Nearly two months after the effective compliance date of the SEC’s amended Marketing Rule, the SEC has released a Frequently Asked Question (FAQ) regarding the presentation of gross and net performance in advertisements governed by the Marketing Rule.
Rule 206(4)-1(d)(1) requires that any advertisement presenting gross performance must also include net performance (the “net performance requirement”). Due to the definitions of the relevant terms (including “portfolio” and “extracted performance”) in the Marketing Rule, many industry participants had interpreted the Marketing Rule as not requiring net performance with respect to the presentation of gross performance of a single investment if it was presented in a “fair and balanced” manner and was not otherwise misleading.
In the FAQ, the SEC Staff stated that the performance presentation of one investment or a group of investments in a private fund is an example of “extracted performance” under the new rule and, if an adviser shows gross performance (i.e. a case study) of such investment(s), it must also show the net performance of such investment(s) with equal prominence and using the same methodology. The SEC Staff also reiterated that an adviser must satisfy the tailored disclosure requirements, which require the performance presentation to be presented in a “fair and balanced” manner and not be misleading.
As many can assume, the industry has a lot of questions about the timing of this release, seeing as though the compliance date was two months ago and this clarification could have cascading challenges/costs for compliance departments and their firms. In fact, in an email from the Investment Adviser Association, this concern was directly expressed:
“It is unfortunate that the SEC staff issued its FAQ after the compliance date and after members grappled with this question for many months and devoted valuable resources to finalizing their compliance policies and procedures. We expect that affected members may face practical challenges in presenting net performance to satisfy this FAQ. It is also troubling that the guidance was issued just as SEC examiners are about to conduct planned examinations of advisers for compliance with the Marketing Rule. We would expect SEC examiners to consider the timing of this FAQ and permit advisers adequate time to carefully review and revise their marketing materials and compliance programs, as necessary, in light of the FAQ.”
The IAA also took this opportunity to remind subscribers that senior officials from the SEC’s Division of Investment Management and Division of Examinations will be at their annual Compliance Conference in March to discuss the Marketing Rule, including this FAQ. Quest CE will also be an exhibiting partner at the conference and hope to see you there.
To read the complete FAQ, click here.