On March 19, 2025, the SEC staff published two new Marketing Rule FAQs that relieve issues with displaying investment performance under previous staff guidance. The new FAQs allow advisers to advertise the performance of individual investments as well as various portfolio or investment characteristics on a gross basis if the net and gross performance of the entire portfolio (or composite) is also included prominently in the advertisement.
Background
The new FAQs are the result of two years of industry and trade group engagement with SEC staff in response to the staff's previous guidance.1 The earlier guidance provided that the performance of individual positions must be presented on a net basis. To address this issue , advisers—and in particular private fund managers that charge performance-based fees—were required to devise various methodologies to estimate portfolio-level fees at the individual investment level. This process has proven frustrating for advisers and confusing for investors.
Advisers have also faced challenges determining whether various portfolio characteristics and risk metrics are considered "performance" that must be presented on a net basis under the Marketing Rule.2 In deficiency letters and public statements, SEC staff previously suggested that information such as yield, sector returns and contribution to returns also must be displayed net of model fees.
New FAQs
In short, the new FAQs permit an advertisement to include (1) case studies, lists of individual investments and other forms of "extracted performance" on a gross basis; and/or (2) portfolio or investment characteristics on a gross basis; in each case, if the following conditions are satisfied:
- The extract or characteristic is clearly identified as gross of fees;
- The performance of the portfolio or composite from which the
extract or characteristic was derived is also presented:
- Consistent with the requirements of the Marketing Rule;
- On a gross and net basis, to demonstrate the effect of fees;
- With at least equal prominence to and in a manner designed to facilitate comparison with the extract or characteristic; and
- Over a period of time that includes the entire period over which the extract or characteristic is calculated.
Practical Considerations
What is "equal prominence"? The staff noted in a footnote that "equal prominence" and "in a manner designed to facilitate comparison" do not require the portfolio/composite performance to be included side-by-side or on the same page as the extracted performance or characteristics in every case, but that including the portfolio/composite performance prior to the extract or characteristic would likely satisfy this standard. In practice, presenting portfolio/composite performance at the beginning of a presentation on portfolio characteristics likely would be sufficient. However, including portfolio/composite performance only in an appendix at the end of a long presentation likely would not be sufficient to meet this standard.
What are "portfolio or investment characteristics"? The FAQ regarding portfolio and investment characteristics is not limited in scope to specific characteristics. Instead, the FAQs together are intended to cover a wide range of quantitative information about investment portfolios, such that advisers (and the staff) do not need to distinguish between characteristics that are technically "performance" under the Marketing Rule and those that are not. Examples highlighted by the staff include yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, Sharpe ratio and Sortino ratio.
Next Steps. The FAQs are effective immediately. Although advisers are not required to change current practices, we anticipate most advisers will seek to take advantage of the additional flexibility afforded by the new FAQs.
Footnotes
1. See SEC staff Marketing Compliance Frequently Asked Questions, issued Jan. 11, 2023.
2. Rule 206(4)-1 under the Investment Advisers Act of 1940 (the "Marketing Rule").
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
