Key Notes:
- The Securities and Exchange Commission (SEC) staff clarified that while extracted performance generally requires net performance alongside gross performance, advisers may present gross performance alone if specific conditions are met.
- For portfolio characteristics such as yield and volatility, advisers may present gross figures without net equivalents, provided they follow specific disclosure and comparison requirements.
- Although these FAQs offer some flexibility in specific situations, advertisements must still comply with the general prohibitions of Rule 206(4)-1 and Sections 206(1) and 206(2) of the Advisers Act.
Background
In March 2025, the SEC’s Division of Investment Management released updated responses to frequently asked questions (FAQs) on Rule 206(4)-1 under the Investment Advisers Act of 1940 (the Marketing Rule). Since the rule’s adoption in December 2020, investment advisers have faced ongoing challenges in determining compliance, particularly regarding using extracted performance and portfolio characteristics in advertisements. Many advisers have faced challenges in presenting this data in compliance with regulatory expectations while avoiding misleading disclosures. Ongoing uncertainty has made adherence to the rule complex and often frustrating. The latest FAQs provide much-needed clarity, offering practical insights into the SEC staff’s views and easing the compliance burden for advisers.
The SEC’s staff interpretations in these FAQs are not legally binding but are intended to assist advisers in navigating the complexities of the Marketing Rule. They do not impose new obligations or modify existing regulations or statutes.
Key Updates and Guidance from the 2025 FAQs
Extracted Performance
Updated March 19, 2025
The Marketing Rule generally requires advisers to present both gross and net performance when displaying extracted performance—i.e., the performance of a subset of investments from a portfolio. However, the SEC staff has provided additional flexibility in certain cases.
Q: When an adviser displays the gross performance of one investment or a group of investments from a private fund or other portfolio, must the adviser show the net performance of such single investment or group of investments?
A: Yes, extracted performance is subject to the Marketing Rule’s requirements. However, the SEC staff stated they would not recommend enforcement action if an adviser presented only gross extracted performance, provided that:
- The extracted performance is clearly identified as gross performance.
- The advertisement includes the total portfolio’s gross and net performance, in accordance with the rule.
- The total portfolio’s performance is displayed with equal prominence to facilitate comparison.
- The total portfolio’s performance is calculated over a period that aligns with the extracted performance.
Since the time periods for extracted and total portfolio performance may not always align with Rule 206(4)-1(d)(2), the SEC staff indicated they would not recommend enforcement action if the extracted performance is based on a clearly disclosed period.
Advertisements featuring extracted performance remain subject to the general prohibitions of Rule 206(4)-1(a) and Sections 206(1) and 206(2) of the Advisers Act.
Portfolio or Investment Characteristics
Updated March 19, 2025
Another area of uncertainty has been whether portfolio or characteristics such as yield, coupon rate, contribution to return, and volatility constitute "performance" under the Marketing Rule. The SEC staff acknowledges these challenges and has clarified how advisers may present such data in advertisements.
Q: If portfolio characteristics qualify as "performance" under the Marketing Rule, must advisers also show net equivalents in advertisements?
A: The SEC staff recognizes that calculating net versions of certain portfolio characteristics can be impractical or misleading. As a result, they stated they would not recommend enforcement action if an adviser presents gross characteristics without net equivalents, provided that:
- The gross characteristic is clearly identified as calculated without deducting fees and expenses.
- The advertisement includes the total portfolio’s gross and net performance and is consistent with the Marketing Rule.
- The total portfolio’s gross and net performance is presented with equal prominence for comparison.
- The total portfolio’s gross and net performance is calculated over a period that aligns with the period used for the characteristic.
As with extracted performance, if time periods for portfolio characteristics do not align with Rule 206(4)-1(d)(2), the SEC staff stated they would not recommend enforcement action if the characteristic is based on a clearly disclosed period.
Advertisements using portfolio characteristics in accordance with this guidance must still comply with the general prohibitions of Rule 206(4)-1(a) and Sections 206(1) and 206(2) of the Advisers Act.
Conclusion
The SEC’s 2025 Marketing Rule FAQs provide crucial guidance on extracted performance and portfolio characteristics—two complex areas of compliance for investment advisers. While the rule generally requires net performance to accompany gross performance, the SEC staff has clarified specific situations where flexibility is permitted, easing compliance burdens for advisers while maintaining transparency.
As regulatory interpretations evolve, the SEC may issue additional updates to address additional concerns or provide further clarification in the future. Advisers should stay informed and ensure their advertisements continue to meet the rule’s requirements.
This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. © 2025 THOMPSON HINE LLP. ALL RIGHTS RESERVED.
