April 9, 2025

Good news!  On March 19, 2025 the SEC published 2 new Frequently Asked Questions that address presentation of performance in advertisements.  These FAQs address two issues that have been causing headaches for Marketing Departments and compliance professionals since the Marketing Rule was adopted – presentation of performance for a single investment or an extract of a portfolio (“Extracted Performance”) and use of investment or portfolio characteristics or metrics (“Characteristics”).  We summarize each of these FAQs below and offer some thoughts on how advisers can leverage this guidance and update their compliance programs.

Gross Extracted Performance
Generally, the Marketing Rule requires that anytime gross performance is presented in an advertisement, net performance must also be presented with at least equal prominence and in a format designed to facilitate comparison.  The SEC reiterated in a January 11, 2023 FAQ that this requirement applied to Extracted Performance, including the performance of a single investment (e.g., a case study).  As a result of this 2023 FAQ, advisers had to get creative in some instances on how to calculate or estimate net performance of an extract or an individual security and the resulting net performance did not always result in meaningful information to prospective clients or fund investors.

The March 19, 2025 FAQ reverses the SEC’s position on how the gross and net performance requirements apply to Extracted Performance.  Under the new guidance, advisers may utilize gross Extracted Performance without also showing the corresponding net Extracted Performance if the following conditions are met:

• The Extracted Performance is clearly identified as gross performance;
• The Extracted Performance is accompanied by a presentation of the total portfolio’s gross and net performance, presented in compliance with the Marketing Rule.  This requirement serves to allow the reader of the advertisement to understand the impact of fees on performance;
• The total portfolio gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the Extracted Performance; and
• The total portfolio gross and net performance is calculated over a period that includes the entire period over which the Extracted Performance is calculated.

Additionally, if the conditions of the FAQ are met, Extracted Performance is not required to be presented for the prescribed one-year, five-year and ten-year time periods (“prescribed time periods”).

Given that the Marketing Rule already requires an advertisement to provide (or offer to provide) the performance of the entire portfolio as a condition of using Extracted Performance, many advisers are likely already presenting much of the above information in their advertisements which makes compliance with the conditions of the FAQ straightforward and easy to accomplish.

Notably, the FAQ makes it clear that the total portfolio gross and net performance does not need to be presented on the same page as the Extracted Performance to meet the prominence standard.  The FAQ suggests that presenting the total portfolio performance before the Extracted Performance would meet the prominence condition, which implies that burying the total portfolio performance in an appendix is not permissible.  The same applies to the prominence requirement for Characteristics shown below.

Gross Investment or Portfolio Characteristics
An issue that has been frustrating to advisers is whether certain characteristics or risk metrics (e.g., yield, coupon rate, contribution to return, volatility, sector or geographical returns, attribution analyses, Sharpe ratio, Sortino ratio) are considered measures of performance and therefore subject to the performance reporting requirement of the Marketing Rule.  The Marketing Rule does not define “performance” and SEC has been reluctant to provide clear guidance on whether various Characteristics are performance.  In issuing this new FAQ, the SEC remains reluctant to do so, but did provide advisers with a means to remain compliant regardless of whether a Characteristic is classified as performance.  Under the FAQ, if an adviser either determines a Characteristic is a measure of performance or is unsure whether to do so, it can utilize the conditions of the FAQ to comply with the Marketing Rule.

The FAQ allows advisers to present Characteristics on a gross basis without also showing the net Characteristic if the following conditions are met (which are very similar to the conditions for using gross Extracted Performance):

• The gross Characteristic is clearly identified having been calculated without the deduction of fees and expenses;
• The gross Characteristic is accompanied by a presentation of the total portfolio’s gross and net performance, presented in compliance with the Marketing Rule. 
• The total portfolio 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
• The total portfolio gross and net performance is calculated over a period that includes the entire period over which the Characteristic is calculated.

Similar to above, if the conditions of the FAQ are met, the Characteristic is not required to be presented for the prescribed time periods.

It is important to note that this FAQ is not applicable to calculations that are clearly “performance” under the rule such as total return, time-weighted return, ROI, IRR, MOIC and total value to paid in capital.  It is also important to note that meeting the conditions of this FAQ is not an obligation anytime a Characteristic is used.  If an adviser determines that a Characteristic is not a measure of performance, the Characteristic can be presented on a gross basis without meeting the conditions of the FAQ.  However, if there is sufficient ambiguity or an adviser wants to be conservative, applying the FAQ can serve as a straightforward way to ensure compliance.

The publication of these FAQs should relieve advisers from a few of the most challenging Marketing Rule implementation issues.  If you have any questions on how to update your compliance programs or apply these FAQs to the specific advertisements your firm is utilizing, please reach out!