SEC Marketing Rule FAQs Provide Relief to Investment Advisers Presenting Extracted Performance and Investment Characteristics

Introduction

On March 19, 2025, the U.S. Securities and Exchange Commission (“SEC”) staff posted two Frequently Asked Questions (“FAQs”) concerning the investment adviser Marketing Rule (Rule 206(4)-1), which are available here.  These FAQs provide flexibility and clarity to registered investment advisers regarding their obligations with respect to the presentation of certain performance metrics and investment characteristics.

FAQ regarding Gross Extracted Performance

The first March 2025 FAQ concerns the presentation of extracted performance, which, as defined in Rule 206(4)-1(e)(6), is the performance results of one or more investments that are a subset of a portfolio.  Pursuant to this FAQ, the SEC staff would not recommend an enforcement action if marketing material presents performance of an investment or investments extracted from a private fund on a gross basis (i.e., without deducting for fees and expenses) only, rather than  presenting the performance for the extracted investment or investments on both a gross and a net basis (i.e., after deducting all fees and expenses, including management fees and performance fees), subject to the following conditions: 

1. the extracted performance is clearly identified as gross performance;
2. the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance that is calculated and displayed in accordance with the Marketing Rule’s requirements; 
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,^[1] the extracted performance; and 
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. 

This FAQ means that registered investment advisers’ marketing materials may present only gross performance of a single investment or group of investments that is extracted from a particular fund so long as the materials also provide the net and gross performance of the entire fund (i.e., the “total portfolio”) in accordance with the FAQ’s conditions and the other applicable provisions of the Marketing Rule. This FAQ changes prior SEC staff guidance, from January 2023, which had the effect of requiring marketing materials that presented extracted performance on a gross basis – including for a single investment – to also present that extracted performance on a net basis.  This is relevant in particular to registered investment advisers who, prior to the January 2023 guidance, would often include “case studies” of certain investments in their marketing materials (along with a full list of all investments presented with gross and net returns) and found it problematic to fairly attribute a net internal rate of return (“IRR”) to particular investments in such case studies.

FAQ regarding Investment Characteristics

The second March 2025 FAQ provides that the SEC staff would not recommend an enforcement action if a registered investment adviser’s marketing materials present one or more gross investment characteristics – such as yield, volatility, or Sharpe ratios – of a private fund/portfolio without including the corresponding net characteristics, subject to the following conditions:

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’s requirements
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 a period that includes the entire period over which the calculation is calculated.

Importantly, a footnote of this FAQ states that this position does not apply to total return, time-weighted return, return on investment (“RoI”), IRR, multiple on invested capital (“MOIC”), and Total Value to Paid in Capital (“TVPI”).  These metrics remain subject to the performance advertising requirements of Rule 206(4)-1(d). 

Concluding Observations 

As a reminder, registered investment advisers that present extracted performance and/or investment characteristics in accordance with these FAQs remain subject to other Marketing Rule provisions, including the Rule’s general prohibitions (set forth in Rule 206(4)-1(a)) and, to the extent they are relevant, requirements related to hypothetical performance in Rules 206(4)-1(d)(6) and (e)(8).^[2] Because compliance with the Marketing Rule depends on the context and particular facts, we encourage registered investment advisers with questions about these FAQs or their marketing activities generally to confer with us.

These FAQs have meaningful ramifications for the Private Capital sector.  At the micro-level, these FAQs relieve registered investment advisers to private funds from the burden of determining net performance of extracted investments and net investment characteristics, which was time-consuming and entailed multiple factual assumptions, and facilitate the provision of useful information to investors.  More broadly, changes such as these to the SEC staff’s administration of the Marketing Rule, which Freshfields (and other market observers) foresaw, exemplify developments that have occurred or are likely to occur under new SEC leadership and are intended to increase capital formation. 

[1] A footnote in the FAQ states that this condition does not require that the gross and net performance of the total portfolio be displayed on the same page as the extracted performance.  Rather, displaying the total portfolio performance prior to the extracted performance could be sufficient, especially if the page with the extracted performance includes a cross-reference to the total portfolio’s performance.  This rationale applies as well to a similar condition of the staff FAQ regarding investment characteristics, which is also summarized in this post.

[2] This post focuses on these FAQs and the Marketing Rule with respect to private funds; marketing materials for separately managed accounts (“SMAs”) would also be subject to Rule 206(4)-1(d)(2), which requires performance to be presented for specified time periods.