The SEC’s Division of Investment Management released an important update to its Marketing Compliance FAQ on March 19, 2025, offering key clarifications around the Marketing Rule (Rule 206(4)-1) under the Investment Advisers Act of 1940.

These updates provide long-awaited staff guidance regarding:

Extracted Performance

The SEC clarified that when advisers display the gross performance of one investment or group of investments extracted from a portfolio, they must generally also show the net performance of the extract. However, staff will not recommend enforcement action if certain conditions are met—including that:

• The extracted performance is clearly identified as gross.
• The total portfolio’s gross and net performance is also presented, with equal prominence and over a time period that includes the extract’s period.
• The extract is not otherwise misleading and is accompanied by appropriate disclosures.

Portfolio or Investment Characteristics

Advisers often question whether characteristics such as volatility, Sharpe ratio, sector returns, or attribution metrics count as “performance” under the rule. While the rule doesn’t define “performance,” the SEC noted:

Staff will not recommend enforcement action for displaying gross characteristics (without net versions), provided that the adviser:

• Clearly labels the characteristics as gross (excluding fees/expenses),
• Presents total portfolio gross and net performance alongside the characteristic,
• Ensures equal prominence and comparability, and
• Uses a clearly disclosed, single time period.

Key Reminder on Performance Methodology Consistency

The staff reaffirmed that gross and net performance must be calculated over the same time period and using the same methodology. For private funds, this means IRRs calculated with and without fund-level subscription lines must align in methodology and timing. Inconsistent application may constitute a violation of the Marketing Rule.

Why It Matters

This new guidance was recently foreshadowed at the Investment Adviser Association’s 2025 compliance conference. Advisers who advertise performance—particularly those managing private funds—should revisit marketing materials and ensure compliance with the updated staff guidance.

Need help reviewing your performance presentations or disclosures? Our compliance consulting team is here to help you navigate these evolving expectations.