SEC Updates Marketing Rule Guidance, Easing Restrictions on Advertising Performance

The U.S. Securities and Exchange Commission released new guidance on the adviser marketing rule, specifically easing restrictions on the investment performance aspects of the rule, within its Marketing Compliance Frequently Asked Questions document/webpage.

Prepared by the staff of the Division of Investment Management, the FAQ addresses questions related to the adoption of amendments to Rule 206(4)-1 under the Investment Advisers Act of 1940 in December 2020.

The Marketing Rule, adopted in 2021 and effective since late 2022, allows registered investment advisers to use client testimonials in advertisements. The rule also shares parameters for how RIAs can advertise investment performance. For instance, the rule forbids firms from advertising gross performance without also including context on net performance after fees.

From the FAQ, the update on gross and net performance and extracted performance states that “when an adviser prominently displays the gross and net performance of the total portfolio from which an extract was extracted, calculated pursuant to the requirements of the marketing rule and presented in a manner that is not otherwise materially misleading, and appropriate information accompanies the gross performance of the extract, there is little risk that presenting only the gross performance of an extract will be misleading.”

In this case, according to the FAQ, staff doesn’t recommend the SEC take enforcement action under rule 206(4)-1(d)(1) if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, if the:

• Extracted performance is clearly identified as gross performance;
• Extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
• 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 extracted performance; and
• 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 staff further states in the FAQ that because the time periods over which extracts are calculated may not easily align with the time periods required by Rule 206(4)-1(d)(2), it wouldn’t recommend SEC enforcement action under Rule 206(4)-1(d)(2) if the extracted performance presented was calculated over a single, clearly disclosed period.

Another FAQ update focuses on portfolio/investment characteristics, specifically whether characteristics are considered “performance” under the marketing rule.

The question specifically states: “If such characteristics are performance, would the staff recommend enforcement action if an adviser displays characteristics calculated without reflecting the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio(s) (‘gross characteristics’), without also showing the corresponding characteristics calculated after the deduction of all fees and expenses (‘net characteristics’)?”

Recognizing that advisers may be unsure whether certain characteristics like yield, contribution to return, the Sharpe ratio, the Sortino ratio, and other similar metrics are “performance,” the staff notes that calculating these characteristics net of fees and expenses may be impossible or lead to misleading or confusing results.

The staff goes on to state that when an adviser prominently displays the gross and net performance of the total portfolio calculated, presents in a manner that is not otherwise materially misleading and provides information about the characteristic and how it is calculated, there is “little risk that prospective clients and prospective investors will be misled about the impact of fees and expenses on their returns.”

Staff then listed additional parameters for when it wouldn’t recommend SEC enforcement, easing restrictions of the Marketing Rule.

As previously reported by AltsWire in fall 2024, the SEC settled charges against nine RIAs for violating the Marketing Rule by disseminating advertisements that included untrue or unsubstantiated statements of material fact or testimonials, endorsements, or third-party ratings that lacked required disclosures. All nine firms agreed to settle the SEC’s charges and pay $1.24 million in combined civil penalties.

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