On this Ropes & Gray podcast, Alyssa Horton and Colleen Meyer, both counsel in the private funds regulatory group, explore the recent SEC staff guidance on the Marketing Rule. They discuss the new FAQs issued on March 19, 2025, which address the presentation of investment-level returns and investment characteristics. Colleen and Alyssa provide a comprehensive overview of the history behind these FAQs, the operational challenges faced by advisers, and the significant changes brought by the new guidance. Listen in to gain valuable insights on how to effectively implement these updates in your marketing materials and ensure compliance with the Marketing Rule.
Transcript:
Colleen Meyer: Welcome to the Ropes & Gray podcast on recent guidance by the SEC staff on the Marketing Rule. I’m Colleen Meyer, and I’m joined today by my colleague Alyssa Horton. We are both counsel in the private funds regulatory group of Ropes & Gray. Our group has been advising hundreds of clients on various Marketing Rule-related issues since the rule was adopted in December 2020, and we wanted to share some of the history related to this recent guidance and our thoughts. Alyssa, thanks for joining me.
Alyssa Horton: Thanks, Colleen. I’m excited to dig into this. We will be talking to you today about the staff’s new FAQs on the Marketing Rule, specifically, those regarding investment-level returns and investment characteristics, which were issued on March 19 of this year. These new FAQs have definitely caused a stir in the industry and provided some welcome relief, especially for private fund advisers that have been grappling with how to present certain investment and performance information under the Marketing Rule.
Colleen Meyer: Absolutely. Let’s first set the stage for our listeners and give the history behind the FAQs. For those of you who don’t know, the Marketing Rule requires advisers to show net returns if they show gross returns. After the Marketing Rule was adopted by the SEC in December 2020, it was clear that when an adviser showed extracted performance (that is, performance for a subset of a fund or portfolio) in an advertisement, that the adviser needed to comply with the net requirements in the rule. However, there was a lot of uncertainty about whether the returns of a single investment were, in fact, extracted performance and, therefore, whether single investment net returns were required to be shown when gross returns were presented. When the Marketing Rule went into effect in November 2022, many advisers took the position that the performance results of a single investment were not extracted performance (in other words, individual investments were not a “subset” of the fund). However, in January of 2023, the SEC staff issued an FAQ clarifying that, yes, performance results for a single investment were extracted performance and, therefore, net returns were required at the investment level, not just at the fund level.
Alyssa Horton: This was obviously a big deal and a big shift for advisers that had taken the position that net returns were not required for individual investments, and has led to a lot of operational challenges in figuring out how to provide a net return for individual investments because fees and expenses are typically taken at the fund level, not the investment level, and the FAQ did not provide any guidance on how an adviser should calculate net returns for these individual investments. However, over the last few years, firms have largely agreed on a few methodologies to provide these returns, and then came the welcome relief with this new FAQ earlier this year, where the staff essentially reversed its position and now says that net returns are not required for a single investment or a subset of investments, provided that certain additional requirements are met. That’s a significant shift. This had an immediate impact and will continue to impact how advisers prepare their marketing materials and will ease a lot of the frustrations that accompanied the earlier guidance.
Colleen Meyer: Let’s walk through what the new FAQ actually requires. The FAQ says that if an adviser presents the gross performance returns of one investment or a group of investments in a private fund or other portfolio, they are not required to show corresponding net returns provided that certain requirements are met. These requirements are:
- the extracted performance must be clearly identified as gross performance;
- the extracted performance must be accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
- the gross and net performance of the total portfolio must be presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance; and lastly,
- the gross and net performance of the total portfolio must be calculated over a period that includes the entire period over which the extracted performance is calculated.
Alyssa Horton: There are a few important things to note about these requirements. First, this guidance only applies in situations where firms are also showing both the gross and net returns of the total portfolio. While this is common market practice, it is worth noting that to the extent advisers distribute marketing materials that do not include both the gross and net returns of the total portfolio, going forward you will need to continue to show net performance of the extract of the portfolio. In addition, for purposes of satisfying the criteria Colleen described, the FAQ clarifies that equal prominence does not require that the gross and net total portfolio performance appear on the same page as the extracted performance, and this could be satisfied by placing the gross and net total portfolio performance prior to the extracted performance. So, while not stated explicitly, this would seem to imply that the gross and net total portfolio performance appearing after the extracted performance would not necessarily satisfy the equal prominence requirement.
Colleen Meyer: I want to highlight a few additional points. First, with respect to requirement #1 (extracted performance must be clearly identified as gross performance), the staff clarified that they would view an advertisement as clearly identifying that the extracted performance is gross performance if, for example, it discloses that the extracted performance shown does not reflect the deduction of all fees and expenses that a client or investor has paid or would have paid and refers the recipient to the presentation of the total portfolio’s gross and net performance to understand the overall effect of fees. In addition, when presenting any performance information, it must always be done in a manner that is not misleading. So, even though net returns may not be required at the investment level, advisers should be careful and thoughtful about how they present performance returns for a single investment or a subset of investments, making sure the context is clear and that the information provided is not likely to mislead investors.
Alyssa Horton: That’s a great point, Colleen. While these new requirements are mostly straightforward, we have seen some questions arise as advisers are implementing these updates.
For instance, we have gotten many questions about footnote 1 in the FAQ. Footnote 1 essentially provides that the views of the staff expressed in the FAQ apply both to the performance of an extract from a portfolio as well as to performance of an extract from a composite of multiple portfolios. So, the guidance applies when you are showing the performance of a single investment or a subset of investments from a single fund, and the guidance also applies when you are showing a composite performance across multiple funds; for instance, the performance of all realized investments or the performance of all investments within a particular industry. While the staff acknowledges that composite performance is hypothetical performance, the staff does not address in the FAQ the application to other types of hypothetical performance, such as projections or targets and whether there are additional requirements for showing that type of performance.
Colleen Meyer: Yes, and these types of ambiguities are important for our listeners to understand, and we have seen advisers differ in their preferred approaches and risk tolerance in applying the guidance in these scenarios. It is critical to be thoughtful in your approach and to consult with counsel when considering how to show performance in these types of scenarios.
Alyssa Horton: Now, let’s jump to the second FAQ issued by the SEC staff in March. The second FAQ addressed another grey area when it comes to presentation of certain investment information, namely when and whether certain portfolio characteristics are considered “performance” metrics under the Marketing Rule, such that when they are presented on a gross basis, corresponding net characteristics must also be shown with equal prominence. Examples of these portfolio characteristics include yield, coupon rate, contribution to return, volatility, attribution analyses, the Sharpe ratio, and other similar metrics.
Colleen Meyer: While we had previously seen advisers take varied approaches with respect to investment characteristics, we had observed a trend away from characterizing certain investment characteristics as performance when, for example, it was representative of the operating performance of a particular investment, like an investment’s annual recurring revenue, but more questions arise the closer the characteristic came to representing metrics an investor might expect to receive in return for an investment in the private fund or portfolio, like multiple on invested capital or internal rate of return.
Alyssa Horton: Yes, and the SEC staff has taken the position in this FAQ that such portfolio or investment characteristics may be presented on a gross basis without including a corresponding net characteristic, provided that certain requirements are met, including:
- the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
- the characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
- 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
- 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.
Colleen Meyer: Interestingly, the staff declined to provide any guidance on whether such characteristics are, in fact, “performance” for purposes of the Marketing Rule and whether they need to comply with the other performance requirements of the Marketing Rule, but noted that this relief does not apply to IRR, MOIC, total return, time-weighted return, ROI, or TVPI, regardless of how such metrics are labeled in the advertisement. So, while there remain interpretive questions regarding characteristics, the new guidance provides some relief from calculating such characteristics on a net basis.
Alyssa Horton: Yes, and it’s important to remember that neither FAQ impacts other guidance the staff has provided relating to the treatment of subscription facilities for the purposes of calculating returns. Advisers should continue to align their marketing materials with any existing policies aimed at complying with those requirements.
Colleen Meyer: And we want to emphasize to our clients and listeners: if you have questions about these FAQs or how to implement the guidance in marketing materials, we’re happy to discuss the details, help you navigate these requirements, and provide our insight on evolving market practice.
Alyssa Horton: Thanks, Colleen. That’s a great note to end on. The staff’s guidance continues to evolve, and it’s important for everyone to stay informed. So, thanks to everyone for tuning in, and don’t hesitate to contact us if you have any questions about the new FAQs or the Marketing Rule in general.
