Overview
WHAT YOU NEED TO KNOW
On March 19, 2025, the US Securities and Exchange Commission’s (SEC) Division of Investment Management updated its frequently asked questions (FAQs) related to Rule 206(4)-1 (the Marketing Rule) under the Investment Advisers Act of 1940, as amended. The two additional FAQs permit registered investment advisers to present – subject to the satisfaction of certain conditions – the following performance and performance-like metrics in marketing materials on a gross-only basis:
- The performance of a single investment or group of investments (e.g., case studies) in a private fund or other portfolio (Extracted Performance).
- Certain portfolio or investment characteristics (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, and other similar metrics) (Portfolio Characteristics).
This guidance is a welcome relief for private fund advisers who not only have struggled with how to present Extracted Performance and Portfolio Characteristics on a net basis since the Marketing Rule’s November 2022 compliance date but also had concerns that presenting these metrics on a net basis has led to confusing and potentially misleading performance results.
Advisers who include Extracted Performance and Portfolio Characteristics in their marketing materials should consider whether that information would be more meaningfully presented in a manner that aligns with the FAQs. To the extent that advisers revise their marketing materials, they should ensure compliance with the conditions outlined in the FAQs and the Marketing Rule’s other requirements. Advisers may also need to update their Marketing Rule compliance policies to align with any changes to their marketing materials.
In Depth
BACKGROUND
Among other things, the Marketing Rule requires that any presentation of gross performance be accompanied by net performance presented with at least equal prominence to (and in a format designed to facilitate comparison with) gross performance calculated using the same methodology and over the same time period.
Compliance with this requirement brought challenges for private fund advisers presenting Extracted Performance since a fund’s fees and expenses are applied at the fund level. While the industry adopted various methodologies to satisfy this requirement, there was concern across the industry that the results were confusing to investors and potentially more misleading than presenting Extracted Performance on a gross-only basis with adequate disclosures. Prior SEC guidance failed to alleviate these challenges.
It also remained unclear under the Marketing Rule and prior guidance whether Portfolio Characteristics were considered “performance” for purposes of the Marketing Rule’s net requirement. Without articulating a position as to whether any particular Portfolio Characteristic would be considered “performance”[1], the SEC noted that even if Portfolio Characteristics are considered performance for purposes of the Marketing Rule, calculating these characteristics net of fees and expenses is challenging and may lead to misleading or confusing results. Therefore, the SEC articulated its view that (1) so long as an adviser prominently displays the gross and net performance of the total portfolio calculated pursuant to the requirements of the Marketing Rule and (2) in a manner that is not otherwise materially misleading and provides appropriate accompanying information about the Portfolio Characteristic and how it is calculated, there is little risk that prospective investors will be misled about the impact of fees and expenses on their returns when viewing such a characteristic.
GROSS-ONLY PERFORMANCE CONDITIONS
As set out in the FAQs, investment advisers may present Extracted Performance and Portfolio Characteristics on a gross-only basis, provided the following conditions are satisfied:
- The Extracted Performance and Portfolio Characteristics are clearly identified as being calculated on a gross-only basis and do not reflect the deduction of fees and expenses.
- The Extracted Performance and Portfolio Characteristics are 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 gross-only Extracted Performance or Portfolio Characteristics.
- The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the Extracted Performance and Portfolio Characteristics are calculated.
The SEC noted that any advertisement that presents gross-only Extracted Performance or Portfolio Characteristics in accordance with the FAQs remains subject to the general prohibitions of the Marketing Rule.
