SEC clarifies when gross-only performance may be permissible

The US Securities and Exchange Commission staff (Staff) has issued revised guidance regarding the application of Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (Marketing Rule), providing flexibility for investment advisers when reporting extracted performance and certain portfolio characteristics on a gross basis.

Issued on March 19, 2025, the FAQs replace prior guidance issued in January 2023 in which the Staff expressed the view that extracted performance (eg, a case study describing a single investment or presenting a subset of investments) should be presented on a gross and net basis but without recognizing the context for the presentation of extracted performance. The FAQs provide a more practical approach for investment advisers using extracted performance and portfolio characteristics in certain situations.

Key changes introduced in the FAQs

Presentation of gross extracted performance

Generally, if an adviser displays the performance of one investment or a group of investments in a private fund or other portfolio (ie, an extract), it will be viewed as extracted performance under the Marketing Rule. The Staff had previously taken the view that, if an adviser showed the gross performance of an extract in an advertisement, the adviser must also show a net equivalent of such extract in the advertisement.

The Staff clarified that it would not recommend enforcement under Rule 206(4)-1(d)(1) if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, if:

• The extracted performance is clearly identified as gross performance (ie, it discloses that the extracted performance 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 extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the Marketing Rule


• The gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance, which would not have to be on the same page, but should precede the presentation of extracted performance, and


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

This FAQ enables advisers to present individual case studies or subsets of portfolios on a gross basis without needing to make the complex, and often arbitrary, calculations and assumptions required to present net performance.

Treatment of portfolio and investment characteristics

The second new FAQ addresses whether certain portfolio or investment characteristics constitute performance under the Marketing Rule. The Staff acknowledged that advisers may be unsure whether certain characteristics, such as yield, coupon rate, contribution to return, volatility, sector returns, geographic returns, attribution analyses, Sharpe ratio, and Sortino ratio, constitute “performance.”

Specifically, the Staff would not recommend enforcement action 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), provided:

• 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 Marketing 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, which would not have to be on the same page but should precede the presentation of such characteristic(s), 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.

The Staff specifically noted that the FAQ does not apply to total return, time-weighted return, return on investment (ROI), internal rate of return (IRR), multiple on invested capital (MOIC), or total value to paid in capital (TVPI), indicating the Staff’s position is that such data are “performance.” Notably, the Staff declined to take a position on whether any particular characteristic or attribute should be considered “performance” for purposes of the Marketing Rule.

If an adviser presents portfolio characteristics other than those enumerated in the FAQ, it should analyze whether the characteristics are performance subject to the Marketing Rule’s requirements.

Questions?

If you have any questions about the Marketing Rule or the recently published guidance, please contact the authors, your DLA Piper relationship attorney, or another member of the DLA Piper Investment Funds team.