Learn about the requirements and restrictions for performance advertising under the new SEC marketing rule.
In our blog post series on the new SEC marketing rule, we consider various issues related to the new rule, including the expanded definition of advertising, leveraging technology, testimonials and endorsements, third-party ratings, recordkeeping and Form ADV requirements, review and approval of ads, and overall best practices. In this post, we examine rule requirements and restrictions for performance advertising. Our next post in the series will drill down into the complex topic of hypothetical performance.
Let’s start with some definitions.
Net Performance Requirement
The new marketing rule includes a net performance requirement that references a few key terms.
The net performance requirement prohibits ads from presenting gross performance unless they also present net performance
- with at least equal prominence to, and in a format that allows comparison with, the gross performance and
- calculated over the same time period, and using the same type of return and methodology, as the gross performance.
The net performance requirement applies to all ads, regardless of the intended audience (retail, high net worth, institutional, etc.). This is a significant change from current SEC guidance that allows the use of gross performance only in one-on-one client presentations that meet certain criteria.
Extracted Performance Provision
As mentioned above, the new marketing rule defines extracted performance as the performance results of a subset of investments extracted from a single portfolio. A notable addition to the new rule that wasn’t formally addressed by the SEC until now, the extracted performance provision allows advisers to extract performance of a particular strategy from a multi-strategy portfolio with the purpose of marketing a portfolio that follows the particular strategy.
The new rule prohibits ads from displaying extracted performance unless they also provide, or offer to provide promptly, the performance results of the total portfolio from which the performance was extracted.
Time Period Requirement
Ads that display the performance results of portfolios—or any composite aggregation of related portfolios—must also display the results for certain time periods. Marketing and compliance teams need to consider these inclusions and exclusions.
Performance results for periods other than those noted above may be displayed if the 1-, 5-, and 10-year periods are included. If performance history doesn't exist for the 5- and 10-year periods, you should present the since-inception period and note the start date.
Related Performance Provisions
The related performance provisions of the new marketing rule use two key terms that are important to distinguish.
Under the new marketing rule, presentations of related performance must include all related portfolios (individually or collectively), excluding any related portfolios to which these two conditions apply:
- the advertised performance results are not materially higher than if all related portfolios had been included and
- the exclusion of any related portfolio doesn't alter the presentation of 1-, 5-, and 10-year periods discussed above.
Predecessor Performance Provisions
According to the new marketing rule, predecessor performance includes investment performance achieved by a group of investments consisting of an account or a private fund that the investment adviser didn't manage during the period shown. In other words, effective presentations of predecessor performance show relevant historical data that investors may find helpful. The new rule allows ads to display predecessor performance only under certain circumstances.
As you consider effective—and compliant—ways to advertise your firm’s performance, make sure you understand these important rule requirements and provisions. In our next post, we’ll take a closer look at hypothetical performance.