FAQs on SEC Updates on Compliance with Marketing Rules – Viewing Gross and Net Performance | Seward & Kisell Law Firm

On January 11, 2023, the staff of the Investment Management Division of the Securities and Exchange Commission (the “Staff”) updated the Frequently Asked Questions (the “FAQ”) regarding compliance with Rule 206(4)-1 under the Investment Act. . Advisors Act 1940, as amended (“Marketing Rules”). Updated FAQ to address viewing gross and net performance.¹

question
The question posed asks whether an SEC-registered investment advisor (“advisor”) is required to present the net performance of a single investment, such as a case study or a group of investments. investment group.

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The FAQ indicates the staff’s belief that “representing the performance of one investment or group of investments in a private fund” constitutes extracted performance² Also, in such scenarios, advisors should view the net performance of an investment or investment group.

Under the Marketing Rules, Advisors are prohibited from presenting extracted performance in advertisements unless performance results for the entire portfolio from which performance is extracted are provided or immediately offered.³ The rationale behind this provision is for advisors to select only profitable investments to advertise from their portfolios, thus addressing the risk of misleading investors.^Four Extending this rationale, the staff expressed the view that advisors must provide net performance, in addition to gross performance, for advertisements of single investments or groups of investments.

Finally, the staff notes that when presenting abstracted performance, advisors are subject to a general prohibition against providing specific investment advice in a fair and balanced manner, as well as other tailored disclosure requirements​. ​and general prohibitions must be met.

¹ U.S. Securities and Exchange Commission, Marketing Compliance Frequently Asked Questions, https://www.sec.gov/investment/marketing-faq (January 11, 2023).

² By convention, extracted performance is defined as “the performance results of a subset of investments extracted from the portfolio”. Rule 206(4)-1(e)(6).

³ Recruitment Release, Investment Advisory Marketing, Section II.E.5. (p. 195), available at https://www.sec.gov/rules/final/2020/ia-5653.pdf.

^Four Ditto.

^Five SEC Adopts Investment Advisor Marketing Rule (December 23, 2020); SEC Adopts New Investment Advisor Marketing Rule (January 26, 2021); Advisor Advertising – Frequently Asked Questions About Marketing Rules (September 13, 2021) Day); New Marketing Rule: One month from the compliance date (October 4, 2022).