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As a general principle, the Marketing Rule requires registered
investment advisers to include net performance alongside any
presentation of gross performance. Market practice on whether or
how this principle applies to case studies and other portfolio
highlights in the context of an advertisement that already presents
net and gross performance information for the portfolio as a whole
has varied widely in the two months since the effectiveness of the
However, on January 11, 2023, the Staff of the U.S. Securities
and Exchange Commission Division of Investment Management sought to
eliminate any heterodoxy on this point by issuing a new FAQ
requiring that net performance always be shown whenever gross
performance is displayed, even when the performance relates to a
single investment or group of investments.
In response to the question,
When an adviser displays the gross performance of one investment
(e.g., a case study) . . . must the adviser show the
net performance of the single investment[?]
the SEC Staff stated that:
an adviser may not show gross performance of one
investment . . . without also showing the net
performance of that single investment[.]
Unfortunately, calculating what is sometimes termed
“derived net,” “regulatory net” or
“imputed net” performance is not as simple as one might
hope. Fund managers and sponsors that intend to show performance
for case studies or other portfolio highlights will need to
consider questions such as the following:
- How to equalize performance when some investors were admitted
after the position was initialized.
- How and whether to include high water mark credits, especially
in older funds where not all investors are under the high water
mark (or under the same high water mark).
- For funds with multiple investments and an American-style
waterfall, whether to assume that all assets are sold at once,
whether to make a reasoned assumption about the order of their sale
or whether to apply the full carry or incentive to that investment
on a stand-alone basis.
- How to adjust the calculation for preferential returns.
- Whether and how to account for (or whether to ignore) the
possibility of a clawback.
- Which fees to utilize for funds and strategies with multiple
share classes or fee arrangements.
- Whether fund expenses should be spread across the entire
portfolio or attached to specific investments.
- Whether to adjust for any tax distortions.
- If applicable, whether to impute a liquidity discount.
There are no instructions on how to address these questions and
considerations, and it is unlikely that comprehensive guidance will
In addition to the operational difficulties of calculating
regulatory/derived/imputed net performance, fund sponsors and
managers must assess whether the resulting figures are misleading
under a Rule 10b-5 anti-fraud analysis and whether they meet the
Marketing Rule’s “fair and balanced”
While Staff positions do not reflect the views of the Commission
itself and do not have the force of law, they are indicative of
positions that SEC Examination and Enforcement personnel may take
when assessing an adviser’s marketing materials. Accordingly,
comprehensive explanations of the steps taken and the assumptions
made will be more important than ever.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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