The SEC is considering releasing new guidance about its marketing rule to clarify when advisors must include net and gross performance in their advertisements.
SEC staff announced that they anticipate publishing two new marketing rules FAQs “in the near future” during the Investment Adviser Association’s compliance conference this week in Washington, D.C.
The information in the upcoming FAQ will try to allay “significant implementation challenges” the IAA has raised with SEC staff and revisit information included in a FAQ initially published in January 2023.
The marketing rule took effect in May 2021, with a compliance date in late 2022. The rule dictates how and when advisors can use testimonials and endorsements in advertising, and the kind of portfolio performance metrics firms can use to sell themselves and their services.
According to the IAA, the rule has continued to be a chief concern for compliance officers, and the commission’s enforcement division has brought numerous cases. Nine RIAs collectively paid $1.2 million to settle SEC accusations of ad rule violations last September.
Since the rule’s unveiling, the question of whether an advisor (particularly private fund advisers) must include both net and gross performance of investments has been of particular concern, and a 2023 FAQ intended to clarify the question.
In that FAQ, the SEC asserted that when an advisor displays the gross performance of a single investment or group of investments from a private fund, it must also prominently include the net performance (i.e. after fees) of that single investment or group of investments. When advisors report on performance results of a subset of investments extracted from a portfolio (what it calls “extracted performance”), advisors must report those results on a net basis alongside the gross performance of the total portfolio the investments came from.
The commission believed the rule addressed the risk “that advisers would present misleadingly selective profitable performance with the benefit of hindsight.”
However, according to the IAA, the updated guidance from the SEC will allow advisors to advertise the gross performance of an individual investment (as well as portfolio and investment characteristics) while showing the net and gross performance of the entire portfolio (as long as both types are “prominently” displayed in the advertisement).
According to the IAA, the updated guidance will also address issues “related to the presentation of yield, attribution and other portfolio and investment characteristics.”