SEC Marketing Rule FAQs for Gross and Net Performance of Extracted Performance

The Securities and Exchange Commission’s (SEC) Division of Investment Management released its much-anticipated Marketing Rule Frequently Asked Questions (FAQs) on March 19, 2025, to clarify how advisers should present gross and net performance of extracted performance and performance characteristics.

Since the Marketing Rule took effect, the obligation to provide net performance has complicated implementation of the rule. The requirement to include net returns for all performance - combined with a lack of guidance on what qualifies as “performance” -  led advisers to adopt broad interpretations of both what counts as performance and how best to calculate net-of-fee returns. As a result, compliance with the rule often felt arbitrary, confusing, and at times, misleading. These FAQs directly address these issues.

Portfolio and investment characteristics

This FAQ specifically discusses portfolio or investment characteristics that advisers commonly include when advertising a strategy, expressly mentioning examples of yield, coupon rates, contribution to return, volatility, sector or geographic returns, attribution analysis, and the Sharpe Ratio.

It does not address whether these characteristics are “performance” for purposes of the Marketing Rule. However, states that if advisers present certain performance characteristics on a gross-only basis, the SEC staff would not recommend enforcement action under Rule 206(4)-1(d)(1), provided the following conditions are met:

1. Gross characteristics are clearly identified as being calculated without the deduction of fees and expenses,
2. The portfolio’s total gross and net performance are included consistent with the requirements of the rule,
3. Total gross and net performance are shown with at least equal prominence to and in a manner designed to facilitate comparison with gross, and
4. Gross and net total portfolio returns are calculated over the same time period as the characteristics shown.

This FAQ further clarifies that the time periods shown for the characteristics and total portfolio returns could be over a single, clearly disclosed period - and that these characteristics are not required to meet the "prescribed time period" requirements of the Marketing Rule. This allows advisers to show attribution as of the most recent quarter-end or another specified period. This FAQ aligns with common practices that existed prior to the Marketing Rule's amendment in November 2022.

Extracted performance

One of the most challenging aspects of the Marketing Rule - if not the most challenging - is the requirement that gross extracted performance must be shown alongside net extracted performance. To meet this requirement, advisers adopted various practices to reflect the impact of fees and expenses within individual investments or groups of investment returns.

This FAQ addresses the net-of-fee requirements for extracted performance and allows for gross only extracted returns when certain conditions are met. With a better understanding of how advisers use extracted performance in their advertising, this FAQ provides relief from misleading or confusing net results. It specifically states that when gross and net returns of the total portfolio are presented alongside the extracted performance, there is little risk in showing gross only extracted performance.

If an adviser would like to show gross only extracted performance, the SEC staff would not recommend enforcement action under 206(4)-1(d)(1) provided the following other conditions are met:

1. Extracted performance is clearly identified as gross performance,
2. Extracted performance is accompanied by a presentation of total gross and net performance,
3. Gross and net performance of the total portfolio is presented in at least equal prominence to, and designed in a manner to facilitate comparison with the extracted performance, and
4. Gross and net total portfolio returns are calculated over the same time period as the extracted performance shown.

The time periods shown for the extracted performance and total portfolio could be over a single, clearly disclosed period.

Conclusion

Both FAQs provide essential guidance to ensure advertising practices provide transparency and reduce the risk of misleading information. By clearly identifying extracted performance and characteristics as gross, presenting total portfolio performance prominently, and adhering to the specified disclosure requirements, advisers can provide information that makes sense to an investor and maintain compliance with the Marketing Rule.

How we help

ACA is the only governance, risk, and compliance firm that offers both regulatory compliance advisory  and performance expertise, including a deep understanding of the intricacies of complex performance calculation methodologies. Our services include:

• Gap analysis: Conduct a gap analysis to help assess the impact of the new FAQ on your firm’s presentation of investment performance and provide recommendations to calculate and present such performance. 
• Implementation support:  
  • Provide resources to create or edit your firm’s investment performance templates to include required performance calculations.  
  • Assist with documenting the policies and procedures associated with the chosen calculation methodology and ensure the methodology is appropriately disclosed.
• Focused review: Review of the calculation to ensure the methodology was applied consistently and in line with the SEC Marketing Rule. 

Our team is available to help your firm navigate this aspect of the Marketing Rule - or any part of your broader compliance program. Let's connect to ensure your approach is both effective and aligned with SEC expectations.

Contact us