On January 11, 2023, the staff of the Division of Investment Management of the Securities & Exchange Commission (the “Staff”) updated its Frequently Asked Questions (“FAQ”) relating to compliance with Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (the “Marketing Rule”). The update to the FAQ addresses displays of gross and net performance.1
Question
The question posed asks whether an SEC-registered investment adviser (an “adviser”) must show the net performance of a single investment, such as a case study, or group of investments, when an adviser displays the gross performance of such single investment or group of investments.
Answer
The FAQ indicates the Staff’s belief that “displaying the performance of one investment or a group of investments in a private fund” constitutes extracted performance2 and that in such scenarios an adviser must display net performance of the investment or group of investments.
Under the Marketing Rule, an adviser is prohibited from presenting extracted performance in any advertisement unless the performance results of the total portfolio from where the performance is extracted is provided, or promptly offered to be provided.3 The rationale behind this provision is to address the risk that an adviser would select only profitable investments to advertise from their portfolio and mislead investors as a result.4 Extending this rationale, the Staff expressed its view that an adviser must provide net performance, which can be in addition to gross performance, regarding the advertisement of a single investment or group of investments.
Lastly, the Staff stated that when presenting extracted performance, an adviser still must satisfy the general prohibition against providing specific investment advice in a manner that is not fair and balanced, as well as the other tailored disclosure requirements and general prohibitions.
1 U.S. Securities & Exchange Commission, Marketing Compliance Frequently Asked Questions, https://www.sec.gov/investment/marketing-faq (January 11, 2023).
2 Pursuant to the Rule, extracted performance is defined as “the performance results of a subset of investments extracted from a portfolio.” Rule 206(4)-1(e)(6).
3 Adopting Release, Investment Adviser Marketing, Section II.E.5. (p. 195), available at https://www.sec.gov/rules/final/2020/ia-5653.pdf.
4 Id.
5 SEC Adopts Investment Adviser Marketing Rule (Dec 23, 2020); SEC Adopts New Investment Adviser Marketing Rule (Jan 26, 2021); Adviser Advertising – Marketing Rule FAQs (Sept 13, 2021); New Marketing Rule: One Month Away from the Compliance Date (Oct 4, 2022).
