SEC Clarifies Marketing Rules for Investment Advisers

On March 19, 2025, the staff of the Securities and Exchange Commission’s (SEC) Division of Investment Management published supplements to its (FAQ) applicable to SEC-registered investment advisers. In general, the updates relate to the , specifically (i) advertisements containing the gross performance of an investment extracted from a group of investments or portfolio (Extract Performance), (ii) what types of investment or portfolio characteristics (Characteristics) constitute performance under the marketing rule and (iii) when an investment adviser is required to disclose in an advertisement the gross and net results of certain Characteristics.

Extract Performance

Rule 206(4)-1(d)(1) of the Investment Advisers Act of 1940, as amended (Advisers Act), prohibits an investment adviser from publishing an advertisement that includes any presentation of gross performance, unless the advertisement also presents net performance with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance. The rule additionally requires the net performance be calculated in the same manner and over the same time period as the gross performance.

The staff’s recent updates explain that no enforcement action will be recommended if an investment adviser displays in an advertisement the gross Extract Performance without including the net Extract Performance if the below conditions are satisfied:

1. The Extract Performance is clearly identified as gross performance;
2. The Extract Performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with Rule 206;
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 Extract Performance; and
4. The gross and net performance of the total portfolio is calculated over the entire period the Extract Performance encompasses.

Because the staff guidance related to Extract Performance overlaps significantly with the staff’s notes to the new information regarding Characteristics, this client alert includes in the third section a summary of staff recommendations to implement that will ensure compliance with the applicable requirements.

Investment and Portfolio Characteristics; Disclosure of Gross and Net Characteristics

The second update to the FAQ relates to Characteristics and determining what constitutes performance under the marketing rule. The staff notes that whether a presentation of a Characteristic in an advertisement is subject to Rule 206(4)-1(d) depends on whether such Characteristic is performance; to the extent a Characteristic is not performance, the presentation of such Characteristic is not within the scope of Rule 206(4)-1(d).

The staff includes a disclaimer and avoids taking a position on whether any particular Characteristic or attribute should be considered performance for Rule 206(4)-1. However, the release clarifies that the staff's guidance has no application to total return, time weighted return, return on investment, internal rate of return, multiple on invested capital or total value to paid in capital, regardless of how such metrics are labelled in an advertisement. 

The publication states the staff will avoid recommending an enforcement action to the Commission if an adviser presents in an advertisement one or more gross Characteristics of a portfolio or investment, even without the corresponding net characteristics, if the below requirements are met:

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 marketing rule, requirements relating to performance in Rule 206(4)-1(d);
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 the entire period the Characteristic encompasses.

The staff notes that it views the above four requirements as applicable to Characteristics calculated based on the performance of a composite aggregation of related portfolios, a representative account, a subset of a portfolio (i.e., extracted performance) and a subset extracted from a composite aggregation of related portfolios.

Staff Guidance and Implementation of FAQ

Clear Identification of Gross Performance

The staff states an advertisement can satisfy the requirement to clearly identify the Extract Performance or Characteristic as gross performance calculated without the deduction of fees and expenses by including a disclosure of the same and referring the recipient to a presentation of the total portfolio’s gross and net performance to understand the effect of fees.

Presentation of Portfolio Gross and Net Performance with Equal Prominence to Extract or Characteristic

The publication explains that when an investment adviser prominently displays the gross and net performance of the total portfolio related to the Extract Performance or Characteristic, calculated pursuant to the marketing rule and presented in a straightforward manner with appropriate disclosures in accordance with the applicable four requirements, there is little risk presenting the gross performance will confuse prospective investors. The staff noted that presenting in an advertisement the gross and net performance of the total portfolio on the page prior to the Extract Performance or Characteristic can facilitate comparisons and satisfy the equal prominence requirement.

In calculating gross and net performance over the relevant period, the staff acknowledged that because the time periods applicable to the Extract Performance or Characteristic may lack alignment with the time periods required by Rule 206(4)-1(d)(2), no enforcement action will be recommended if the Extract Performance or Characteristic is calculated over a single, clearly disclosed period and presented in alignment with the applicable four requirements. 

The release reminds investment advisers that in each case other than a private fund, Rule 206(4)-1(d)(2) requires advertisements with gross and net portfolio performance to present such information over one, five and ten year periods, each with equal prominence and ending on a date no less recent than the last calendar year end, unless a portfolio existed for less than the prescribed periods, in which case the advertisement must include gross and net performance for the life of the portfolio.

If you have any questions on the above guidance related to the Advisers Act or any other securities regulations matters, please contact one of the authors. Manatt, Phelps & Phillips, LLP provides clients with valuable expertise in the financial and securities industries, with a world class legal practice serving issuers and financial institutions across a variety of sectors and countries. Our financial services and capital markets practice group consistently works with clients and regulatory authorities to navigate and ensure compliance with applicable regulations and meet our clients’ objectives.