommendation of the In-scope Manager, or solicit or refers investors to be a client of, or investor in, a private fund advised by the In-scope Manager. Such statements are defined as " e mo al " ra er a e dor eme w ere ey are made by a curre cl e of, or ve or a private fund advised by, the adviser. The requirements under the Marketing Rule are substantially the same for compensated testimonials as for compensated endorsements, and for purposes of readability we refer o bo a "e dor eme " Cl e Aler , al ou ec cally a arra er' ol c a o would be " e mo al " a oppo ed o "e dor eme " w ere e arra er a curre cl e of, or investor in a private fund advised by, the In-scope Manager.
4. A "Pr va e Fu d" def ed u der e Marke Rule, by refere ce o ec o 202(a)(29) of e Adv er Act, as an issuer of securities that would be an investment company, as defined in section 3 of the ve me Compa y Ac of 1940 ( e " CA") (15 U.S.C. 80a–3), but for the exceptions provided for in section 3(c)(1) or 3(c)(7) of the ICA.
5. For a discussion as to whether a CLO manager constitutes an "In-scope Manager", see "Applicable to CLOs - Applicability to European CLOs".
6. See § 275.206(4)-1(e)(1).
7. The vast majority of US and European CLO issuers rely on the Section 3(c)(1) or Section 3(c)(7) exemp o from re ra o u der e CA a d erefore co u e "pr va e fu d ". To e ex e a CLO or other structured issuer has an In-scope Manager but relies on a different ICA exemption (such as Rule 3a-7 or Sec o 3(c)(5)), would o be a "pr va e fu d" a d marke ac v e would o be scope, although general Advisers Act anti-fraud principles would still apply.
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