Marketing Compliance: SEC Updates to FAQs
Since the Rule’s adoption, many advisers have struggled with how to properly apply the requirement to show net performance whenever performance is included. Without clear definitions of what constitutes “performance,” firms often took overly cautious or inconsistent approaches. The updates to the FAQs now offer a clearer path forward for these situations.
Investment Characteristics in Marketing
The SEC’s guidance discusses certain common portfolio or investment metrics often included in marketing content, such as yield, coupon rates, volatility, attribution data, Sharpe ratios, and sector or geographic returns.
Although the guidance does not definitively state whether these items qualify as “performance” under the Marketing Rule, it outlines the instances when presenting them on a gross-only basis would be acceptable. Specifically, enforcement action would not be recommended under Rule 206(4)-1(d)(1) if the following are true:
- the metrics are clearly labeled as not accounting for fees or expenses
- gross and net total returns for the portfolio are also shown and comply with the Rule’s presentation standards
- these portfolio-level returns are presented with equal visibility and in a format conducive to comparison with the gross characteristics
- the period covered by the portfolio performance matches that of the characteristics shown.
The FAQs also confirm that the time period for these metrics is not required to match the standard one, five, or ten-year intervals; advisers may use a single, clearly disclosed time frame.
Clarification on Extracted Performance
One of the more difficult aspects of the Marketing Rule has been how to address “extracted performance”, meaning the performance of individual investments or segments taken from a broader portfolio. Showing the results net of fees is often operationally challenging, especially when the performance doesn’t directly align with a fee structure.
The FAQs state that gross-only extracted performance may be shown under specific conditions, as long as the presentation also includes the portfolio’s total gross and net returns for the same time period. Under this framework, no enforcement action would be recommended if:
- extracted returns are clearly described as gross of fees
- they are presented alongside both gross and net total performance of the portfolio
- the gross and net figures are given equal prominence and are laid out in a way that allows for straightforward comparison
- the same clearly disclosed time period is used for both sets of data.
This clarification is intended to remove confusion around showing extracted performance in a way that still follows the Rule, and reflects how advisers have typically shared partial performance data in the past.
Summary
This latest guidance should help advisers more confidently approach performance advertising under the Marketing Rule. With more clarity as to when gross-only data is acceptable and under what conditions, the FAQs create a clearer framework for compliance. Firms that carefully follow the outlined criteria will be better equipped to ensure that their performance presentations are accurate, balanced, and investor-friendly, without falling below the regulatory expectations.
How Waystone can help
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