SEC’s Marketing Rule Updates May Provide Relief for Investment Managers

Background

The SEC adopted the Marketing Rule in 2021 and in January 2023 adopted an FAQ requiring that gross performance of a private fund or subset of its investments be accompanied by the corresponding net-of-fees performance. Private fund managers in particular found it challenging to present a net-of-fees performance on individual investments because fees are typically charged at the fund level.

Updated Guidance

With the new FAQs, an adviser may display the performance of one investment or a group of investments (i.e., an “extracted performance” or an “extract”) on a gross-performance basis without including a corresponding “net” performance for the same time period if:

1. the adviser makes it clear that the performance of the extract is gross performance;
2. the extract is accompanied by a presentation by the adviser of the total portfolio’s gross and net performance;
3. the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner that facilitates comparison with, the extract; and
4. The gross and net performance of the total portfolio is calculated over a period that includes the entire period for which the extract is calculated.

Put simply, the new guidance permits a return to common industry practice prior to the 2023 FAQ adoption.

Another challenge for investment advisers under the 2021 Marketing Rule has been handling so-called “investment characteristics,” such as yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analysis, Sharpe ratio, the Sortino ratio, and so forth. Concern that these could be considered “performance” caused managers to attempt to create similar metrics net of fees and expenses. The new FAQs allow an adviser to present advertisements with one or more gross characteristics to demonstrate the performance of a portfolio or single investment, even if the characteristics do not include a corresponding net-of fees measurement, if:

1. the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
2. the gross characteristic is accompanied by a presentation of the total portfolio’s gross and net performance;
3. the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner that facilitates 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 for which the characteristic is calculated.

The other Marketing Rule FAQs remain unchanged by the March 19, 2025, action. This includes the FAQ explaining the staff’s view on calculating gross and net internal rate of return. These calculations must be done over the same time period and incorporate leverage, such as fund-level subscription facilities, in the same manner for both gross and net calculations.

Takeaways

The two new FAQs present investment advisers with flexibility and the ability to use gross performance in situations that were permitted prior to the 2023 marketing rule FAQ. Before using the new flexibility, however, investment advisers should review their marketing policies and procedures as well as their disclosure language to ensure the technical requirements of the new guidance are satisfied.