SEC Staff Issues Updated Marketing Rule FAQs

The SEC Division of Investment Management updated FAQs for private fund managers and investment advisers communicating gross and net performance under the marketing rule.

The new FAQs clarified the use of "extracted performance" and investment "characteristics" to communicate gross performance in marketing materials without requiring side-by-side net performance illustrations under the Investment Advisers Act Rule 206(4)-1 ("Investment Adviser Marketing"). The Division explained that the marketing rule requires that an adviser who shows the gross performance of an extract in an advertisement must also show the net performance of such extract in the advertisement.

In the FAQs, the Division stated "the staff would not recommend enforcement action to the Commission under the Rule 206(4)-1(d)(1)" if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, 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 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; and
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."

On the use of investment "characteristics" in marketing, the Division said that it "would not recommend enforcement action to the Commission under rule 206(4)-1(d)(1) 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; and
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."

The Division emphasized the continuing requirement for clear disclosures and adherence to Rule 206(4)-1 general prohibitions and anti-fraud provisions to avoid misleading investors.