SEC provides clarification on marketing rules for investment advisers

SEC’s Clarity on Marketing Rules for Investment Advisers

The Securities and Exchange Commission (SEC) recently clarified marketing rules for investment advisers, specifically regarding advertisements containing gross performance and investment or portfolio characteristics that constitute performance under the marketing rule.

Regarding extracted performance, Rule 206(4)-1(d)(1) of the Investment Advisers Act of 1940 prohibits investment advisers from including gross performance in advertisements without also presenting net performance equally prominently. The SEC staff’s recent updates provide conditions under which advertisements can display gross extracted performance without net performance. This includes clearly identifying it as gross, presenting gross and net performance of the total portfolio with equal prominence, and calculating performance over the same period.

The second update focuses on investment and portfolio characteristics, determining what constitutes performance under the marketing rule. The SEC staff explains that whether a characteristic is considered performance depends on whether it falls under Rule 206(4)-1(d). The staff does not take a position on specific characteristics but clarifies that certain metrics like total return or time-weighted return are exempt. The publication provides guidelines for presenting gross characteristics without net characteristics, ensuring compliance.

To implement these guidelines effectively, advertisements must clearly identify gross performance without fee deductions, present total portfolio gross and net performance in comparison with characteristics, and align time periods. The staff emphasizes equal prominence for gross and net performance, recommending displaying this information prior to characteristics. Ensuring alignment of time periods between characteristics and total portfolio performance is essential, with enforcement leniency for deviations with clear disclosures.

In conclusion, the SEC’s clarifications provide investment advisers with a clearer understanding of how to comply with marketing rules regarding performance disclosures. By following the staff’s recommendations, advisers can effectively present performance information to prospective investors without confusion. Advertisements can successfully showcase gross performance alongside the total portfolio’s net performance, meeting regulatory requirements and facilitating comparisons for investors. It is crucial for advisers to implement these guidelines to ensure transparency and compliance in their marketing efforts.