On March 19, 2025, the staff of the Division of Investment Management of the Securities and Exchange Commission (the "SEC") released updated responses to frequently asked questions ("FAQs") related to Rule 206(4)-1 (the "Marketing Rule") under the Investment Advisers Act of 1940 (the "Advisers Act").1
- Extracted Performance — The first FAQ sets out certain conditions that, if met, allow an SEC-registered investment adviser to display the gross performance of a single investment or group of investments from a private fund or other portfolio without also showing the net performance of such single investment or group of investments.
- Portfolio or Investment Characteristics — The second FAQ provides similar conditions relating to when an SEC-registered investment adviser may display certain gross portfolio or investment characteristics without also showing the corresponding net characteristics.
The Marketing Rule, adopted in 2021 to update the rules that govern investment adviser marketing, prohibits an SEC-registered investment adviser from including any presentation of gross performance in an advertisement unless (1) it also presents net performance with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance and (2) the net performance is calculated over the same time period, and using the same type of return and methodology, as the gross performance.2 The Marketing Rule also imposes requirements on advisers that display related performance, extracted performance or hypothetical performance in an advertisement.
Gross Performance of an Extract
Under a prior FAQ released on January 11, 2023, the SEC staff had characterized the display of the performance of one investment or a group of investments in a private fund or other portfolio ("extract") as an example of extracted performance under the Marketing Rule. As a result, an adviser could not show the gross performance of an extract in an advertisement without also showing the net performance of such extract and meeting the related presentation requirements of the Marketing Rule.
In the updated FAQ, the SEC staff has instead stated that it would not recommend enforcement action to the SEC's Division of Enforcement when an adviser displays the gross performance of an extract3 in an advertisement without including corresponding net performance of the extract, if the following conditions were met:
- the extracted performance is clearly identified as gross performance;
- the extracted performance is accompanied by a presentation of the total portfolio's gross and net performance consistent with the requirements of the Marketing Rule;
- 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
- 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.
The staff stated that it would view an advertisement as clearly identifying that the extracted performance is gross performance if, for example, it discloses that the extracted performance shown does not reflect the deduction of all fees and expenses that a client or investor has paid or would have paid and refers the recipient to the presentation of the total portfolio's gross and net performance to understand the overall effect of fees.
The staff further clarified that the gross and net performance of the total portfolio does not need to be presented on the same page of the advertisement as the extracted performance, provided that the presentation facilitates comparison between the gross and net performance of the total portfolio and the extracted performance. As an example, the staff stated that presenting the gross and net performance of the total portfolio prior to the extracted performance in the advertisement could facilitate such comparisons and help make sure they are presented with at least equal prominence to the performance of the extract.
Finally, the staff provided that it would not recommend enforcement action if the presented extracted performance was calculated over a single, clearly disclosed period instead of aligning with the time periods required by the Marketing Rule (other than in the case of a private fund) with respect to the gross and net performance of the total portfolio.
Gross Portfolio or Investment Characteristic
The second FAQ mirrors the conditions set out in the updated FAQ discussed above, but with respect to the display of certain gross portfolio or investment characteristics instead of extracted performance.
The SEC staff began its response by recognizing that the Marketing Rule does not define "performance" and, as a result, advisers may be unsure whether certain portfolio or investment 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) would be considered "performance" under the Marketing Rule.4 This determination is important because, to the extent a characteristic is not performance, the presentation of such characteristic would not be subject to the requirements of paragraph (d) of the Marketing Rule. The staff further acknowledged that it may be impossible or lead to misleading or confusing result if certain characteristics are calculated net of fees and expenses.
As a result, the staff provided that it would not recommend enforcement action to the SEC's Division of Enforcement when an adviser presents one or more gross characteristics5 of a portfolio or investment in an advertisement, even if it does not include the corresponding net characteristic(s), if the following conditions were met:
- the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
- the characteristic is accompanied by a presentation of the total portfolio's gross and net performance consistent with the requirements of the Marketing Rule;6
- 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
- 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.
The staff specified that it would view an advertisement as clearly identifying that the characteristic is calculated without the deduction of fees and expenses if, for example, it discloses that thecharacteristic shown does not reflect the deduction of all fees and expenses that a client or investor has paid or would have paid and refers the recipient to the presentation of the total portfolio's gross and net performance to understand the overall effect of fees.
As with extracted performance, the staff clarified that gross and net performance of the total portfolio does not need to be presented on the same page of the advertisement as the characteristic, provided that the presentation facilitates comparison between the gross and net performance of the total portfolio and the characteristic. The staff provided the example that presenting the gross and net performance of the total portfolio prior to the characteristic in the advertisement could facilitate such comparisons and help ensure they are presented with at least equal prominence.
The staff also provided that it would not recommend enforcement action if the presented characteristic was calculated over a single, clearly disclosed period instead of aligning with the time periods required by the Marketing Rule (other than in the case of a private fund) with respect to the gross and net performance of the total portfolio.
Finally, the staff cautioned that the general prohibitions of paragraph (a) of the Marketing Rule and sections 206(1) and 206(2) of the Advisers Act still apply to any advertisement that presents characteristics.
Footnotes
1 See https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/marketing-compliance-frequently-asked-questions.
2 See Rule 206(4)-1(d) under the Advisers Act.
3 The staff clarified that for purposes of this FAQ, its views also apply to the performance of an extract from a composite of all related portfolios but cautioned that performance extracted from a composite of portfolios may also be considered hypothetical performance.
4 The staff clarifies that it is not stating whether any particular characteristic or attribute should be considered "performance" for purposes of the Marketing Rule. However, the staff does make clear that total return, time-weighted return, return on investment (RoI), internal rate of return (IRR), multiple on invested capital (MOIC), and Total Value to Paid in Capital (TVPI), regardless of how such metrics are labelled in the advertisement, would be considered performance.
5 The staff clarified that for purposes of this FAQ, its views also apply to characteristics calculated based on the performance of (i) a composite aggregation of related portfolios, (ii) a representative account; (iii) a subset of a portfolio (i.e., extracted performance), and (iv) a subset extracted from a composite aggregation of related portfolios.
6 In the case of a characteristic calculated using a representative account, the staff expressed that an adviser could satisfy this condition if the gross characteristic were accompanied by the gross and net performance of a composite aggregation of all of the representative account's related portfolios (rather than the gross and net performance of the total representative account).
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