SEC Marketing Rule FAQ
The New SEC marketing rule FAQ is likely to significantly impact marketing materials prepared by investment advisers marketing new North America private funds.
Nearly three months after the effective date of The Securities and Exchange Commission (the “SEC”) amended Marketing Rule, the Staff of the Division of Investment Management (the “Staff”) released a Frequently Asked Questions (the “FAQ”) regarding the presentation of gross and net performance in advertisements. The FAQ is likely to significantly impact marketing materials prepared by investment advisers that were marketing new private funds.
The FAQ states that the prior performance of a single investment in a private fund (deal-by-deal returns) is considered “extracted performance” under the new Marketing Rule. This means that an SEC-registered adviser may not show gross performance of one investment or of a group of investments without also showing the net performance. The FAQ does not, however, address the SEC’s views on whether this extends to managed accounts or single-investment funds.
Although the SEC’s guidance is not binding, it provides insight into how the Staff will interpret and enforce the Marketing Rule.
The full FAQ text is below:
Q: I understand that an adviser must comply with the amended adviser marketing rule with respect to its advertising and solicitation activities by the compliance date (November 4, 2022), which is 18 months after the effective date of the rule. May an adviser choose to comply with some of the marketing rule requirements before the compliance date, but not comply with others?
A: No. An adviser may choose to comply with the amended marketing rule in its entirety any time starting on the effective date, May 4, 2021. Until an adviser transitions to the amended marketing rule, the adviser would continue to comply with the previous advertising and cash solicitation rules and look to the Staffs’ positions under those rules. The Staff believes an adviser may not cease complying with the previous advertising rule and instead comply with the amended marketing rule but still rely on the previous cash solicitation rule.
Advisers are reminded that they should review their compliance policies and procedures in light of regulatory developments, including the adoption of the amended marketing rule. In addition, the Staff believes that when advisers transition to the amended marketing rule, they will need to implement any revisions to the written compliance policies and procedures necessary so that they are reasonably designed to prevent violations of the amended marketing rule.
Advisers are also reminded that they are required to maintain a copy of all compliance policies and procedures in effect at any time within the previous five years, and that it should be clear when those policies and procedures were in effect.
Q: The marketing rule prohibits an adviser from displaying performance results in an advertisement, unless certain requirements are satisfied. For example, an advertisement, except for an advertisement that includes private fund performance information, must include performance results for prescribed time periods ending on a date that is no less recent than the most recent calendar year-end. My firm is not able to calculate its one-, five-, and ten-year performance data immediately following a calendar year-end, but anticipates having updated performance figures within one month of the calendar year-end. However, my firm has performance information that is current as of the third quarter of that calendar year (“interim performance information”). Can my firm instead use the interim performance information in an advertisement?
A: The Staff would not object if you are unable to calculate your one-, five-, and ten-year performance data in accordance with rule 206(4)-1(d)(2) immediately following a calendar year-end and you use performance information that is at least as current as the interim performance information in an advertisement until you can comply with the calendar year-end requirement. The Staff believes that a reasonable period of time to calculate performance results based on the most recent calendar year-end generally would not exceed one month. The interim performance information remains subject to the other provisions of the marketing rule, including the general prohibitions.
- 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?
- 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.
How Apex Group can help
Apex Group’s global compliance team has many years of experience managing SEC regulatory compliance programs, giving clear insight into how to help advisers interpret and navigate the implementation of procedures to comply with new regulation.
Reach out to Michael Barakat, Assistant Director, Compliance on firstname.lastname@example.org or a member of our team for additional information.