On January 11, 2023, the staff of the Investment Management Division of the U.S. Securities and Exchange Commission (“SEC Staff”) updated the Marketing Rules FAQ. The new FAQ appears to impose net performance presentation requirements at the investment level (not just the portfolio level) under Rule 206(4)-1, as amended under the Investment Advisers Act of 1940 (the new “Marketing Rules”) . This FAQ represents the most significant public interpretive positions taken by the SEC staff after the November 4, 2022 Marketing Rule Compliance Date.
Net performance requirements and new FAQ
Rule 206(4)-1(d)(1) requires that any advertisement presenting gross performance must also include net performance (“Net Performance Requirement”). The definition of related terms (including “portfolio” and “extracted performance”) in marketing rules has led many industry players to believe that marketing rules do not require net performance in relation to presenting the gross performance of a single investment. was interpreting. It was presented in a “fair and balanced” way and was not otherwise misleading.
In a frequently asked question, the SEC staff states that a representation of the performance of an investment or group of investments in a private fund is: teeth is an example of “extracted performance” under the new rules, and if an advisor indicates the gross performance of such an investment, it must Also We use the same methodology to give equal prominence to the net performance of such investments. The SEC staff also noted that advisors must meet tailored disclosure requirements, which require that representations of performance be presented in a “fair and balanced” manner and not misleading. I repeated.
Compliance challenges
The marketing rules do not prescribe a specific approach for calculating net performance information at the investment level, and the SEC staff has not yet provided guidance in this regard. Calculating and presenting net performance information for individual private fund investments that meet specific disclosure requirements presents significant challenges for private fund sponsors. Calculating ‘actual’ net performance at the investment level is often impractical, if not impossible, especially due to fund-level allocations of expenses and accrued interest and issues related to retroactive accounting of investment allocations. am. investment-level costs, and timing issues for such allocations. These challenges suggest that a quote or model fee is required in many situations, which raises another disclosure issue to prevent the presentation from being misleading.
The SEC staff justifies the FAQ on the view that advisors may “misleadingly present selective profitable performance.” However, this risk appears to be addressed more directly by a “fair and balanced” presentation requirement. The Net Performance Requirement was justified in adopting the Marketing Rules release as “serving to convey information to audiences about rates and cost effectiveness”. related performance. The FAQ does not address how this risk exists in the context of traditional “building block” performance representations. Individual investment performance is presented in a table showing the gross and fund-level performance of each investment (both gross and performance included). and net performance).
Finally, the timing of this FAQ is an issue for investment advisors. This is only his third FAQ issued by his SEC staff in the two years following adoption of the Marketing Rule. The SEC staff published the FAQ a little over two months after the November 4, 2022 compliance date, but before the SEC staff completed a round of review focused on the marketing rule. The SEC staff has not stated why it chose not to wait to use the information gathered from the investigation to issue a new FAQ or why it did not publish the FAQ before November 4, 2022. Hmm. Address ads distributed before the publication of this FAQ after November 4, 2022.
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