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Regulation and Compliance > Federal Regulation > SEC

New SEC Marketing Rule FAQ Could be ‘Problematic,’ Compliance Pro Says

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What You Need to Know

  • The SEC’s new Marketing Rule includes a directive on displaying gross and net performance that could be problematic, compliance experts say.
  • Firms don’t calculate performance on an investment-by-investment basis at the net level.
  • Additionally, advisors may face challenges in presenting net performance that aren’t specifically addressed by the SEC.

The Securities and Exchange Commission recently updated question-and-answer guidance on its new Marketing Rule, which had a Nov. 4 compliance date. It includes a potentially “problematic” directive on displaying gross and net performance, according to compliance experts.

The guidance included in the FAQ on gross and net performance “when using extracted performance is the first bit of real guidance from the SEC on the new Marketing Rule, post implementation,” Amy Lynch, founder and president of FrontLine Compliance, wrote Tuesday in an email to ThinkAdvisor.

The FAQ asks, “When an adviser displays the gross performance of one investment (e.g., a case study) or a group of investments from a private fund, must the adviser show the net performance of the single investment and the group of investments?”

The SEC’s answer: “Yes. The staff believes that displaying the performance of one investment or a group of investments in a private fund is an example of extracted performance under the new marketing rule. Because the extracted performance provision was intended, in part, to address the risk that advisers would present misleadingly selective profitable performance with the benefit of hindsight, the staff believes the provision should be read to apply to a subset of investments (i.e., one or more).

“Accordingly, an adviser may not show gross performance of one investment or a group of investments without also showing the net performance of that single investment or group of investments, respectively. In addition, the adviser must satisfy the other tailored disclosure requirements as well as the general prohibitions, including the general prohibition against specific investment advice not presented in a fair and balanced manner, when showing extracted performance.”

According to the SEC’s answer, “firms using extracted performance must show both gross and net for the extracted investments shown,” Lynch said. “This could be problematic from a practical perspective in that firms do not already calculate performance on an investment-by-investment basis at the net level. They don’t do this because fees and expenses are not typically attributed at the investment level. It will be interesting to see how the industry, especially the private fund side, handles this.”

Sanjay Lamba, associate general counsel at the Investment Adviser Association in Washington, wrote in another email that advisors “may face practical challenges in presenting net performance that aren’t specifically addressed by the FAQ.”

Moreover, Lamba said, the SEC guidance “was issued just as SEC examiners are about to conduct planned examinations of advisers for compliance with the Marketing Rule.”

The Investment Adviser Association, Lamba adds, hopes that SEC examiners “consider the timing of this FAQ and permit advisers adequate time to carefully review and update their marketing materials and compliance programs, as necessary, in light of the FAQ.”

As to the SEC’s response to timeline of performance information shown in marketing materials, the agency is “simply verifying that their position has not changed on this matter,” Lynch said.

“Basically, firms must use the most recent data available (and finalized) for presentations and that the information should not be stale,” Lynch said. “Any data shown that is more than six months old could be deemed stale by a regulator.”

(Photo: Diego M. Radzinschi/ALM)


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