SEC Staff Gives Advisers a Break on Presenting Net Performance for Case Studies and Portfolio Characteristics

Background — The Difficulty for Advisers

Since the U.S. Securities and Exchange Commission (“SEC”) adopted Rule 206(4)-1 under the Investment Advisers Act of 1940 (the “Marketing Rule”), investment advisers have struggled with certain requirements relating to presenting “net” performance figures, especially when such figures are difficult to determine. One scenario relates to the presentation of “extracted” performance – i.e., performance results of a subset of investments extracted from a single portfolio, which the staff of the Division of Investment Management (the “Staff”) had previously stated was subject to the requirement that gross performance information be accompanied by net performance information. The other scenario relates to the presentation of portfolio or investment “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), which was not clearly identified by the SEC or the Staff as “performance”, and thus subject to ambiguity as to whether net performance information was required as well.

The consequence was that advisers were faced with the difficult task of devising various methodologies to estimate portfolio-level fees at the individual investment level, which resulted in divergent industry practices.

FAQs Ease Certain Requirements

On March 19, 2025, the Staff published two new FAQs relating to the Marketing Rule, which specifically ease the requirements of presenting net performance for the above scenarios. The complete FAQs can be accessed here.

The Staff has now clarified that it will generally permit advisers to present (i) case studies, lists of individual investments and other forms of “extracted” performance, and (ii) portfolio or investment “characteristics” (similar to the ones described above), each on a gross basis only; provided that in each case:

1. the extract or characteristic is clearly identified as gross performance or as being calculated without the deduction of fees or expenses;
2. the extract or characteristic is accompanied by the total portfolio’s gross and net performance;
3. 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 extract or characteristic; and
4. the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extract or characteristic is calculated.

Further Considerations

The Staff indicated that an advertisement would clearly identify that the extract is gross performance, or the characteristic is calculated without the deduction of fees and expenses, if, for example, it discloses that the extracted performance or characteristic 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.

The Staff also indicated that the gross and net performance of the total portfolio does not necessarily need to be presented side-by-side on the same page as the extracted performance/characteristic, provided that the presentation facilitates comparison between the gross and net performance of the total portfolio and the extracted performance/characteristic. We would assume that it is generally sufficient if the net performance of the total portfolio is shown at the beginning of a presentation or closely before or after the relevant pages that show the extracted performance/characteristic. By contrast, showing the net performance of the total portfolio only in an appendix in the back of a long presentation may be problematic, depending on facts and circumstances.

Additionally, in respect of the universe of “characteristics” in particular, the Staff clarified that it cannot provide an exhaustive list of examples as to when certain characteristics are “performance” under the Marketing Rule. However, the Staff did express the view that the following characteristics are performance information, meaning they must be presented with net figures pursuant to the new requirements described above: total return, time-weighted return, return on investment (RoI), internal rate of return (IRR), multiple on invested capital (MOIC) and Total Value to Paid in Capital (TVPI), regardless of how such metrics are labelled in the advertisement.

Next Steps for Advisers

As these FAQs are effective immediately, advisers seeking to take advantage of this additional flexibility should consider whether they would like to amend existing marketing materials.

Your regular Kleinberg Kaplan attorney is of course available to answer any questions or otherwise discuss any of the foregoing, or other issues related to the Marketing Rule.