SEC's Division of Investment Management Updates Marketing Rule FAQs

The SEC's Division of Investment Management (Division) on March 19, 2025, updated its Marketing Compliance Frequently Asked Questions (FAQs) with respect to Rule 206(4)-1 under the Investment Advisers Act of 1940 (Marketing Rule) to issue new interpretative guidance regarding the presentation of performance data with respect to extracted performance and certain performance-related characteristics. The updated FAQs permit the presentation of extracted performance (including for individual investments) and certain performance-related characteristics on a gross basis in advertisements without also showing corresponding information on a net basis, subject to certain conditions.

Summary of New FAQs

The first new FAQ addresses extracted performance (i.e., where an adviser displays the performance of one investment or a group of investments in a private fund or other portfolio). Currently, if an adviser shows the gross performance of one or more investments in an advertisement, the rule requires the adviser to also show the net performance of such investments in the advertisement. In the new FAQ, the Division stated that it would not recommend enforcement action if an adviser displays the gross performance of one or more investments in an advertisement without including corresponding net performance if:

1. The extracted performance is clearly identified as gross performance.
2. 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.
3. 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.
4. 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 second new FAQ addresses how to present 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) under the Marketing Rule. The Division recognized that advisers may be unsure of whether these performance-related characteristics qualified as performance under the Marketing Rule and, even if they do qualify as performance, calculating these characteristics net of fees and expenses may be impossible or lead to misleading or confusing results. The Division stated in the FAQ that it would not recommend enforcement action if an adviser chooses to present in an advertisement one or more gross characteristics of a portfolio or investment, even if it does not include the corresponding net characteristic(s), if:

1. The gross characteristic is clearly identified as being calculated without the deduction of fees and expenses.
2. The characteristic is accompanied by a presentation of the total portfolio's gross and net performance consistent with the requirements of the rule.
3. 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.
4. 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.

With respect to both FAQs, the Division noted that because the time periods over which performance-related characteristics or extracted performance are calculated may not easily align with the time periods required by the Marketing Rule, the Division would not recommend enforcement action if the information presented is calculated over a single, clearly disclosed period.

Key Takeaways

• The Division recognized in these new FAQs some of the struggles investment advisers have faced attempting to comply with the Marketing Rule in instances where it is difficult to calculate net performance. In many cases, the inclusion of net performance in these scenarios was not resulting in useful information for the investor because of the assumptions investment advisers had to make in order to calculate net performance.
• The first FAQ marks a material departure from prior SEC guidance on the topic of extracted performance. Under the prior version of the FAQs from January 2023 (issued by a Gary Gensler-led SEC), the Division took the position that the performance of any subset of a portfolio, including a single investment, would be considered "extracted performance" under the Marketing Rule and subject to the requirement that gross performance information must be accompanied by net-performance information. This requirement created challenges for investment advisers, as it was not clear how fees and expenses should be applied to a single investment and resulted in divergent industry practices.
• In the second new FAQ, the Division did not take a position on whether any particular performance-related characteristic is considered "performance" under the Marketing Rule. Instead, the FAQ allows investment advisers to show total gross and net performance without having to determine whether the use of the characteristic would qualify as "performance" under the rule.
• The updated guidance in these new FAQs – including welcome insight into when the SEC may not recommend enforcement – is a notable departure from prior Division positions and serves as another reminder of changing priorities and policies under new SEC leadership. Nevertheless, advisers are urged not to become lax in their efforts to ensure compliance with the Marketing Rule and other applicable rules and regulations as the SEC's Examinations and Enforcement staff will continue to keep a close eye on what such regulated entities are doing to comply with the law and discharge their fiduciary duties to clients.