• On March 19, 2025, the SEC Staff updated the Marketing Rule Frequently Asked Questions page to add two new FAQs. The FAQs clarify the Staff’s revised view that registered investment advisers are not required to show net performance for: (1) individual investments and subsets of investments (i.e., “extracted performance”), reversing and replacing a January 2023 FAQ; and (2) certain metrics (e.g., yield, attribution, contribution) that are tangential to performance. In each case, certain conditions must be satisfied.
• Now that the Staff has formally published these new FAQs, investment advisers can proceed with revising marketing materials to remove net performance for extracted performance and should follow the conditions in the first FAQ.
• With respect to metrics such as yield, advisers that have been including net figures may remove those figures. Advisers that have not been including a net figure for metrics such as yield may continue to refrain from showing a net figure. In either case, we recommend that materials comply with the conditions set out in the second FAQ.

On March 19, 2025, the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “SEC”) updated the Frequently Asked Questions page relating to Rule 206(4)-1 under the Investment Advisers Act of 1940 (the “Marketing Rule”) to add two new FAQs. Previewed by Staff speakers at an Investment Adviser Association conference earlier this month, the FAQs provide new conditional safe harbors from the requirement to show net performance for: (1) individual investments and subsets of investments (i.e., “extracted performance”), reversing and replacing an FAQ previously issued by the Staff on January 11, 2023; and (2) certain metrics (e.g., yield, attribution, contribution) that are tangential to performance.

Now that the Staff has formally published these new FAQs, investment advisers can proceed with revising marketing materials to remove net performance for extracted performance and should follow the conditions in the first FAQ.

With respect to metrics such as yield, advisers that have been including net figures may remove those figures. Advisers that have not been including a net figure for metrics such as yield may continue to refrain from showing a net figure. In either case, we recommend that materials comply with the conditions set out in the second FAQ.

Note that although advisers in practice may treat these FAQs as safe harbors with respect to Marketing Rule compliance, the FAQs clearly state that, like all Staff guidance, they do not formally alter or amend applicable law.

Below we provide a summary of the new FAQs and how the Staff and industry positions on these topics have evolved since the Marketing Rule was adopted on December 22, 2020.

Extracted Performance FAQ

Background

Before the adoption of the Marketing Rule, many registered investment advisers (“registered advisers”) presented a fund’s track record with gross and net performance of the total portfolio, together with gross only performance for each individual investment. The reasoning for that approach was that investors, who generally participate in the entire portfolio, could clearly understand overall performance while also seeing how particular investments contributed to that performance. Investment-level net performance was often seen as unnecessary in the context of a full track record, and even as potentially misleading, because calculating investment-level net performance could require qualitative judgments about the allocation of fund expenses to particular investments. In addition, it is challenging to accurately allocate management fee and carried interest to individual investments, particularly with respect to a fund with a European waterfall (that is, not deal by deal).

The Marketing Rule expressly prohibits any presentation of gross performance in an advertisement unless the advertisement also presents net performance with at least equal prominence, calculated over the same time period and using the same methodology as the gross performance.

• The Rule defines “gross performance” as “the performance results of a portfolio (or portions of a portfolio that are included in extracted performance, if applicable) before the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio.”

• “Extracted performance” is defined as “the performance results of a subset of investments extracted from a portfolio.”

• “Portfolio” is defined as “a group of investments managed by the investment adviser,” which “may be an account or a private fund.”

These definitions, particularly the plural “investments” in the definition of “extracted performance,” led to uncertainty in the industry as to whether a single individual investment would meet the definition of extracted performance and be subject to the net performance requirement.

To address this question, the Staff published an FAQ on January 11, 2023, stating that the definition of extracted performance “should be read to apply to a subset of investments (i.e., one or more),” requiring the application of the net requirement to case study and other investment-level performance, as well as performance broken out by sector, geographical area, realized and unrealized aggregations and the like. Following this guidance, the industry did its best to adapt and comply despite the fact that many fees and expenses are incurred at the fund level. Registered advisers, however, adopted varying methods for calculating investment-level net performance, which further reduced its utility to investors in making performance comparisons.

New Guidance

The first of the two new Marketing Rule FAQs replaces and rescinds the former January 11, 2023 FAQ and instead states that the Staff would not recommend enforcement action if an adviser presents extracted performance (such as case study performance or investment-level performance in a track record) on a gross-only basis if the following conditions are satisfied:

• The extracted performance is clearly identified as gross performance (i.e., calculated without the deduction of fees and expenses).

• It is accompanied by total portfolio-level gross and net performance.

• The total portfolio-level gross and net performance is presented with at least equal prominence and in a way that facilitates comparison with the extracted performance.

• Notably, the Staff does not prescribe a single approach to equal prominence. The FAQ states that total portfolio-level gross/net does not need to be on the same page as the extracted performance as long as it is presented in a way that facilitates comparison with the extracted performance. As an example, the FAQ notes that “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.”

• This is consistent with the Marketing Rule’s requirement that any advertisement containing extracted performance also include the total portfolio performance from which it was extracted (or an offer by the adviser to promptly provide such total portfolio performance).

• In addition, the Marketing Rule’s Adopting Release indicates that the disclosure required for specific investment advice and/or performance to be fair and balanced can be adequately provided via a layered approach that utilizes hyperlinks and/or cross-references.

• The total portfolio-level net and gross performance is calculated over a period that includes the entire period over which the extracted performance is calculated.

• For portfolios that are not private funds, the extracted performance does not need to be presented over one, five and 10 years even though the portfolio-level gross/net does. Instead, such extracted performance can be calculated over a “single, clearly disclosed period.”

Even where all of the above conditions are satisfied, the FAQ notes that the general prohibitions of the Marketing Rule still apply (including the general prohibition on presentation of specific investment advice (i.e., “cherry picking”) in a manner that is not fair and balanced), as well as the Advisers Act’s antifraud provisions.

The rationale for the new extracted performance FAQ is consistent with the prevailing industry view before the new Marketing Rule was adopted—namely, that net performance for a subset of a fund’s investments is at best not useful, and at worst potentially misleading, given that it requires a hypothetical allocation of fees, carried interest and expenses.

Portfolio/Investment Characteristics FAQ

Background

The Marketing Rule does not define what constitutes “performance.” As a result, registered advisers and their counsel have been required to make judgments about whether certain metrics, such as yield, attribution and contribution, should be treated as performance under the Rule. This analysis has resulted in some inconsistency across the industry, based on differences in interpretation, circumstances and risk tolerance. Previous Staff activity on this topic provided in the context of examinations and informal statements has also reflected the lack of a uniform view regarding whether certain “characteristics” are performance.

Even where a registered adviser has determined to treat a metric as performance, formulating an appropriate methodology for calculating a net version of such metric poses many of the same challenges and risks as net extracted performance, perhaps to a greater degree.

New Guidance

Similar to the new extracted performance FAQ, the second new Marketing Rule FAQ states that the Staff would not recommend enforcement action if an adviser presents in an advertisement one or more “characteristics” of a portfolio or investment on a gross-only basis if the following conditions are satisfied:

• The characteristic is clearly identified as gross (i.e., calculated without the deduction of fees and expenses).

• It is accompanied by total portfolio-level gross and net performance.

• The total portfolio-level gross and net performance is presented with at least equal prominence and in a way that facilitates comparison with the gross characteristic.

• As with the extracted performance FAQ, the Staff does not prescribe a single approach to equal prominence. The FAQ states that the total portfolio-level gross/net does not need to be on the same page as the characteristic as long as it is presented in a way that facilitates comparison with the characteristic. The Staff also provides the same illustrative example of presenting the total portfolio gross/net prior to the characteristic in the advertisement as one way an adviser could present with equal prominence and facilitate comparisons.

• The total portfolio-level net and gross performance is calculated over a period that includes the entire period over which the characteristic is calculated.

• As with extracted performance, for portfolios that are not private funds, the characteristic does not need to be presented over one, five and 10 years even though the portfolio-level gross/net does. The characteristic can instead be calculated over a “single, clearly disclosed period.”

Perhaps most importantly, in its response to this FAQ, the Staff appears to have gone to great lengths not to describe any particular metric as performance. Instead, the Staff simply acknowledges that “advisers may be unsure whether certain 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) are ‘performance’ under the rule” before setting out the safe harbor conditions that alleviate the necessity for corresponding net characteristics “even if such characteristics were to qualify as performance.”

Crucially, this means this new FAQ does not compromise prior analyses that registered advisers and their counsel have undertaken as to whether a particular metric should be treated as performance.

Advisers that have been including net figures for metrics such as yield may remove those figures, and advisers that have not been including net figures may continue to refrain from showing a net figure. In either case, we recommend that materials comply with the conditions set out in this FAQ.

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.