SEC Staff Issues New Marketing Rule FAQs

Key Takeaways:

• On March 19, 2025, the staff of the SEC’s Division of Investment Management issued two new FAQs related to Rule 206(4)-1 under the Investment Advisers Act of 1940 (the “Rule”). The new guidance reduces the complexity of the Rule’s general requirement to present performance information on both a gross and net basis when marketing: (1) the performance of individual investments or a subset of investments extracted from a fund or portfolio, and (2) certain portfolio or fund characteristics like yield, Sharpe ratio, and other metrics.[1] The new FAQs also provide related relief from the Rule’s “time period” requirement under Rule 206(4)-1(d)(2).
• The new FAQs reverse certain prior positions taken by the SEC Staff and allow advisers to implement the new flexibility effective immediately, provided care is taken to include key disclosures and comply with the other conditions of the FAQs. Investment advisers should review their existing marketing policies and procedures and update them as necessary to reflect the new FAQs.
• The new FAQs reflect a recent shift in approach by the SEC Staff and certain SEC Commissioners to identify opportunities to lessen regulatory burdens for investment advisers and other registrants. Members of the SEC Staff have recently made efforts to invite industry participants to engage with them in discussions of other regulatory and compliance pain points, particularly if doing so will facilitate the development of innovative products and services that met with resistance under the SEC’s prior leadership.

Extracted Performance FAQ

The first new FAQ relates to compliance with the Rule’s requirement to present performance metrics on both a gross and net basis. Prior guidance from the Staff suggested that the gross and net requirement applied to the presentation of the performance of a single investment or subset of investments extracted from a fund or portfolio (an “extract”).[2] The Staff now takes the position that investment advisers may advertise gross performance of an extract without including corresponding net performance, provided that the following conditions are met:

1. The extracted performance is clearly identified as being calculated on a gross basis, without the deduction of fees and expenses.
2. The extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance, consistent with the requirements of the Rule.
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 extracted performance. The Staff states that this could be accomplished by, for example, presenting the gross and net performance of the total portfolio prior to the extracted performance in the relevant marketing materials.[3]
4. The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance is calculated.

The SEC Staff also takes the position it would not recommend enforcement action to the SEC under Rule 206(4)-1(d)(2) if the extracted performance presented as described above is calculated over a single, clearly disclosed period, rather than over the one-, five-, and ten-year periods generally required by the Rule.

This reversal is a welcome change of the prior Staff position that has frustrated investment advisers seeking to comply with the Rule—in particular, private fund managers that commonly presented “case studies” of specific fund investments in marketing materials. Calculating net performance in the context of a case study or other extracted performance examples created challenges for these investment advisers, as it was not clear how the fees and expenses should be applied to a single investment, which resulted in inconsistent (and potentially non-compliant) practices.

Portfolio Characteristics FAQ

The second FAQ addresses how the Rule’s gross and net performance requirement applies to certain fund or portfolio characteristics that resemble or relate to performance (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics). Because the Rule does not define “performance,” it was not previously clear whether the Rule’s requirement to present gross and net performance and certain other performance conditions applied to these characteristics. Many investment advisers therefore took a conservative approach—in part due to cautionary statements by certain SEC Staff members—and attempted to present these characteristics on a gross and net basis or avoided presenting these performance characteristics altogether. Notably, investment advisers that sought to present attribution analyses, which is a useful method to identify and convey the sources of excess returns in a portfolio, struggled to apply the Rule’s gross and net requirement to those analyses.

The second new FAQ clarifies that investment advisers may advertise these performance characteristics on a gross basis without the need to calculate and present corresponding net performance, provided that disclosure conditions are met that are similar to those identified above as to the first FAQ. Like the first new FAQ noted above, the SEC Staff also takes the position it would not recommend enforcement action to the SEC under Rule 206(4)-1(d)(2) if the characteristic presented as described above is calculated over a single, clearly disclosed period, rather than over the one-, five-, and ten-year periods generally required by the Rule.

A key factor to note is that the Staff stated that the flexibility outlined in this new FAQ does not extend to total return, time-weighted return, return on investment (ROI), internal rate of return (IRR), multiple on invested capital (MOIC), or total value to paid in capital (TVPI), implying that the SEC Staff views such data as “performance.”[4]

Conclusion

These new FAQs appear to have been motivated by a new willingness within the SEC Staff to actively identify opportunities to engage with the industry and provide helpful guidance to mitigate or reverse prior Staff positions, if doing so will alleviate regulatory and compliance burdens now considered unnecessary.

Investment advisers seeking to take advantage of the newfound flexibility should comply with the specific conditions of the FAQs, include all necessary disclosures in relevant advertisements, and, of course, comply with the Rule’s general requirement to present performance in a fair and balanced manner and to avoid omitting to state certain material facts. Investment advisers that seek to rely on the FAQs should also consider appropriate updates to their Marketing Rule policies and procedures.

[1] See Marketing Compliance Frequently Asked Questions, SEC Division of Investment Management Staff (updated Mar. 19, 2025).

[2] The Rule defines “extracted performance” as the performance results of a subset of investments extracted from a portfolio. See Rule 206(4)-1(e)(6) under the Advisers Act. The FAQ notes that the position applies to the performance of an extract from a portfolio and an extract from a composite of all related portfolios. However, it does not appear that this FAQ applies to the presentation of composite performance more generally, i.e., investment advisers should continue to present composite performance on a gross and net basis in accordance with the Rule.

[3] See footnotes 6 and 11 of the Marketing Compliance Frequently Asked Questions. Note that the Rule applies this same “equal prominence” standard in other performance advertising conditions. Previously, the industry generally understood that this standard meant that the relevant information had to be presented side by side, in the same size font, and on the same page of the advertisement. It is not clear whether the Staff’s interpretation of the “equal prominence” standard in the new FAQ can be applied in other contexts, e.g., the presentation of gross and net performance more generally.

[4] Id.