On March 19, 2025, the staff of the Division of Investment Management (the “SEC Staff”) of the Securities and Exchange Commission (the “SEC”) released an update to its Frequently Asked Questions¹ (the “FAQs”) relating to compliance with Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (the “Marketing Rule”).

The Marketing Rule prohibits an adviser from disseminating any advertisement that includes “any presentation of gross performance, unless the advertisement also presents net performance: (i) with at least equal prominence to, 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 return and methodology, as the gross performance” (the “Net Performance Requirement”).

The updates to the FAQs contain significant revisions² to the SEC Staff’s views on how the Net Performance Requirements apply to marketing materials that include (i) gross extracted performance³ or (ii) gross portfolio or investment characteristics.

Extracted Performance

The SEC Staff states in the updated FAQs that it would not recommend enforcement action under the Net Performance Requirement provisions if an adviser displays the gross performance of one investment or a group of investments in a private fund or other portfolio (an “extract”) in an advertisement without including corresponding net performance of the extract, if:

1. the extracted performance is clearly identified as gross performance;
2. the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the Marketing Rule;
3. the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance; and
4. the gross and net performance of the total portfolio is calculated over a period⁴ that includes the entire period over which the extracted performance is calculated.

Portfolio or Investment Characteristics

The SEC Staff acknowledges in the updated FAQs that advisers may face uncertainty in determining whether certain portfolio or investment characteristics (“characteristics”) are “performance” under the Marketing Rule since the Marketing Rule does not define performance⁵.  While the updated FAQs provide guidance regarding the presentation of such characteristics, the SEC Staff clarifies that such guidance applies to “yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics”.  The SEC Staff states that its positions regarding the presentation of characteristics do not apply to total return, time-weighted return, return on investment, internal rate of return, multiple on invested capital or Total Value to Paid in Capital, regardless of how such metrics are labelled in an advertisement.

The SEC Staff states in the updated FAQs that it would not recommend enforcement action under the Net Performance Requirement provisions if an adviser chooses to present in an advertisement one or more gross characteristics⁶ of a portfolio or investment, even if it does not include the corresponding net characteristic(s)⁷, if:

1. the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
2. the characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the Marketing Rule;
3. the total portfolio’s 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
4. the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated.

The SEC Staff states that the foregoing also applies to characteristics calculated based on the performance of (i) a composite aggregation of related portfolios, (ii) a representative account; (iii) a subset of a portfolio (i.e., extracted performance) and (iv) a subset extracted from a composite aggregation of related portfolios, provided the characteristics are presented in a manner consistent with the FAQs’ guidance.  If a characteristic is calculated using a representative account, the SEC Staff believes an adviser could satisfy the conditions set forth in the FAQs’ guidance if the gross characteristic was accompanied by the gross and net performance of a composite aggregation of all of the representative account’s related portfolios (rather than the gross and net performance of the total representative account) in a manner consistent with the FAQs’ guidance.

Additional Guidance

The SEC Staff would view an advertisement as “clearly identifying” that extracted performance is gross performance or that a gross characteristic is being calculated without the deduction of fees and expenses if the advertisement (i) discloses that the extracted performance or the characteristic shown, as applicable, does not reflect the deduction of all fees and expenses that a client or investor has paid or would have paid and (ii) refers the recipient to the presentation of the total portfolio’s gross and net performance to understand the overall effect of fees.

In order to comply with the condition that the gross and net performance of the applicable total portfolio be presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance or gross characteristic, as applicable, the SEC Staff states that such total portfolio performance does not need to be presented on the same page of the advertisement as the extracted performance or the characteristic, as applicable, provided that the presentation facilitates comparison between the gross and net performance of the total portfolio and the extracted performance or the characteristic, as applicable.  By way of example, the SEC Staff states that, in its view, presenting the gross and net performance of the total portfolio prior to the extracted performance or the characteristic, as applicable, in an advertisement could also facilitate such comparisons and help ensure they are presented with at least equal prominence.

The SEC Staff cautions advisers that any extracted performance and portfolio characteristic presented in accordance with the updated FAQs remain subject to the general prohibitions under the Marketing Rule and the general anti-fraud provisions of the Investment Advisers Act of 1940, as amended.

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Advisers should review their advertisements that include extracted performance and/or investment or portfolio characteristics to ensure that the presentation of such extracted performance and/or investment or portfolio characteristics is consistent with the guidance set forth in the FAQs.

If you have any questions regarding Marketing Compliance, please contact your Investment Management Group attorney at Seward & Kissel LLP.