SEC Updates Marketing Rule Guidance to Clarify Extracted Performance and Portfolio Metrics
From the desk of Jim Eccleston at Eccleston Law
The Securities and Exchange Commission (SEC) has issued updated guidance on its marketing rule, addressing industry concerns regarding net performance requirements, extracted performance, and portfolio characteristics. According to ThinkAdvisor, the new guidance aims to clarify compliance requirements for investment advisors who have struggled with the rule since its adoption.
The updated guidance allows advisors to advertise extracted performance—returns from a subset of investments—on a gross basis, provided that they also prominently include both the net and gross performance of the entire portfolio in the advertisement. Gail Bernstein, general counsel at the Investment Advisor Association (IAA), told ThinkAdvisor that these changes will reduce investor confusion and enable advisors to share critical investment data more effectively.
The treatment of extracted performance has been a contentious issue since the rule’s implementation. Amy Lynch, founder of FrontLine Compliance, noted that SEC examiners have applied inconsistent interpretations during examinations. Some firms reported that examiners were reluctant to comment on extracted performance presentations, highlighting regulatory uncertainty.
Julia Reyes, partner at ACA Group, welcomed the ability to present extracted performance on a gross basis alongside full portfolio disclosures. She explained that previous requirements forced private fund managers to apply arbitrary fees to individual investments, making returns less meaningful. Similarly, public market managers had to perform unnecessary calculations for sector and geographic returns.
The SEC’s FAQ also clarifies whether extracted performance data must align with the overall fund’s time period. According to ThinkAdvisor, the guidance confirms that differences in timeframes can be disclosed clearly to avoid misleading presentations. Additionally, portfolio characteristics such as Sharpe ratios, yields, and return contributions can be displayed, provided that gross and net performance are given equal prominence.
Lynch emphasized the importance of footnotes in the FAQ, which provide necessary disclosure language to ensure compliance. She also noted that allowing extracted performance to appear separately from overall fund performance improves marketing flexibility while maintaining transparency.
The SEC’s updated guidance offers much-needed clarity for private fund managers and investment advisors navigating the marketing rule. By aligning industry practices with regulatory expectations, the changes establish a clearer framework for presenting investment data while ensuring that disclosures remain fair and not misleading.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
Tags: eccleston, eccleston law, sec
