New Marketing Rule Challenges for Real Estate Advisers
The compliance date for the revised version of Securities and Exchange Commission (“SEC”) Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended, also known as the New Marketing Rule, is November 4, 2022. Advisers that focus on real estate strategies are working through some unique issues as they prepare to implement the provisions of the rule.
Net performance requirement
One of the largest challenges faced by real estate advisers is how to address the requirement to provide net performance information wherever gross performance is presented. In particular, advisers are trying to determine whether and how asset-level performance and attribution metrics can be shown net of fees when they have historically been presented gross of fees. Use of a model fee and expense methodology that is applied on a pro-rata basis may offer one solution but can be difficult to implement in practice.
Marketing of joint ventures and separate accounts
The New Marketing Rule requires advisers to show 1-, 5-, and 10-year performance for any portfolios or composites that are not “private funds.” The New Marketing Rule defines private funds as an issuer that would be an investment company under the Investment Company Act of 1940 if not for an exemption under section 3(c)(1) or 3(c)(7) of the Act. For those real estate managers who want to advertise the performance of joint ventures or separate accounts – which are typically not structured as private funds – they must determine how these types of entities should be presented in light of the new marketing rule.
Marketing of 3(c)(5) and other pooled vehicles
Advisers to 3(c)(5) funds and other types of pooled vehicles are wondering how such vehicles fit into the guidance of the New Marketing Rule if they are not technically considered private funds. While 3(c)(5) funds are not explicitly addressed in the new rule, some managers are following the new rule’s guidance on marketing of private funds as a practical approach, particularly since such vehicles often rely on multiple exemptions that may also include 3(c)(1) or 3(c)(7).
Marketing of third-party ratings
The New Marketing Rule addresses the presentation of third-party ratings, which are defined by the rule as “rating or ranking of an investment adviser provided by a person who is not a related person … and such person provides such ratings or rankings in the ordinary course of its business.” Any use of third-party ratings in advertisements is subject to several considerations, including whether the questionnaire or survey used in preparing the rating makes it equally easy to provide favorable and unfavorable responses and the inclusion of certain disclosures, such as whether the adviser paid a fee to participate in the rating or ranking.
Many real estate managers include information in marketing materials about their Global Real Estate Sustainability Benchmark ("GRESB”) scores, which capture information about ESG performance and sustainability best practices of real estate entities. The New Marketing Rule’s guidance on what constitutes a “third-party rating” leaves some questions about whether GRESB scores or other ESG-type metrics, such as LEED certifications for specific buildings, would be in scope under the New Marketing Rule. Advisers are considering whether they should disclose more information about the ratings to ensure such claims could not be seen as misleading.
Given the uncertainty around the impact that certain provisions in the New Marketing Rule will have on the practices of real estate managers, we recommend that advisers work closely with outside counsel or compliance consultants to understand the options and risks that apply to different approaches.
How we help
We have both advisory and performance services to help your firm comply with the New Marketing Rule. Please contact your ACA consultant, or contact us below, for more information about the New Marketing Rule or the services we provide to real estate managers.