SEC unveils Marketing Rule guidelines around private investments, performance reporting

The SEC's newly unveiled guidelines around its Marketing Rule may prove to be a mixed blessing for investment advisors, as some of the brighter lines it draws may leave certain registrants offside and needing to refresh their marketing materials.

One Wednesday, the Securities and Exchange Commission released additional guidance on its Marketing Rule, clarifying how investment advisers should present performance metrics in advertisements.

The updates from the Division of Investment Management outlines when and how advisers must disclose net performance alongside gross performance for extracted returns and portfolio characteristics.

Those are the very areas highlighted in a survey by Seward & Kissell last year, where 70 percent of participating SEC-registered investment advisors agreed advertising performance was a thorny affair, with gross vs. net performance reporting being the most challenging facet. 

For some advisory firms, the idea of marketing based on performance is something to be avoided as it could also cloud clients' expectations.

"Client expectations are typically unrealistic to begin with, especially when we have experienced times of large positive market gains as we have the past five years," Dinon Hughes, previously told InvestmentNews.

While the new SEC guidance does not introduce new regulatory obligations, it provides insight into the watchdog’s expectations for compliance.

One key clarification addresses when advisers must display net performance alongside gross performance for specific investments or groups of investments within a portfolio, referred to as “extracted performance.” Under the Marketing Rule, an adviser that includes extracted gross performance in an advertisement is required to present the net performance of that extract as well.

However, SEC staff indicated they would not recommend enforcement action if an adviser instead provides the gross and net performance of the total portfolio to accompany the gross performance of the extract, provided that those separate sets of information are given equal prominence and determined over the same time periods.

In an analytical note published Wednesday, compliance consultancy firm Iron Road Partners highlighted the possible impact for investment firms, including those offering evergreen and open-ended funds.

"This may affect marketing materials, including websites, that previously omitted performance metrics., requiring a restructuring," the firm said.

The SEC also provided guidance on whether certain portfolio characteristics – such as yield, volatility, and attribution analysis – should be treated as performance under the rule. The staff acknowledged that it may be unclear whether such characteristics fall within the definition of performance and that calculating them net of fees could be difficult or misleading.

As a result, the SEC stated it would not take enforcement action against advisors who run ads presenting gross-only characteristics of a portfolio or investment, provided they clearly disclose how those figures are calculated and also present the portfolio’s overall gross and net performance in a way that makes them comparable with a particular characteristic.

"Managers showing extractions or non-performance metrics on a gross-only basis must still include fund gross performance in marketing to meet the time period requirement when using a subscription line of credit," Iron Road Partners said.

The Managed Funds Association, a global industry group representing alternative asset managers, hailed the SEC's willingness to address concerns around the marketing rule.

"The new practical and informative guidance supports investor needs and advisers," MFA President and CEO Bryan Corbett said on Thursday, pledging the group "will continue constructively engaging with the SEC on policies that strengthen capital markets and benefit all Americans."