SEC Issues New FAQ on Marketing Rule

On Dec. 22, 2020, the Securities and Exchange Commission (SEC) announced amendments to the then-current advertising rule (Rule 206(4)-1) and cash solicitation rule (Rule 206(4)-3) under the Investment Advisers Act of 1940. The amendments unified the advertising and cash solicitation rules into the new single Rule 206(4)-1 (Marketing Rule).^[1] Since the Marketing Rule’s adoption, the SEC has issued very little in the way of interpretive guidance. However, on Jan. 11, the SEC updated its Marketing Rule FAQs with respect to the Marketing Rule’s requirement to include both gross and net performance in “advertisements.” Fund managers should carefully consider whether their marketing materials need to be updated as a result.

One of the Marketing Rule’s requirements is that any advertisement that includes gross performance must also include net performance (i) with equal prominence and in a format designed to facilitate comparison with the gross performance and (ii) calculated over the same time period and using the same type of methodology as used for the gross performance. Prior to issuance of the new FAQ, the prevailing view in the industry was that this requirement would only mandate the inclusion of net performance of the portfolio as a whole, and not each time a particular position or investment was presented. However, the new FAQ applies the net performance requirement to any presentation of the gross performance of a single investment or group of investments.^[2]

In light of this update, fund managers wishing to present the gross performance of any particular investments or groups of investments in their marketing materials will need to also calculate and provide the net performance of such investments. For instance, each time a case study is presented that includes gross investment performance, the net performance of that case study would have to be presented. However, neither the Marketing Rule nor any SEC guidance as of yet addresses how net performance should be calculated for these purposes. For example, it is unclear how particular items such as the carried interest should be allocated between each investment in a fund, which will have a significant effect on the resulting net performance.

We are available to address this new Marketing Rule development. The updated Marketing Rule FAQs can be found here: SEC.gov | Marketing Compliance Frequently Asked Questions. 

^[1] _{The compliance date for the Marketing Rule was Nov. 4, 2022.}

^[2] _{The new FAQ indicates that any such presentation would be an example of “extracted performance” under the Marketing Rule and would thus be subject to the net performance requirement.}