Unveiling the SEC’s New Marketing Rule FAQs: A Game Changer for Investment Advisers
The financial landscape is always evolving, and on March 19, 2025, the SEC’s Division of Investment Management added a significant twist to the narrative by releasing two pivotal FAQs regarding Rule 206(4)-1 of the Investment Advisers Act of 1940. These updates promise to simplify and modernize the presentation of marketing materials for investment advisers.
Key Takeaways from the SEC FAQs
- With the new FAQs, advertising can now highlight **performance metrics** on a gross basis without the typically required net information for certain individual investments and selected portfolio characteristics.
- Investment advisers can implement this newfound flexibility **immediately**, provided compliance with key disclosures.
- This shift marks a proactive approach from the SEC, showcasing a willingness to reduce **regulatory burdens** and engage more effectively with industry professionals.
Breaking Down the Extracted Performance FAQ
The first of the two new FAQs centers around the compliance aspect of presenting performance metrics. Previously, advisers were bound by strict guidelines regarding gross and net performance metrics for both isolated investments and the overall portfolio performance. However, the SEC Staff’s latest guidance now permits investment advisers to advertise the gross performance of an extract without including the corresponding net performance, as long as specific conditions are satisfied:
- The extracted performance clearly states it is calculated on a **gross basis**, meaning it does not deduct fees and expenses.
- Accompany the extracted performance with the total portfolio’s **gross and net performance** to maintain compliance with the Rule.
- Ensure that the total portfolio’s gross and net performance is presented prominently; the SEC suggests showing this information **before** the extracted performance in marketing materials to enhance comparison.
- Calculate the gross and net performance over the entire period for which the extracted performance is reported.
Moreover, the SEC has indicated that they will not pursue enforcement action for this extracted performance if it covers a single, clearly disclosed period rather than the typical one, five, or ten-year intervals usually mandated by the Rule. This reversal is particularly welcome news for private fund managers who have often faced hurdles when aiming to demonstrate specific fund investments through case studies.
Diving Into the Portfolio Characteristics FAQ
The second FAQ takes a closer look at how the gross and net performance requirements apply to various portfolio characteristics—think yield, volatility, Sharpe ratio, and other metrics that are performance-adjacent. Given the absence of a clear definition of "performance" in the Rule, investment advisers have often played it safe and either presented these characteristics using both gross and net metrics or entirely avoided their inclusion.
Now, thanks to the new FAQ, investment advisers have the option to promote these characteristics on a gross basis without needing to calculate or present the corresponding net performance, provided they adhere to certain disclosure conditions that are closely related to those outlined in the first FAQ.
However, it’s crucial to note that this flexibility does not extend to core performance metrics such as total return and return on investment (ROI). The SEC continues to classify these metrics as fundamental performance data, thus maintaining the traditional compliance requirements.
Conclusion: Embrace the Change!
The revisions in these new FAQs underscore a significant shift in the SEC’s stance—one that reflects a commitment to collaborate with the investment community while easing burdens viewed as unnecessary. This could be a game-changer for investment advisers wishing to utilize their marketing strategies more effectively.
For advisers ready to harness this flexibility, meticulous attention to the FAQs’ specific conditions is essential. This includes ensuring that all disclosures are intact and that advertising adheres to the overarching requirement for presenting performance fairly and without omission of critical material facts. As the financial marketing landscape continues to evolve, it’s time for investment advisers to update their Marketing Rule policies and procedures to align with these new directives.
To further delve into the SEC’s guidelines, explore the Marketing Compliance Frequently Asked Questions, where you can find additional insights and updates that can empower your marketing strategies.
