Past Guidance is No Assurance of Future Guidance: SEC Staff Reverses Course with New Marketing Rule FAQs on Extracted Performance and Portfolio Characteristics

Introduction

On March 19, 2025, the US Securities and Exchange Commission (“SEC”) released updated guidance for compliance with Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).¹ Specifically, the SEC Division of Investment Management SEC staff updated the “Marketing Compliance Frequently Asked Questions” with two major revisions: (i) an update to the previously-issued extracted performance guidance (the “Updated Extracted Performance FAQ”) and (ii) new guidance about “portfolio or investment statistics” (the “Portfolio or Investment Statistics FAQ,” and together with the Updated Extracted Performance FAQ, the “New Marketing Rule FAQs”). In this Legal Update, we provide a brief overview of the New Marketing Rule FAQs.

Updated Extracted Performance FAQ

In the context of the Marketing Rule, “extracted performance” means “the performance results of a subset of investments extracted from a portfolio” (e.g., case studies and asset-by-asset performance information). In the SEC staff’s prior version of this FAQ, the SEC staff stated that this performance must be shown on a net basis in accordance with the requirements of the Marketing Rule. However, the industry found that in many circumstances, the calculation of extracted net performance was challenging, if not close to impossible, and resulted in extracted performance presentations that were confusing and, some could argue, misleading, often relying on a number of stated assumptions in order to calculate a theoretical “net” performance figure for the extract. Recognizing these challenges, the Updated Extracted Performance FAQ reverses course on the prior guidance, and the guidance permits advisers to present that extracted performance on a gross-only basis,² subject to the following conditions:

• The extracted performance must be clearly identified as gross performance.³
• The extracted performance must be accompanied by total portfolio gross/net performance that is calculated/presented in compliance with the Marketing Rule (which could be a representative account⁴ or a composite, and presumably must be actual not hypothetical performance).⁵
• The total portfolio return information must be at least as prominent as the extracted performance, and must facilitate comparison to the extracted performance.⁶
• Total portfolio performance must be for a period of at least as long as the period covered by the extracted performance. However, recognizing that the time periods over which extracts are calculated may not easily align with the time periods required by Rule 206(4)-1(d)(2), the SEC staff guidance permits the extracted performance to be calculated over a single, clearly disclosed period, even if the accompanying gross and net performance of the total portfolio must be presented over one-, five-, and ten-year periods.

Regarding the third condition, notably, under this new guidance, the gross and net performance of the total portfolio does not necessarily need to be presented on the same page of the advertisement as the extracted performance—as long as the presentation facilitates a comparison between the gross and net performance of the total portfolio and the extracted performance. For example, in the SEC staff’s view, presenting the gross and net performance of the total portfolio prior to the extracted performance in the advertisement could also facilitate such comparisons and help ensure they are presented with at least equal prominence to the performance of the extract.

In caution, the SEC staff noted that any advertisement that presents the gross performance of one or more extracts in reliance on this guidance remains subject to the general prohibitions of Rule 206(4)-1(a) (as well as sections 206(1) and 206(2) of the Advisers Act); accordingly, advisers should bear in mind that the Updated Extracted Performance FAQ does not create a free-for-all for cherry-picking and similar issues that would run afoul of the general “fair and balanced” and other requirements.

Portfolio or Investment Characteristics FAQ

The Marketing Rule does not define “performance,” and advisers and practitioners have expressed uncertainty as to whether certain portfolio or investment metrics and characteristics (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics) must be treated as “performance” under the Marketing Rule. If such metrics and characteristics are performance, then the Marketing Rule would require that those metrics need to be presented on a net basis.
In the new Portfolio or Investment Statistics FAQ, the SEC staff recognized this uncertainty and further recognized that even if these characteristics were to qualify as performance, calculating these characteristics on a net basis may be impossible or lead to misleading or confusing results. In response to these challenges, the SEC Staff guidance permits gross-only portfolio/investment characteristics, subject to the following conditions (which echo those in the above guidance):

• The portfolio/investment characteristic must be clearly identified as being gross (i.e., calculated without the deduction of fees and expenses);
• The characteristic must be accompanied by total portfolio gross/net performance (presumably actual) that is calculated/presented in compliance with the Marketing Rule;
• Total portfolio return information must be at least as prominent as the characteristics, and in a manner designed to facilitate comparison with, the gross characteristic; and
• Total portfolio performance must be for a period at least as long as the period covered by the characteristic. However, the characteristics can be calculated over a single, clearly disclosed period, even when the accompanying gross and net performance of the total portfolio must be presented over one-, five-, and ten-year periods.⁷

The SEC staff also indicated that whether a presentation of a characteristic in an advertisement is subject to Rule 206(4)-1(d) in the first instance depends on whether such characteristic constitutes “performance.” The SEC staff in this FAQ specifically declined to take a position on whether any particular characteristic or attribute should be considered “performance” for purposes of Rule 206(4)-1. To the extent a characteristic is not performance, the presentation of such characteristic would not be within the scope of Rule 206(4)-1(d). It is important to understand that the Portfolio or Investment Characteristics FAQ does not cover measures of total portfolio performance, such as total return, time-weighted return, return on investment, internal rate of return, multiple on invested capital, or Total Value to Paid in Capital, regardless of how such metrics are labeled in the advertisement.

In caution, the SEC Staff noted that any advertisement that presents characteristics in accordance with the Portfolio or Investment Characteristics FAQ remains subject to the general prohibitions of Rule 206(4)-1(a) (as well as sections 206(1) and 206(2) of the Advisers Act).

¹ 17 C.F.R. § 275.206(4)-1.

² “The staff 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.” (emphasis added).

³ The staff 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.

⁴ In the case of performance extracted from a representative account, the SEC staff believes that the adviser could satisfy the positions stated herein if the gross performance of the extract was accompanied by the gross and net performance of a composite aggregation of all of the representative account’s related portfolios (rather than the gross and net performance of the total representative account from which the extract was extracted) presented in a manner consistent with positions stated in the guidance.

⁵ Such accompanying presentation of gross and net performance of the total portfolio would be subject to the requirements relating to performance in Rule 206(4)-1(d).

⁶ The gross and net performance of the total portfolio does not need to be presented on the same page of the advertisement as the extracted performance, as long as the presentation facilitates a comparison between the gross and net performance of the total portfolio and the extracted performance.

⁷ The SEC Staff reiterated that Rule 206(4)-1(d)(2) requires that advertisements that include accompanying gross and net performance of the total portfolio present such performance over one-, five-, and ten-year periods, each presented with equal prominence and ending on a date that is no less recent than the most recent calendar year-end; however, if the relevant portfolio did not exist for a particular prescribed period, then the life of the portfolio must be substituted for that period.