Unpacking the SEC’s Latest Updates on the Marketing Rule: New Performance Presentation Flexibility
On March 19, 2025, the Securities and Exchange Commission (SEC) rolled out significant changes to its FAQ page regarding Rule 206(4)-1, commonly referred to as the Marketing Rule under the Investment Advisers Act of 1940. This update is packed with fresh insights that grant investment advisers more freedom in how they present performance data, particularly the extraction of performance for a single investment within a portfolio. Let’s dive deeper into these pivotal changes and unpack what they mean for the marketing strategies of investment advisers.
The Shift in Performance Presentation
New Guidelines for Extracted Performance
The SEC’s updated guidelines significantly shift the narrative around presenting extracted performance data. Traditionally, the marketing rules imposed strict requirements to display both gross and net performance metrics together. However, the latest FAQ update introduces a notable flexibility, allowing advisers to showcase the gross performance of a single investment without mandating the inclusion of corresponding net-of-fee data—provided that net performance for the entire portfolio is also properly displayed within the same advertisement.
This means that advisers can now highlight standout performances of individual investments by presenting their gross performance more prominently, making it easier to catch the eye of prospective clients.
Conditions for Presenting Gross Performance
While this new freedom is exciting, there are clearly defined conditions that must be met to avoid any regulatory issues:
- Transparency: The gross performance of the extract must be explicitly labeled as such and should include a disclaimer noting that this performance does not account for all applicable fees and expenses.
- Portfolio Context: The advertisement must also feature the total portfolio’s gross and net performance in a manner that allows for easy comparison. Visual consistency and prominence are key.
- Comprehensive Timeframes: The gross and net performance of the total portfolio should be calculated over the same period as the extract to ensure accuracy and transparency.
This structured approach ensures that while advisers can be more flexible in their marketing strategies, they still maintain a commitment to ethical advertising practices.
Performance Metrics: Addressing Investment Characteristics
The SEC’s Clarification on Performance Characteristics
The updated guidance extends beyond just extracted performance data and tackles lingering confusion surrounding specific investment characteristics—including yield, sortino ratio, and volatility. The SEC recognizes that calculating these metrics on a net-of-fee basis might not only be impractical but could lead to results that are potentially misleading.
To mitigate these challenges, the SEC allows for the presentation of investment characteristics on a gross basis without the need to accompany them with net computations, provided that appropriate disclosures about how these metrics are calculated are included. This means advisers can present appealing characteristics of their investments without the complexity of net-of-fee calculations, again as long as they comply with the rules regarding total portfolio performance presentation.
Key Precepts for Displaying Characteristics
When presenting these characteristics, advisers should be mindful of the following factors to ensure compliance:
- Clear Identification: Each characteristic should be clearly stated as gross, with disclosures about how it has been calculated.
- Portfolio Performance: Include a presentation of the total portfolio’s performance that complies with the Marketing Rule.
- Comparative Prominence: Ensure that the gross and net performance data is at least as prominent as the characteristic being presented.
What This Means for Investment Advisers
These revisions from the SEC have opened the doors to a more dynamic marketing landscape for investment advisers. By allowing advisers to tailor their presentations of both extracted performance and investment characteristics, the SEC fosters a more nuanced approach to performance marketing.
Are you ready to leverage these changes to enhance your marketing strategy? Ensuring compliance with the updated Marketing Rule doesn’t have to be daunting. For more information on navigating these new regulations effectively, consider connecting with experts in investment compliance.
Conclusion
As the investment landscape evolves, so too do the rules governing it. The SEC’s latest FAQ updates signify a significant pivot towards flexibility and clarity in the performance presentation. By understanding and embracing these adjustments, investment advisers can enhance their promotional strategies while maintaining trust and transparency with their clients.
For ongoing guidance and support regarding compliance with these rules, don’t hesitate to reach out to legal experts or compliance teams. Let’s navigate this new era of investment marketing together!
