SEC Rules 482 and 34b-1

Overview of Rules 482 and 34b-1

SEC Rules 482 and 34b-1 are among the rules that have undergone significant changes in the past few years. These two regulations affect advertising and sales literature that investment companies distribute to potential investors. The rule changes, which went into effect in January 2023, impact what investment companies can and cannot say in advertising copy about fund performance and fund complex performance, annual total return, and fee information. 

The final rule impacts registered investment companies, mutual funds, and exchange-traded funds (ETFs). 

A related rule, Rule 30e-3 of the Investment Company Act of 1940, outlines how investment companies can communicate this information to shareholders, whether by mail or through a dedicated website address transmitted to shareholders via email or printed communication. 

Before exploring the new rules in detail, let’s consider why the SEC proposed the amendments in the first place. One of the SEC’s roles is to keep markets fair and transparent. Its commissioners propose rule changes, create amendments, and review corporate filings to ensure fairness. The Rule 34b-1 and Rule 482 changes reflect the SEC’s fairness and transparency commitments, designed to safeguard investors.  

What Is SEC Rule 482?

Rule 482 of the Securities Act impacts advertisements for securities of companies that are registered under the Investment Company Act. A business development company is also covered by this rule. 

While certain types of advertisements are exempt from Rule 482, any public-facing advertisement that a company creates must adhere to this rule. This includes print ads, television commercials, digital ads, and social media posts.

Rule 482 specifies that ads must disclose the risks and benefits of investments mentioned. If the ad mentions fund performance, figures must use standardized return metrics (such as 2-year or 10-year returns) and be up to date. Performance data must be accompanied by standard disclosures around investment risk, such as past performance not being indicative of future returns. 

For these advertisements, companies must make an associated filing with the SEC, and in practice, firms typically also file with FINRA under FINRA Rule 2210 for review, generally within 10 days. 

What Is SEC Rule 34b-1?

SEC Rule 34b-1, adopted under the Investment Company Act of 1940, pertains to the use of sales literature in connection with registered investment companies. 

Sales information is considered misleading if it omits certain facts. For example, sales information would be considered misleading if it cherry-picks data points in order to portray an opportunity as more attractive than it would be if ALL relevant data were included. 

The sales literature that Rule 34b-1 regulates is not broadly distributed, unlike the types of advertisements mentioned above. Rather, these sales materials are provided as supplements to potential investors. Items such as brochures, slide decks, or one-page fact sheets provided to broker-dealers and investment advisors who may recommend a fund to their clients are covered by this rule. 

Rule 34b-1 requires that this supplementary sales literature be accompanied by a statutory prospectus such as that included in the shareholder report. The information must be consistent with information contained in the fund’s registration statement, it must be accurate, and complete. 

There is no need to file with the SEC or FINRA over Rule 34b-1 documents, unless the sales literature includes performance information. 

Key Differences Between Rule 482 and Rule 34b-1

SEC Rule 482 and 34b-1 are similar, in that both pertain to sales and marketing information.

Rule 482 deals with information developed for public consumption, including marketing copy about the performance of registered funds, required fee information, and expected annual total return. Rule 34b-1 deals with supporting sales literature, rather than direct marketing copy. 

This chart explains the key differences between Rule 482 and Rule 34b-1:

Best Practices for BDC Advertising Compliance

These two rules clearly spell out what can and cannot be said when talking about investment opportunities. They make it fairly clear for BDCs to understand what can be said, and they spell out the required supporting information that must be included when speaking about fund performance and potential return, including in material that is included in shareholder reports. 

While the rules are clear, staying in compliance is nevertheless complicated. How can a firm that understands these Exchange Act requirements go about monitoring compliance, making sure that no advertisement, annual report or piece of sales literature says something it should not? 

The first step is creating an in-house procedure for reviewing all marketing literature. Involving legal and compliance team members helps ensure that nothing that could draw scrutiny will slip through. 

Since the SEC outlines strict formats for reporting performance data in these rules and others, including Item 27a, it’s helpful to centralize the underlying data for consistency. When everything is in the same format and accessible through a centralized database or workflow, all marketing materials have a better chance to be consistent and accurate, as required. 

Even with best practices like these, errors can occur. To make sure that nothing inaccurate or misleading gets out, BDCs should maintain version control on all draft advertisements. They should separately maintain an audit log, so they have a chain of custody in the event they need to prove compliance. 

The last step is keeping up to date with proposed amendments and proposed rule changes moving forward. Both the SEC and FINRA continually update their guidance around fund advertising and sales literature. “I didn’t know it changed” is not an acceptable excuse for failing to comply with new rules.  

Streamline BDC Rule Compliance

There are a lot of moving parts to stay ahead of in order to remain in compliance with SEC rules. Not only do BDCs need to make their required SEC filings, like the Form N-CRS and Form N-1A, but they also need to attest that marketing and advertisement language they produce abides by these rules.

The good news is, experts can support compliance for investment companies and monitor new regulatory changes, streamlining compliance and providing support with any related filings. 

DFIN provides SEC reporting streamlined directly through the ActiveDisclosure platform. Pair with in-house regulatory experts for customized guidance on these and other compliance issues, assistance with crafting language that satisfies the disclosure requirements, and help preparing required SEC or FINRA submissions. To learn more about how we can help streamline your reporting requirements, contact us today.