On March 19, 2025, staff from the Securities and Exchange Commission (SEC staff) updated its prior guidance regarding the requirement to show net returns of an individual investment, or subset of investments, in compliance with Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940.
A little more than two years ago, in January 2023, SEC staff issued an FAQ stating its view that displaying the gross return of one investment (e.g., a case study), or a group of investments from a private fund, is an example of extracted performance under the Marketing Rule, and that registered investment advisers (RIAs) were not permitted to show such extracted performance on a gross basis without also showing it on a net basis. Because fees and expenses are not usually deducted at the investment level, however, the 2023 FAQ resulted in RIAs having to calculate an often arbitrary net return.
In its updated FAQ, SEC staff now provides that RIAs can show gross returns at the investment level without also showing net returns (i.e., gross extracted performance only) if they meet certain criteria. Specifically:
- The gross extracted performance is accompanied by fund-level gross and net returns that comply with the Marketing Rule.
- The gross extracted performance is clearly identified as gross (e.g., by disclosing that it does not reflect the deduction of all fees and expenses and cross-referencing the fund-level gross and net returns).
- The fund-level gross and net returns are presented with at least equal prominence to – and in a manner designed to facilitate comparison with – the gross extracted performance.
- The fund-level gross and net returns are calculated over a period that includes the entire period over which the gross extracted performance is calculated.
The updated FAQ helpfully provides that, in the SEC staff’s view, the fund-level gross and net returns do not need to be on the same page as the gross extracted performance, as long as the presentation facilitates comparison between the fund-level returns and the gross extracted performance. In this regard, SEC staff notes that the fund-level gross and net returns can appear before the gross extracted performance.
In a companion FAQ, which may be less applicable to venture capital and private equity firms, SEC staff also provides its view on certain performance-like metrics and how an RIA might include them on a gross-only basis in an advertisement. The FAQ references “characteristics,” such as “yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics.” Importantly, SEC staff clarifies that “characteristics” would not include “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), regardless of how such metrics are labelled.”
While stating that it was not taking a position on whether any particular characteristic or attribute should be considered performance for purposes of the Marketing Rule, SEC staff stated that it would not recommend enforcement action to the SEC under the Marketing Rule if an adviser chooses to present one or more gross characteristics of a portfolio or investment without showing corresponding net characteristic(s) if they meet certain criteria. Specifically:
- The gross characteristic is accompanied by fund-level gross and net returns that comply with Marketing Rule requirements.
- The gross characteristic is clearly identified as being calculated without the deduction of fees and expenses.
- The fund-level gross and net returns are presented with at least equal prominence to – and in a manner designed to facilitate comparison with – the gross characteristic.
- The fund-level gross and net returns are calculated over a period that includes the entire period over which the gross characteristic is calculated.
RIAs should keep in mind that other aspects of the Marketing Rule, including the general prohibitions, still apply to all performance advertising. For more on the Marketing Rule, please see Venture Capital Fund Managers’ Guide to Applying the Latest Marketing Rule Risk Alert and Last-Minute Checklist for Private Fund Managers Complying With Marketing Rule.
The authors
Stacey Song
