SEC Releases New FAQs on Marketing Rules for Performance Presentations

The Securities and Exchange Commission (SEC) recently updated their guidance on Rule 206(4)-1, also known as the Marketing Rule, under the Investment Advisers Act of 1940. This update provides investment advisers with more flexibility in their performance presentations. Specifically, advisers can now present extracted performance data of a single investment within a portfolio solely on a gross basis without the need for corresponding net-of-fee data. However, gross and net performance for the entire portfolio must still be prominently displayed within the same advertisement.

Previously, SEC staff required that if an adviser displayed performance data for one investment or a group of investments, it must include net performance if gross performance was shown. This was commonly referred to as extracted performance. The new guidance clarifies that an adviser is not obligated to include net performance of an extract if the net-of-fee performance of the entire portfolio is included in the same advertisement. Certain conditions must be met, including clearly identifying the extract’s performance as gross, presenting the total portfolio’s gross and net performance with equal prominence, and calculating gross and net performance of the total portfolio over the same period as the extract.

In cases where an extract is derived from representative accounts to create composite performance information, the gross performance of the extract should be accompanied by the gross and net performance of a composite aggregation of related portfolios. The extract may be presented over a single time period subset as long as it aligns with the total portfolio’s performance period. While the gross and net-of-fee performance of the total portfolio does not need to be on the same page as the extract, they must be presented in a way that allows for comparison.

The updated guidance also addresses concerns around presenting certain investment characteristics, such as yield, volatility, and various ratios, on a gross basis without accompanying net calculations. The SEC staff acknowledged that calculating these characteristics on a net-of-fee basis may not be feasible and may lead to misleading results. To alleviate confusion, advisers can present these characteristics on a gross basis as long as they provide appropriate calculation information and prominently display the gross and net-of-fee performance of the total portfolio within the same advertisement.

Similar to extracts, if characteristics represent aggregate or composite performance across related portfolios, the advertisement should also include the gross and net-of-fee performance of a composite aggregation of all related portfolios. The related portfolio performance information does not need to be on the same page, and the time period used can be a subset of the portfolio’s overall performance period.

McGuireWoods will continue to monitor these developments and provide updates as necessary.