In December 2020, the Securities and Exchange Commission (SEC) released the Marketing Rule, which replaced the advertising and solicitation rules.
From the time of its November 2022 official deadline, the SEC has brought numerous enforcement actions against investment advisory firms. These enforcement actions have alleged various marketing violations.
It sucks to be one of those firms, but for everyone else some good has come out of it. Those enforcement actions tell those who pay attention what the SEC doesn’t want to see. Call it “regulation by enforcement,” which is controversial, but it is what it is.
There’s still been some confusion about some aspects of the Marketing Rule, and they’ve answered questions through a number of FAQ releases.
The most recent FAQ released on March 19, 2025. Below is a quick overview of that FAQ.
Q: Can a firm use interim performance for 1-, 5-, or 10-year performance following the end of a calendar year?
A: A firm can use interim performance; however, the SEC notes that “a reasonable period of time to calculate performance results based on the most recent calendar year-end generally would not exceed one month. The interim performance information remains subject to the other provisions of the marketing rule, including the general prohibitions.” This means that firms using interim performance should promptly update to year-end figures once available.
Q: There is a lack of clarity regarding whether certain characteristics are considered performance. Would the SEC recommend enforcement in a situation where these characteristics are presented without the inclusion of fees and expenses?
A: In short, no. The SEC recognizes the difficulty in calculating out such fees and expenses from certain characteristics, and as long as the gross and net performance of the portfolio are included along with “appropriate accompanying information about the characteristic and how it is calculated." They said:
The staff would not recommend enforcement action to the Commission under rule 206(4)-1(d)(1) if an adviser chooses to present in an advertisement one or more gross characteristics of a portfolio or investment, even if it does not include the corresponding net characteristic(s), if:
- 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.
Q: Should gross and net performance be calculated using the same methodology and timeline?
A: Yes, gross and net performance must be calculated using the same methodology and timeline. Additionally, both must be presented in a way to allow for easy comparison.
Q: When an adviser displays the gross performance of one investment or a group of investments from a private fund or other portfolio, must the adviser show the net performance of such single investment or group of investments?
A: No, because with this type of extracted performance, the SEC believes there is less risk of misleading an investor when both gross and net performance of the total portfolio is prominently displayed.
