The SEC’s Marketing Rule (Rule 206(4)-1) requires any presentation of gross performance to be accompanied by net performance and presented with at least equal prominence to gross performance calculated using the same methodology over the same time period.
On March 19, 2025, the SEC updated its frequently asked questions (FAQs) addressing gross and net performance under the Marketing Rule. Certain performance and related metrics are now permitted to be presented on a gross only basis.
The new FAQs provide relief to advisors who present extracted performance and portfolio or investment characteristics. Net calculations can sometimes be tricky and interpreting the meaning of some metrics on a net basis can be confusing.
New FAQ: Extracted Performance
The first of the new FAQs relates to extracted performance, which is the performance of one investment or a group of investments that are carved out, or extracted, from a portfolio. The FAQ notes that advisors can now display gross only performance of an extract, without showing net, if:
- The extracted performance is clearly identified as gross performance,
- The extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the Marketing Rule,
- The gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance, and
- The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance is calculated.
New FAQ: Presentation of Portfolio or Investment Characteristics
The second new FAQ relates to the presentation of portfolio or investment characteristics. The Marketing Rule does not define “performance,” yet advisors are required to present performance both gross and net.
This has presented a quandary to many advisors that seek to present characteristics such as yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, ratios like the Sharpe and Sortino ratios, and other similar metrics. The quandary is, do these metrics qualify as “performance” and, accordingly, does an advisor need to present both gross and net basis calculations?
The recent FAQs clarify that advisors can show portfolio or investment characteristics presented on a gross only basis, if:
- The gross characteristic is clearly identified as being calculated without the deduction of fees and expenses,
- The characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirement of the Marketing Rule,
- The total portfolio’s gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the gross characteristic, and
- The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated. The FAQ further notes that because time periods over which characteristics are calculated may not easily align with the time periods required by the Marketing Rule, advisors can still display it if the characteristic presented is calculated over a single, clearly disclosed period.
Conclusion
The SEC’s updated FAQs provide much-needed clarity for advisors regarding the presentation of gross and net performance under the Marketing Rule, offering flexibility in how extracted performance and portfolio characteristics are disclosed. Advisors can now present certain metrics on a gross-only basis, provided the total portfolio’s performance is clearly presented alongside it. This guidance will help reduce confusion around net calculations and simplify the compliance process for many advisors.
If you have any questions or would like to discuss the new FAQs further, please contact Thomas A. Peters, Director, Investment Industry Group at tpeters@kmco.com.