February 24, 2020 - Recently, the LSTA submitted a so-called “me-too” comment letter in response to a proposed rule published by the SEC late last year (the “Proposals”) impacting advertising and solicitation by investment advisers. The LSTA’s letter simply supports the comments contained in a letter jointly submitted by the Managed Funds Association and the Alternative Investment Management Association. Why is this important to stakeholders in the loan market? As the SEC notes in its related press release the Proposals, which would represent the first material changes to the advertising rule in decades, “would replace the current rule’s broadly drawn limitations with more principles-based provisions.” While the LSTA broadly supports the Proposals, it filed its comment letter to address a number of provisions that would impair the ability of investment advisers, including specifically CLO managers, to communicate with clients and investors. The LSTA identified the following issues:
1. Fund Offering Materials May Be Deemed Advertisements. The Proposals define an “advertisement” as “any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser’s investment advisory services or that seeks to obtain or retain one or more investment advisory clients or investors in any pooled investment vehicle advised by the investment adviser.” This proposed definition could be construed to encompass private fund offering documents and offering circulars of CLOs.
2. Periodic Communications with Existing Investors May Be Deemed Advertisements. As noted above, the proposed definition of “advertisement” includes any communication that seeks “to retain one or more investment advisory clients or investors in any pooled investment vehicle advised by the investment adviser.” This language is broad enough to capture collateral managers to CLOs who regularly convey performance and other information to CLO investors through trustee reports and investor portals. While the forgoing information may be, to some degree, motivated to retain existing investors, the information is primarily intended to provide existing investors with investment information that they certainly expect and need to assess their investments on an ongoing basis.
3. Provision of Certain Data to Third Parties May Be Deemed Advertisements. The proposed definition of “advertisement” includes communications made “by or on behalf of an investment adviser.” In the ordinary course of their business, investment advisers frequently liaise with and provide information to third parties such as performance data to unaffiliated indexing or ranking services and give information about themselves to financial news organizations. In the case of collateral managers, the investment banks and/or trustees often convey performance information received from collateral managers to third parties. Investment advisers including collateral managers typically have no control over how the third parties subsequently use or disseminate the information. If the Proposals were interpreted to make investment advisers responsible for subsequent third-party communications, the Proposals may cause collateral managers to seek to prevent the provision of such information to third parties, which, in turn, could negatively affect the quantity and quality of industry information available to prospective investors.
4. One–on-One Communications. The Proposals do not require that a communication be to “more than one person” as does the current rule to be deemed an advertisement. Often in one-on-one communications investment advisers provide material information about the adviser’s services that would permit the investors to make informed investment decisions. This type of information generally has not been considered an “advertisement” under the current rule because it is not directed to more than one person. With this expansion of the definition, an investment adviser providing even standard due diligence information in the ordinary course to a potential or existing investor could be deemed to be disseminating advertisements that must comply with the full panoply of the advertising rules. The Proposals’ exception for responses to unsolicited investor requests would not provide full relief from this potential burden.
5. Cash Solicitation Rule May Result in Duplicative Regulation. The Cash Solicitation Rule governs the payment by investment advisers to solicit interests in funds. Currently, the Cash Solicitation Rule defines a “solicitor” as “any person who, directly or indirectly, solicits any client for, or refers any client to, an investment adviser.” However, the Proposals would expand this definition to include solicitation or referral of existing and prospective private fund investors. This would mark a reversal of the SEC staff’s previously expressed view that the Cash Solicitation Rule does not apply to payments made solely for the solicitation of private fund investors, because such investors are not “clients” of the adviser. Given that the placement of interests in a private fund constitutes a sale of securities, as noted in the Proposals, many persons who are engaged in the solicitation of private fund investors are already subject to broker-dealer registration requirements, absent an exemption from such registration. The Proposals note the availability of these potential exemptions, but do not otherwise explain why the existing regulatory scheme governing sales of securities is insufficient to serve the client protection aims of the Cash Solicitation Rule. The LSTA was represented by David Dickstein and Phillip Koh of Katten in the review of the Proposals and the formulation of its response. We will continue to follow and report on this rulemaking.