The SEC’s Division of Investment Management: FAQ Update

Written by Mark Buckley-Jones
Director

On March 19^th, The SEC’s Division of Investment Management updated its Marketing Compliance Frequently Asked Questions (“FAQ”s) to provide additional guidance on the application of the Marketing Rule (Rule 206(4)-1) under the Investment Advisers Act of 1940.

This latest update introduced two new responses to questions addressing the presentation of extracted performance and certain other portfolio characteristics in advertisements, such as geographic returns.

Private fund managers will welcome these clarifications, which now allow the presentation of extracted gross performance and certain portfolio characteristics in advertisements, provided they comply with the requirements outlined in the updated FAQ.

See below:

Extracted Performance (Updated March 19, 2025)

Q. When an adviser displays the gross performance of one investment or a group of investments from a private fund or other portfolio, must the adviser show the net performance of such single investment or group of investments?

A. Displaying the performance of one investment or a group of investments in a private fund or other portfolio (an “extract”) is an example of extracted performance under the marketing rule and, if an adviser shows the gross performance of an extract in an advertisement, the rule requires the adviser to also show the net performance of such extract in the advertisement. The staff, however, believes that, when an adviser prominently displays the gross and net performanceof the total portfolio from which an extract was extracted, calculated pursuant to the requirements of the marketing rule and presented in a manner that is not otherwise materially misleading, and appropriate information accompanies the gross performance of the extract, there is little risk that presenting only the gross performance of an extract will be misleading.  Specifically, the staff would not recommend enforcement action to the Commission under rule 206(4)-1(d)(1) if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, if:

1. The extracted performance is clearly identified as gross performance;
2. The extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
3. The gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance; and
4. The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance is calculated.

Because time periods over which extracts are calculated may not easily align with the time periods required by Rule 206(4)-1(d)(2), the staff would not recommend enforcement action to the Commission under Rule 206(4)-1(d)(2) if the extracted performance presented as described above was calculated over a single, clearly disclosed period.

The staff notes that any advertisement that presents the gross performance of one or more extracts in accordance with this FAQ remains subject to the general prohibitions of Rule 206(4)-1(a) (as well as section 206(1) and 206(2) of the Advisers Act).

Portfolio or Investment Characteristics (March 19, 2025)

Q. The marketing rule does not define “performance” and, as a result, investment advisers may need to determine whether certain portfolio or investment characteristics (“characteristics”) are performance under the marketing rule. If such characteristics are performance, would the staff recommend enforcement action if an adviser displays characteristics calculated without reflecting the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio(s) (“gross characteristics”), without also showing the corresponding characteristics calculated after the deduction of all fees and expenses (“net characteristics”)?

A. The staff recognizes that advisers may be unsure whether certain characteristics (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics) are “performance” under the rule. In addition, even if such characteristics were to qualify as performance, calculating these characteristics net of fees and expenses may be impossible or lead to misleading or confusing results. However, in the staff’s view, when an adviser prominently displays the gross and net performance of the total portfolio calculated pursuant to the requirements of the marketing rule and presented in a manner that is not otherwise materially misleading, and provides appropriate accompanying information about the characteristic and how it is calculated, there is little risk that prospective clients and prospective investors will be misled about the impact of fees and expenses on their returns when viewing such a characteristic.

Accordingly, the staff would not recommend enforcement action to the Commission under rule 206(4)-1(d)(1) if an adviser chooses to present in an advertisement one or more gross characteristics of a portfolio or investment, even if it does not include the corresponding net characteristic(s), if:

1. The gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
2. The characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
3. The total portfolio’s gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the gross characteristic; and
4. The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated.

Because time periods over which characteristics are calculated may not easily align with the time periods required by Rule 206(4)-1(d)(2), the staff would not recommend enforcement action to the Commission under Rule 206(4)-1(d)(2) if the characteristic presented as described above is calculated over a single, clearly disclosed period.

The staff notes that any advertisement that presents characteristics in accordance with this FAQ remains subject to the general prohibitions of Rule 206(4)-1(a) (as well as section 206(1) and 206(2) of the Advisers Act).

For a comprehensive understanding of all FAQs, inclusive of these recent updates please click here.