On March 19, 2025, the Securities and Exchange Commission (SEC) staff issued an update to its frequently asked questions (FAQ)[1] guidance with respect to registered investment advisers’ compliance with Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940 (Advisers Act). The FAQ provides new direction for advisers on the presentation of gross and net extracted performance data for a single investment or a group of investments (an “extract”) in marketing materials, as well as guidance as to whether certain portfolio or investment characteristics would constitute “performance” for purposes of the Marketing Rule.
The Marketing Rule originally required the presentation of gross extracted performance to be accompanied by a presentation of net extracted performance. This was made explicitly clear in a prior SEC FAQ published on January 11, 2023.[2] Under the updated FAQ, however, an adviser will now be permitted to present gross extracted performance and refer to certain portfolio or investment characteristics without also presenting corresponding net extracted performance, provided that certain additional requirements are met as described below.
Presentation of Gross and Net Performance of Extracts and Investment Characteristics
Following the release of the Marketing Rule, advisers to private investment funds struggled with the requirement to present net performance data for extracts, as it was unclear from the final rule how fund-level fees and expenses should be applied to specific investments. This led to many advisers taking various diverging approaches in an attempt to comply with the Marketing Rule and a perception among private fund industry participants that such additional disclosures were inherently flawed for resting upon simplistic, if not artificial, assumptions mandated by the Marketing Rule concerning the allocation of fund-level fees and expenses and provided little (if any) practical benefit for investors. Additionally, the Marketing Rule does not define the term “performance”, which led to uncertainty as to whether certain portfolio or investment characteristics (e.g., yield, coupon rate, contribution to return, Sharpe ratio, Sortino ratio and other similar metrics), for which calculating “net” performance may be impossible, misleading or confusing to investors, could actually be included in advisers’ marketing materials.
In the updated FAQ, the SEC staff stated that they would not recommend enforcement action under Rule 206(4)-1(d)(1) of the Advisers Act if an adviser either (i) presents the gross performance of an extract in an advertisement without including the corresponding net performance of the extract or (ii) presents one or more gross characteristics of a portfolio or investment without including the corresponding net characteristics, if each of the following are true:
- The extract’s performance or the gross characteristic (as applicable) is clearly identified as being calculated on a gross basis, without the deduction of fees and expenses;
- The extract’s performance or the characteristic (as applicable) 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 extract’s or the characteristic’s (as applicable) performance;[3] and
- The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extract’s or characteristic’s (as applicable) performance is calculated.[4]
While the SEC staff has not provided a definition of “performance” under the Marketing Rule, the staff clarified that total return, time-weighted return, return on investment, internal rate of return, multiple on invested capital and total value to paid-in capital are each considered “performance” and are subject to the full requirements of the Marketing Rule. Additionally, the staff indicated that if a characteristic is not “performance”, then it does need to be shown on a gross basis.
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The updates to the FAQ represents a marked shift in the SEC’s interpretation and position on extracted performance, and may give advisers additional certainty on how to meet their obligations under the Marketing Rule. Private fund advisers should review their marketing materials that include gross and net performance of extracts or characteristics of a portfolio or investment to ensure the conditions set forth in the FAQ are satisfied.
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[1] Available at: https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/marketing-compliance-frequently-asked-questions#_edn6
[2] The prior FAQ from January 11, 2023, which directly contradicts certain aspects of the new FAQ concerning presentation of net extracted performance, has been removed from the SEC’s FAQ webpage.
[3] The SEC clarified that the total portfolio’s gross and net performance do not need to be shown on the same page of an advertisement as the extract or characteristic, but having the total portfolio’s performance precede the extract or characteristic in an advertisement would help to facilitate a comparison between the two.
[4] Because time periods over which extracts and characteristics are calculated may not easily align with the one-, five- and ten-year periods required by Rule 206(4)-1(d)(2) for advertisements to clients other than private funds, the SEC staff further stated that they would not recommend enforcement action if the extract or characteristic is calculated over a single, clearly disclosed period.
