SEC staff issues new FAQs on the Marketing Rule, providing investment advisers with flexibility and clarity

On March 19, 2025, the Securities and Exchange Commission’s (SEC) Division of Investment Management staff (Staff) issued two new Frequently Asked Questions (FAQs) focused on Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (Marketing Rule).¹ The FAQs focus on two specific areas: (1) the display of the gross performance of an extract in an advertisement without including corresponding net performance of the extract; and (2) the presentation in an advertisement of one or more gross characteristics of a portfolio or investment that does not include the corresponding net characteristic(s).

In the first new FAQ addressing extracted performance (Extracted Performance FAQ), the Staff notes that it would not recommend enforcement action to the SEC under Rule 206(4)-1(d)(1) if an investment adviser displays the gross performance of an extract in an advertisement without including the corresponding net performance of the extract, provided that:

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 period that includes the entire period over which the extracted performance is calculated.

In the second new FAQ addressing investment characteristics (Investment Characteristics FAQ), the Staff acknowledges that advisers may be unsure whether certain investment or portfolio characteristics (for example, yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, Sharpe ratio, Sortino ratio, and other similar metrics) constitute “performance” under the Marketing Rule. The Staff also acknowledges that calculating these characteristics net of fees and expenses may be impossible or lead to misleading or confusing results.

In response to this uncertainty, the Staff notes that it would not recommend enforcement action to the Commission under Rule 206(4)-1(d)(1) if an adviser chooses to present in an advertisement one or more gross characteristics of a portfolio or investment, even if it does not include the corresponding net characteristics, provided that:

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.

Eversheds Sutherland Impressions

1. The New FAQs Offer Flexibility and Clarity

A. The Extracted Performance FAQ

The Extracted Performance FAQ is a significant divergence from a prior FAQ dated January 11, 2023 (which has been removed), where the Staff took the position that performance of one investment or a group of investments in a private fund or other portfolio would be considered “extracted performance” under the Marketing Rule and would thus be subject to the Marketing Rule’s net of fees requirement. This prior FAQ created a host of implementation challenges for firms and was thus viewed as challenging to comply with. As one example, some private fund advisers found it challenging to accurately apply fund-level fees and expenses to investment-level returns.

Now, under the Extracted Performance FAQ, an investment adviser is not required to show extracted performance on a net-of-fees basis as long as it complies with the conditions under the Extracted Performance FAQ.

B. The Investment Characteristics FAQ

The Investment Characteristics FAQ offers clarity with respect to an investment adviser’s obligations under subsection (d)(1) of the Marketing Rule when presenting a portfolio or investment characteristic. In particular, a commonly experienced challenge for compliance professionals has been applying the Marketing Rule’s net of fees and other performance requirements notwithstanding the lack of any definition of the term “performance” in the Marketing Rule. As a result, investment advisers have been unsure whether certain portfolio or investment characteristics qualify as “performance” for purposes of the Marketing Rule (and are thus subject to the net-of-fees requirement, among other requirements).

The Investment Characteristics FAQ clarifies that an investment adviser can present in an advertisement one or more characteristics on a gross-of-fees basis as long as the adviser meets the conditions under the FAQ.

2. Despite the Flexibility and Clarity Offered by the New FAQs, Carefully Read the Conditions and Footnotes to Avoid Foot Faults

A. The Extracted Performance FAQ

Under the Extracted Performance FAQ, an investment adviser can show extracted performance on a gross of fees basis only as long as, among other things, the total portfolio's gross and net performance are equally prominent and easy to compare with the extracted performance.

Footnote 6 of the Extracted Performance FAQ provides a specific example of how an adviser can comply with the equal prominence requirement in this context. In particular, this footnote explains that an adviser can meet its obligations in this respect if it presents the gross and net performance of the total portfolio prior to the extracted performance in the advertisement. While there may be other examples of how to comply with the equal prominence requirement in this context without necessarily showing the extracted performance and the gross and net performance of the entire portfolio on the same page, advisers should be aware of the Staff’s note in the Extracted Performance FAQ that any extracted performance presented in a manner compliant with the Extracted Performance FAQ remains subject to the general prohibitions of the Marketing Rule, as well as Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, as amended (the Advisers Act). Therefore, any consideration of compliance with the equal prominence requirement in this context must consider these general prohibitions and anti-fraud obligations as well.

Notably, these same concepts are repeated in connection with the Investment Characteristics FAQ, at Footnote 11 of the FAQs.

B. The Investment Characteristics FAQ

Footnote 8 of the FAQs warns that notwithstanding the Investment Characteristics FAQ, advisers are not allowed to show “total return, time-weighted return, return on investment (RoI), internal rate of return (IRR), multiple on invested capital (MOIC), or Total Value to Paid in Capital (TVPI) on a gross basis only, regardless of how such metrics are labelled in the marketing materials.” It appears that the Staff considers these metrics to constitute performance information for purposes of the Marketing Rule, and this subject to the Marketing Rule’s net of fees requirement, among other requirements applicable to advertisements showing performance.

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1 See Division of Investment Management: Frequently Asked Questions, Marketing Compliance Frequently Asked Questions (updated Mar. 19, 2025), available at: https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/marketing-compliance-frequently-asked-questions.