On **March 19, 2025**, the Securities and Exchange Commission (SEC) took a significant step forward by updating its **Marketing Compliance FAQs**. This update aims to clear the air for investment advisers, particularly those dealing with private funds, amid the complexities of the recently adopted **Marketing Rule** (amendments to Rule 206(4)-1 under the Investment Advisers Act of 1940) that came into effect in Dec 2020. The new guidelines focus specifically on two critical areas: **extracted performance** and **portfolio characteristics and risk metrics**. Let’s delve deeper into this updated guidance and its implications for advisers.
Understanding the **Background**
The landscape of investment advertising has been vastly transformed since the **Marketing Rule** was adopted back in 2020. Initially championed by former SEC chairman **Jay Clayton**, the intention was to modernize antiquated advertising practices that had hardly evolved, despite the seismic shifts in our financial markets and technology. Clayton expressed, “The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades.” His aim was straightforward: to enhance the quality of information accessible to investors.
After Clayton’s tenure, current SEC Chair **Gary Gensler** has published several FAQs to guide investment advisers through these changes. Significant industry upheaval occurred with the **January 2023** guidance, which mandated fund managers to disclose both **net** and **gross performance**, even for individual investments presented in what is often referred to as “case studies.” This further complicated things for private fund advisers, amplifying the need for clearer regulations.
The **Updated Guidance**: A Breath of Fresh Air
Fortunately, the SEC’s newly released FAQs provide clarity on prior advertising ambiguities related to **investment performance**.
Extracted Performance
Investment advisers can now promote the gross performance of **individual investments** (known as **extracted performance**) under certain conditions. Here’s what to keep in mind:
- The gross extracted performance must be **clearly identified** as such;
- This performance must be accompanied by the **total portfolio’s gross and net performance**, highlighting fees’ impact;
- The overall portfolio performance must receive **equal prominence** and be presented in a way that facilitates easy comparison with the extracted performance;
This update is a game changer, allowing advisers to showcase extracted performance without the prior requirement of presenting it alongside net figures.
Portfolio Characteristics
The updated guidance also permits advisers to advertise certain portfolio characteristics and **risk metrics** using gross figures without having to include corresponding net characteristics, provided the following criteria are met:
- The gross characteristic must be **clearly labeled** as calculated without deducting fees and expenses;
- It must be presented alongside the **total portfolio’s gross and net performance**, as required;
- Again, gross and net performance must be shown with **equal prominence**;
- The performance metrics must be calculated over the same period as the characteristic.
The FAQ highlights that “portfolio or investment characteristics” can encompass a myriad of information, making it tricky for advisers to determine what’s considered a “performance” metric. While the SEC refrained from classifying specific attributes as performance metrics, they confirmed that any characteristics not deemed performance-related would fall outside the Marketing Rule’s purview.
What Does This Mean for **Private Fund Advisers**?
Private fund advisers stand to gain significantly from these updates, having the flexibility to showcase extracted performance tied to a fund—such as an individual portfolio company investment—on a gross basis, as long as they adhere to the above-mentioned conditions. This allows for a more engaging presentation of data that may resonate better with investors.
It’s worth noting that the **“equal prominence”** language does not strictly require that portfolio performance be displayed side-by-side with extracted performance. In practice, it’s sufficient for advisers to present overall portfolio performance immediately before the extracted information—avoiding a placement at the end of the presentation.
**Conclusion**: A Step Towards Industry Engagement
The SEC’s updates to the **Marketing Rule guidance** offer advisers newfound latitude in advertising performance. More importantly, these changes signal a **potential shift** in the SEC’s approach, indicating their willingness to engage with industry feedback. This has been a much-anticipated relief for advisers grappling with uncertainties regarding compliance since the rule’s initial implementation in 2020.
[1] Press Release: SEC Adopts Modernized Marketing Rule for Investment Advisers, (Dec. 2020).
[2] Marketing Compliance Frequently Asked Questions, (Mar. 2025).
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
