#42: Wayne Davis of Tannenbaum Helpern - PrimeAlpha Visionaries & Innovators Series:Preparing for the SEC’s New Marketing Rule

Preparing for the SEC’s New Marketing Rule with Wayne Davis of Tannenbaum Helpern 

 Welcome to PrimeAlpha's interview series, where we will share insights from industry practitioners discussing their journey and their discoveries. I would like to introduce Wayne Davis, Chair of Tannenbaum Helpern's Investment Management Practice, Co-chair of Business and Finance, and a member of the Firm's Management Committee. 

Wayne’s practice focuses on advising clients with respect to the formation and ongoing operation of a broad range of private investment vehicles, minority, and majority asset manager acquisitions and dispositions, and “upper tier” management arrangements.

Transcript

[00:00:00] Amanda: Welcome to prime Alpha's interview series insights from industry practitioners discussing their journey and their discoveries. Hello, my name is Amanda Jok, the CEO of prime alpha, an online ecosystem, bringing together alternative opportunities and their investors. I would like to introduce Wayne Davis chair of 10 inbound investment management practice co-chair of business and finance and a member of the firm's management committee.

[00:00:34] Wayne provides practical and business oriented advice to us. And non-US domiciled venture capital, private equity and hedge funds, advisory firms, and family offices on all aspects of their business, including structuring governing regulation, seek capital and financing transactions, as well as the implementation of select investment strategies.

[00:00:58] Wayne. I'm so glad to have you [00:01:00] here. You've been such a big supporter of prime alpha for years. So thank you for that, but let's just jump in and tell us about your career journey. 

[00:01:09] Wayne: Absolutely. I'm happy to, first of all, thank you for having me and Amanda. It's great to see you. It's been a while since we've seen each other and we really appreciate as a firm and a practice group, you and prime and all the things you do.

[00:01:21] So thank you for that. My journey. As a lawyer has shifted a bit. There was a pivot in there when I started practicing, I was a corporate transactional attorney and then became involved in chapter 11, reorganization proceedings, uh, bankruptcy. And that was actually my pathway to the alternative investment world, B Casa.

[00:01:43] At a point, this was all early in my career. I was introduced to a number of private investment funds who were focused on investing in distressed and stressed debt. In some cases, taking positions in chapter 11 cases. And at that point started representing some ad [00:02:00] hoc committees comprised of the funds.

[00:02:03] So got to know the individuals. The principles I found fascinating, very smart, aggressive, challenging in certain ways, but always so interesting to deal with. I learned a great deal about the investment fund industry, the business, the needs, the timing terms, and how that informed their positions in connection with those investments.

[00:02:24] So I sort of had a bottom line portfolio investment entree to the alternative investment. And from there, as I got to know, more and more funds and moved to my present firm, tanning Baum helper, where I've been for over 20 years, which had an established investment management practice, sort of not too slowly, but.

[00:02:43] Pivoted to representing and advising funds, not just with respect to their underlying investments, but as I grew into the space, uh, with respect to governing regulation and practices and best practices for operation, and I've always felt that that was an advantage for me, cause I really had a sense of [00:03:00] their business from the start and what their needs were as businesses and how they operated from an underlying investment standpoint.

[00:03:07] Being beholden to their investors, what they needed to do certain timeframes they needed to work within. So that informed my career in a, in a very large way. Uh, but it's been a long time since that I've been representing investment funds as I have on the legal and regulatory side, with respect to operations, top tier arrangements among senior executives at the firms.

[00:03:28] And, uh, within my law firm, I've just had. A great opportunity to work and then mature into a position now heading up the group and really a privilege to work with the lawyers I work with. So it's an opportunity not to just assist clients, but really work and, and just, I find it so rewarding to see the people I work with mature and grow into more senior advisors.

[00:03:51] And it's just been a great experience, a great ride, a journey, as you say, And we're really in a nice place now. And I think advising [00:04:00] more and more clients as best as we can in a, a really terrific way. 

[00:04:04] Amanda: I know there's so much happening with the current regulatory compliance, kind of all the changes in the marketing requirements that are happening.

[00:04:14] And I know having known you for so long. About your mission of helping fund managers and just helping people. And you guys do a lot around being at the forefront of insights for your fund clients. So for our audience that may know, or may not know that there's a lot of things that are coming up in the next six months.

[00:04:34] And I know we were talking about turbulent markets, but this is one of those things that you don't wanna. Two last minute. So it would be great if you can just walk us through some of the things that we should be thinking about. 

[00:04:48] Wayne: right. Sure. There's a large regulatory CJ that's taken place in the spring of 2021.

[00:04:55] It was May 4th. The sec announced that there would be a new [00:05:00] marketing rule. May 4th, 2021 started a 18-month transition period. So the new rule goes into. Well, it's in effect, but it becomes mandatory as far as compliance as of November 4th, 2022. So this coming November and it's a change, what it does is it consolidates two longstanding rules.

[00:05:21] There had always been an, a. Advertising rule and then separately, a cash solicitation rule that dealt with, uh, managers working with placement agents, solicitors, registered broker-dealers, third parties who assisted in capital raising. And so this pulls the two of them together into a new marketing role.

[00:05:39] So there's one rule. Now, one of the things it also does, is it codifies if you. Many of the no action letters and guidance that the S E C had been publishing over the years. So we'll talk more about what managers can, can, and should actively be doing between now and November 4th and how their [00:06:00] policies and procedures will need to be updated.

[00:06:02] But one way is that references to no-action letters and many policies and procedure manuals do refer to them by name. Should no longer because those in effective are being subsumed into the new regulation. So it's all a matter of being in compliance with the new marketing rule. So that does go into effect November four.

[00:06:23] We're in the process of the transition period. People should be preparing and we'll talk about some of those changes and in a new definition of advertisement, it includes advisor generate.  Advertisements, but also include statements by third parties, testimonials and endorsements, and then separately as another bucket, it also brings within the purview of the marketing rule, not just written and direct oral, but very specifically social media content.

[00:06:52] Sec, trying to look ahead and they talk about other channels of communication that people may not have even invented yet. Uh, [00:07:00] so the rule is meant to be flexible and very, very, very much forward looking. 

[00:07:05] Amanda: Yeah. I mean, it's great. Cuz you touched on social media. I mean, so much has changed. Especially in the COVID world.

[00:07:12] What was kind of unheard of for our industry is now becoming the norm, uh, social media, LinkedIn posting, doing videos and webinars and thought leadership. What are some of the things that. The managers should think about in terms of what can they talk about? What can they not talk about? I mean, another thing is, is people have been doing a lot of, let's say, for example, LinkedIn posting, do they need to go back and edit everything or delete things?

[00:07:40] So kind of like, what are some of the actual things that they should be thinking 

[00:07:43] Wayne: about? Sure. Well, one thing as far as. Not prescribing the rule, but keeping in mind before, there's just a sort of a general fear and panic as among listeners of the market generally, is that as far as advisor generated [00:08:00] content, what we're talking about still are advertisements and the terms that are used in the new rule.

[00:08:06] And it's consistent as an advertisement is an offer for new or additional advisory services in connection with the sale. Or relating to securities. So that's a general sort of overview as to what we're talking about and what the rule will specifically apply to. There are exceptions and examples, but that's that general parameters.

[00:08:26] So that one thing that needs to be kept in mind is that postings by an advisor or any sort of statements by an advisor that deal with general market commentary or branding, purely educational, regulatory updates. Should all be fine and can continue to be fine. So if that's what's being done by the advisor, there shouldn't be any problem with that.

[00:08:51] When it comes to market, always need to be, uh, aware and sensitive to there's a line that can be blurred, where [00:09:00] for example, advisors speaking to markets, commentary, what's happening in the markets. What's perhaps anticipated to take place in the markets and then takes that next step and says. And this is how we are well situated to assist investors in navigating through those turbulent market times.

[00:09:18] An advisor needs to be careful with that latter part that can lend itself to being considered coming close to being an advertisement or moving into that range. Yeah. So there's all kinds of content that continues to be permissible and, and should not be problematic if generated in a thoughtful way.

[00:09:36] Yeah. 

[00:09:37] Amanda: I thought what was really interesting is. Maybe some of the biggest impact is kind of thinking about who's liable, maybe fund managers who might hire third parties to help them with marketing. Who's liable, maybe employees that might be doing something than who's liable person. Um, so just thinking through that kind of liability, I think is also a different way of [00:10:00] thinking about it.

[00:10:00] Like hiring service providers is probably even more important than ever cuz you have to make sure you are aware of who's representing. 

[00:10:07] Wayne: No question about it when it comes to the hiring of placement agents and. Different representations that are made the rules guidelines with respect to prohibitions on misleading information and the elements of that.

[00:10:23] And I know our time is somewhat limited today. There's a tremendous amount of detail. The new marketing rule, the SEC's release has 50 pages on wow. Literally what constitutes an advertisement and the guidelines around that. So time doesn't allow, but from a, an advisor standpoint, What they need, what an advisor needs to be aware of is that they can't simply, um, engage a placement agent or a broker dealer and say, go to it.

[00:10:52] These are our materials. We appreciate your efforts because what the new role. Specifically [00:11:00] says that an advisor can get into trouble. If it's deemed that the advisor has either adopted that third party's statements and releases or entangled itself in such a way as to become itself responsible for all of the information and materials that the third party disseminates.

[00:11:21] As a general matter. One of the things that advisors should be doing between now and November 4th are going back to the agreements that they have in place with the third party, uh, placement agents, broker-dealers, and they should be updated to refer to the marketing rule and make sure that the. The placement agents, broker-dealers are aware of familiar with perhaps representations to be made in connection with their familiarity and their commitment to adhere to the marketing roles in all respects.

[00:11:51] Yeah. So those are things, that's an engagement level of engagement that advisors should really be thinking about. Uh, very seriously. That's one of the main [00:12:00] areas that we would suggest advisors focus on between now and then, but, and again, So many ways in which this will apply. You mentioned social media.

[00:12:10] Yeah. LinkedIn comes up in a very significant way. An example that was given if an advisor sees a third-party sort of solicitation and then likes it. On LinkedIn, that can be deemed an adoption of it. So that if there's anything in that, in those materials that are either misleading or don't adhere to the marketing rule, by having the fair and balanced approach, the level of disclosure that the marketing rule requires with respect to either statements about the advisor, hypothetical performance, backdated performance projections.

[00:12:48] Any of those areas, the advisor will be held responsible for that if an advisor, and you want to be working closely with the third parties that you've retained, but if you do, you are [00:13:00] gonna be held responsible. You know, that's the level of entanglement. You're not gonna be able to separate yourself from those third-party materials and statements.

[00:13:08] If it's found that you had an active role in putting them together. So you need to be quite conscious of what's ultimately circulated and distributed. 

[00:13:17] Amanda: Yep. I say that all the time you touched on this piece about the performance. The interesting thing is, is prime alpha. We started seven years ago and we've seen thousands of presentations.

[00:13:28] Our hedge funds have done a great job of showing net returns. But when we start talking to our venture or private equity guys, they always talk in gross numbers. so I think there's a change in kind of thinking about gross performance reporting. There's 

[00:13:43] Wayne: really no ambiguity in the rule going forward is that performance needs to be shown on a net basis.

[00:13:49] It can be shown on a gross basis, but it needs to be accompanied then by net performance and the net performance has to be. Using the same methodology [00:14:00] for the same time periods, it needs to be relevant. So as to, again, the overarching principle, if I didn't mention it before, it's a conceptual framework is that presentations need to be fair and balanced.

[00:14:11] And that's really the load star to all of this. And if you keep going back and have that in mind, It should get you back to the right place, at least analytically for how you put your materials together. So there's no question, but that net performance needs to be shown and needs to be shown in a way that's particularly relevant in context to the reader.

[00:14:31] Yep. 

[00:14:31] Amanda: So wait, can you tell me a little bit about how you guys help clients navigate through this change? 

[00:14:37] Wayne: Sure. Well, it starts with a conversation often. It's very practical conversation about the client, its business, its resources, its needs, and what might work best for it, depending upon the client, its size, what other initiatives it has in place.

[00:14:53] Cuz everybody has only a limited amount of time. They devote to various things as a business and in some cases [00:15:00] only a certain amount of resources to devote to certain things as to where they want to from. Marketing advertising standpoint focus. And it may be that while well, aspirationally, it would be good to engage in certain testimonials and endorsements that perhaps just because of the amount of time and resources, it would take to make sure that such things were compliant, continue to stay away from that.

[00:15:24] Even though the new rule does allow for those. And that's new, there are rules around that that need to be complied with. So it might be that that's. At least immediately something that the client wants to move into. So those type of very practical judgements, and then on a more legal and substantive level, what we have started to do, and I'm sure we're gonna be doing much more of it between now and November four is to focus with our clients on their existing policies and procedures, taking a look at them, updating them to make sure that they're fully compliant with the marketing rule in [00:16:00] connection with.

[00:16:00] There's the dissemination of those policies and procedures among personnel within the advisors organization. So there's training that we recommend take place to make sure that the advisors done the right thing. The FCC might come in. It's always a good thing to be able to establish to the advisor that you engaged in inappropriate training with respect to your personnel, as far as the new policies and procedures and how they're intended to be and should be implement.

[00:16:27] That's extremely important. We touched on going back to placement agreements, broker-dealer agreements. You may now have in place. Those all need to be reviewed. There are new record-keeping bookkeeping requirements. Now, again, touching on social media that becomes not a complication. It's an additional task.

[00:16:46] It's one thing to take your marketing materials, the old traditional type marketing materials and keep copies of them. But now when we talk about. Advisor postings or webinars or different types [00:17:00] of podcasts, you know, those type of things. You need to have copies of those. You need to retain a record of those, as well as all the information that you've used to provide the information that was contained there in if you have back-tested.

[00:17:14] Performance. If you have any sort of hypothetical performance that you have disclosures around, you need to have your work papers that went into compiling that information so that it's available for inspection. So there's discussion and the policies and procedures need to talk about that. One thing to mention is there is a new part of the form ADV and the form has not yet been distributed, but it will be prior to.

[00:17:38] November 4th. And so there's an additional filing requirement that will need to be, uh, complied with, by those who are fully or filing form ADV. And now we'll talk about marketing efforts and how the client is engaging in those. Vis-a-vis the new marketing rule. So, 

[00:17:55] Amanda: so informative. And so important. So I'm gonna ask my fun, last [00:18:00] question.

[00:18:02] yourself. What do you think is your superpower and why? 

[00:18:07] Wayne: you've given me some advanced notice on this. So that's an interesting one. It's not generally my nature to think of myself in most terms, but. The one thing that we were talking earlier about my journey, but I got at this and you were so gracious.

[00:18:20] And so thank you for talking about our focus on assisting clients and assisting others and do what we can. I think that what's been most rewarding for me is really spending the time and. Perhaps honing my skills or my ability to really listen, I guess, listen carefully, listen deeply to understand this applies to both colleagues, but now we're talking about clients or I'm talking about clients to what their, the client Tru needs are and, and what the dynamics are around their business, their goals, and what really, what they need from us, so that we're at all points.

[00:18:55] Hopefully. Taking all boxes, exactly the way that the client, you know, wants [00:19:00] us to, and really having a positive impact on the client and its business. I know it's a term that's used frequently, but we really. Truly seek to partner with our clients and be some we're on the legal side, of course, but be as much of a business partner in that way as we can.

[00:19:17] So just really understand what the client's goals are as an enterprise and be there to assist in any way we can. And the last thing I'll say in that is if we truly understand where the client is going or wants to. We can not just operate reactively, but proactively and provide information with saying this is coming down the pike, the market is changing.

[00:19:39] Perhaps you should be thinking about this. Perhaps we could assist you with respect to this. Let's talk about your plans for the next quarter, the next six months, the next year, the next three to five years. So how do we work with you best to put yourself in the best position to achieve your. 

[00:19:56] Amanda: I love that this is why we're having this podcast.

[00:19:58] Cause I think this is [00:20:00] also very important. Wayne, thank you so much for your time as always a pleasure. And I think we're gonna be doing a lot more of these, especially as the environment's changing. And I think there's a lot of regulatory things coming down the pike. So thank you 

[00:20:15] Wayne: so much. Well, it's been a pleasure and Amanda's always thanks so much for not only putting this together, but again, for everything that you do.

[00:20:22] So thank you. 

[00:20:24] Amanda: Thank you for listening to prime Alpha's visionaries and innovators podcasts. As always, you could head over to prime, alpha.com to sign up to our email list as well as check out our other podcasts. See you next time. This podcast is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any investment or any securities listeners should make their own investigations and evaluations of the information contained here in certain information contained in this podcast constitutes forward looking statements.

[00:20:58] Listeners should not

 [00:21:00] rely on these forward looking statements. Listeners should bear in mind. Past performance is not necessarily indicative of future results.