Washington D.C. – In a move welcomed by many in the investment advisory industry,the Securities and Exchange Commission (SEC) updated its Marketing Compliance Frequently Asked Questions (FAQs) on March 19, 2025. These updates address lingering ambiguities surrounding the presentation of performance data under Rule 206(4)-1 of the Investment advisers Act of 1940, commonly known as the Marketing Rule. Specifically, the new guidance clarifies when advisers can present extracted performance and certain non-performance metrics on a gross basis, without the previously required net performance figures.

The SECS Division of Investment Management (the Division) acknowledged the challenges firms faced in calculating net performance in certain scenarios, where the inclusion of net performance didn’t provide practical benefits for investors due to necessary assumptions. the updated FAQs offer a more practical approach, providing much-needed clarity on what constitutes acceptable marketing practices.

Decoding the new FAQs: What Investment Advisers Need to Know

The updated FAQs tackle two critical areas:

1. Extracted Performance: This refers to showcasing the performance of a specific investment or a select group of investments within a larger portfolio.
2. Performance-Related Characteristics: This includes metrics like yield, coupon rate, volatility, Sharpe ratio, and sector or geographic returns.

Previously,displaying gross performance for individual investments mandated the inclusion of corresponding net performance figures. Now, under specific conditions, the Division has indicated it “woudl not recommend enforcement action” if an adviser presents extracted performance on a gross basis without net figures.

These conditions include:

1. Clearly identifying the extracted performance as “gross performance.”
2. presenting the total portfolio’s gross and net performance in accordance with the Marketing Rule.
3. Ensuring the total portfolio’s performance is displayed with at least equal prominence and in a manner facilitating comparison with the extracted performance.
4. Calculating the total portfolio’s performance over a period encompassing the entire duration of the extracted performance calculation.

Similarly, when presenting portfolio or investment characteristics, the Division will not recommend enforcement action if the gross characteristic is displayed without its net counterpart, provided that:

1. The gross characteristic is clearly identified as calculated without deducting 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.
3. The total portfolio’s performance is presented with at least equal prominence to, and in a manner allowing for comparison with, the gross characteristic.
4. The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated.

The SEC also recognized potential difficulties in aligning performance calculation periods. Consequently, the Division “would not recommend enforcement action” if the facts is calculated over a single, clearly disclosed period.

A Shift in Stance: Implications for Investment Advisers

the updated FAQs represent a notable shift from previous SEC guidance. In January 2023, the Division, under the leadership of Gary Gensler, took a stricter stance, considering any subset of a portfolio’s performance as “extracted performance” subject to the gross-net presentation requirement. This created considerable challenges for advisers, notably in determining how to allocate fees and expenses to individual investments.

This change also reflects broader shifts in priorities within the SEC. The current approach emphasizes practicality and investor understanding, moving away from perhaps burdensome requirements that might not yield meaningful information. The Division has not taken a position on what performance-related characteristics are considered “performance” under the Marketing Rule. Rather, the FAQ allows investment advisers to show total gross and net performance without having to determine whether the use of the characteristic would qualify as “performance” under the rule.

Compliance is Still King: A Word of Caution

While the updated FAQs offer welcome flexibility, compliance remains paramount. Investment advisers should not interpret this guidance as a license to become lax in thier adherence to the Marketing Rule and other applicable regulations.

As the SEC made clear, advisers are urged not to become lax in their efforts to ensure compliance with the Marketing Rule and other applicable rules and regulations as the SEC’s Examinations and Enforcement staff will continue to keep “a close eye on what such regulated entities are doing to comply with the law and discharge their fiduciary duties to clients.”.

The SEC’s Examination and Enforcement divisions will continue to scrutinize firms’ marketing practices to ensure they comply with the law and uphold their fiduciary duties to clients. Firms should carefully review their marketing materials and procedures to align with the updated guidance and maintain a robust compliance program.

Practical Applications: Real-World Scenarios

Imagine a hypothetical scenario: a registered investment adviser (RIA) wants to highlight the impressive performance of a specific tech stock within a client’s portfolio. Under the previous guidance, the RIA would have needed to calculate and present the net performance of that single stock—a task frequently enough fraught with complexity and subjective allocation decisions.

Now, the RIA can showcase the gross performance of the tech stock, provided they clearly label it as such and present the client’s overall portfolio performance (both gross and net) with equal or greater prominence. This allows the RIA to highlight prosperous investments without getting bogged down in potentially misleading net performance calculations for individual holdings.

Addressing Potential Counterarguments

Some critics might argue that allowing the presentation of gross performance without net figures coudl mislead investors, potentially creating a false impression of investment success. However, the SEC’s conditions—particularly the requirement to prominently display overall portfolio performance—are designed to mitigate this risk. By providing a clear picture of the portfolio’s total returns,investors can make informed decisions based on complete information.

Moreover, requiring net performance for extracted investments could, in certain specific cases, lead to arbitrary or misleading results due to the difficulty of accurately allocating fees and expenses. The new guidance acknowledges this reality and seeks to strike a balance between clarity and practicality.