On March 19, 2025, the staff of the Securities and Exchange Commission (SEC) updated the FAQ page pertaining to Rule 206(4)-1 (the Marketing Rule) under the Investment Advisers Act of 1940. The updated guidance permits investment advisers to present extracted performance data of a single investment within a portfolio solely on a gross basis without the need to include corresponding net-of-fee data, so long as gross and net performance for the entire portfolio is prominently displayed within the same advertisement.
Similarly, the updated guidance permits advisers to present gross performance data of certain investment-related characteristics without corresponding net performance so long as gross and net-of-fee performance data for the entire portfolio is prominently displayed within the same advertisement.
Use of Extracted Performance
SEC staff previously took the position that the display of performance data for one investment or a group of investments in a private fund or other portfolio, including when presented as a case study, is an example of extracted performance (Extract) under the Marketing Rule, which generally requires the presentation of net performance of Extracts if gross performance is included. Many in the private funds industry interpreted the Marketing Rule and the staff’s position to require the display of net-of-fee performance of the Extract any time gross performance of the Extract was included.
Under the new guidance, SEC staff clarify that an adviser who includes the gross performance of an Extract is not required to also include the net performance of such Extract if, among other things, the net-of-fee performance of the entire portfolio from which the Extract is taken is included within the same advertisement. SEC staff specifically identified the following as conditions in which it would not recommend enforcement action when gross performance of an Extract is presented without corresponding net performance:
- the Extract’s performance is clearly identified as gross performance and includes disclosures that performance does not reflect the deduction of all applicable fees and expenses;
- the Extract 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 Extract; and
- the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the Extract is calculated.
In the case of an Extract adapted from one or more representative accounts to create composite performance information, the staff’s position is that it could satisfy the foregoing if its gross performance is accompanied by the gross and net performance of a composite aggregation of all the applicable representative account’s related portfolios and is otherwise presented in a manner consistent with the updated FAQ. Additionally, Extracts may be presented over a single, clearly disclosed time period, so long as it is a contiguous subset of the time period over which the performance of the entire portfolio is calculated.
The gross and net-of-fee performance of the total portfolio does not need to be presented on the same page of the advertisement as the Extract. However, SEC staff note that the Extract and the performance of the total portfolio must be presented in a manner that facilitates comparison between the gross and net performance of the total portfolio and the Extract.
Disclosures Around Investment Characteristics
The updated guidance also addresses industry confusion regarding whether certain characteristics — including yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio and similar metrics — are “performance” metrics under the Marketing Rule. While SEC staff did not take a position on whether these characteristics are performance metrics, it acknowledged that calculating these characteristics on a net-of-fee basis may be “impossible or lead to misleading or confusing results” within advertisements.
To address this confusion, SEC staff takes the position that the presentation of these and other characteristics on a gross basis (and without accompanying net-of-fee calculations) is not materially misleading if an adviser includes appropriate information about how the characteristic is calculated and prominently displays the Marketing Rule-compliant gross and net-of-fee performance of the total portfolio within the same advertisement. SEC staff specifically identified the following as conditions in which it would not recommend enforcement action when gross characteristics are presented without corresponding net characteristics:
- 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;
- 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.
Similar to Extracts, additional considerations apply to the display of characteristics that represent aggregate or composite performance across one or more related portfolios. For such characteristics, the staff would expect the advertisement to also include the gross and net-of-fee performance of a composite aggregation of all such representative account’s related portfolios, which must otherwise be compliant with the Marketing Rule. The related portfolio performance information, whether or not it represents an aggregate or composite portfolio, does not need to appear on the same page of the advertisement, and the associated time period may be a contiguous subset of the time period used to calculate the performance of the portfolio(s) as a whole.
McGuireWoods will continue to monitor developments regarding the Marketing Rule. Our team stands ready to assist. For questions about compliance with the Marketing Rule and related matters, contact the authors of this article or another member of McGuireWoods’ private investments funds team.
SEC Updates Marketing Rule FAQs to Provide Additional Performance Presentation Flexibility
On March 19, 2025, the staff of the Securities and Exchange Commission updated the FAQ page pertaining to Rule 206(4)-1 (the Marketing Rule) under the Investment Advisers Act of 1940. The updated guidance permits investment advisers to present extracted performance data of a single investment within a portfolio solely on a gross basis without the need to include corresponding net-of-fee data, so long as gross and net performance for the entire portfolio is prominently displayed within the same advertisement.
Similarly, the updated guidance permits advisers to present gross performance data of certain investment-related characteristics without corresponding net performance so long as gross and net-of-fee performance data for the entire portfolio is prominently displayed within the same advertisement.
Read on to learn more about how the updates offer greater flexibility to investment advisers.