SEC Updates Marketing Rule Guidance

On March 19, 2025, the SEC made two significant updates to the Marketing Rule's FAQ page. DWT discussed the SEC's recently adopted Marketing Rule (Rule 206(4)-1 under the Investment Advisers Act of 1940) in our 2024 post, and now the SEC has provided new guidance on compliance with the Marketing Rule related to the use of performance data in marketing materials.

The first updated FAQ concerns the use of "extracted" performance in advertisements displaying the performance of one investment or a group of investments in a private fund or other portfolio. In the plain language reading of the Marketing Rule, if an adviser shows the gross performance of an extract in an advertisement, the rule requires the adviser to also show the net performance of such extract in the advertisement. This has caused significant pushback from the industry because it severely limited an adviser's ability to use extracted performance. This FAQ update addressed that friction. Specifically, the FAQ suggests that staff will not recommend enforcement action to the SEC if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, if:

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 consistent with the requirements of the rule;
   
   
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, 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. See Marketing Rule FAQ available here.

The second update related to the very concept of whether certain portfolio or investment characteristics would be considered performance under the Marketing Rule. Even before the final adoption of the Marketing Rule, industry participants have been unsure whether certain "gross characteristics" (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics) would be considered "performance" under the rule and therefore subject to the disclosure requirements. A significant concern was that even if such calculations could be made net of fees and expenses it could be impossible to accurately calculate, which would lead to misleading or confusing results, frustrating the purpose of the Marketing Rule. To address this, the SEC staff's position is that, "when an adviser prominently displays the gross and net performance of the total portfolio, calculated pursuant to the requirements of the marketing rule and presented in a manner that is not otherwise materially misleading, and provides appropriate accompanying information about the characteristic and how it is calculated, there is little risk that prospective clients and prospective investors will be misled about the impact of fees and expenses on their returns when viewing such a characteristic." See Marketing Rule FAQ available here.

The FAQ provides that the staff would not recommend enforcement action against an adviser who presents in an advertisement one or more gross characteristics of a portfolio or investment, even if the adviser does not include the corresponding net characteristic(s), if:

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 requirements of the rule;
   
   
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 characteristic is calculated.

The updated guidance to the Marketing Rule has been highly anticipated as we move further away from the 2022 compliance date. The SEC's staff expects advisers to be fully in compliance with the Marketing Rule and have appropriately tailored policies and procedures to address their marketing practices. Advisers should be aware of staff expectations and should use the FAQ as guidance when developing marketing materials even though the FAQ does not alter or amend applicable law. For more information, reach out to DWT's securities regulatory team today.