On March 19, the Division of Investment Management published an updated FAQ on the Marketing Rule addressing extracted performance. The January 2023 Marketing Rule FAQ on extracted performance has been substantially revised.
The old FAQ had required the calculation of new return for the performance shown in a case study for a private fund. I have long argued that showing the net return for the fund as a whole was the better comparison than making up the net return for a single investment in a private fund. The net return for the private fund is what the investor actually gets.
The updated FAQ provides:
“The staff, however, believes that, when an adviser prominently displays the gross and net performance of the total portfolio from which an extract was extracted, calculated pursuant to the requirements of the marketing rule and presented in a manner that is not otherwise materially misleading, and appropriate information accompanies the gross performance of the extract, there is little risk that presenting only the gross performance of an extract will be misleading. Specifically, the staff would not recommend enforcement action to the Commission under rule 206(4)-1(d)(1) if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, if:[3]
- the extracted performance is clearly identified as gross performance;[4]
- the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;[5]
- 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;[6] 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.”
Also pay attention to footnote 6:
[6] In the staff’s view, the gross and net performance of the total portfolio does not need to be presented on the same page of the advertisement as the extracted performance, provided that the presentation facilitates comparison between the gross and net performance of the total portfolio and the extracted performance. For example, in the staff’s view, presenting the gross and net performance of the total portfolio prior to the extracted performance in the advertisement could also facilitate such comparisons and help ensure they are presented with at least equal prominence to the performance of the extract.
This is an even more liberal view than I had argued for. The fund performance doesn’t have to be on the same page. Marketing groups are going to be very happy.
Sources:
- Marketing Compliance Frequently Asked Questions
- A New Marketing Rule FAQ January 12, 2023