Registered investment advisors have received updated guidance from the Securities and Exchange Commission regarding compliance with its marketing rule, WealthManagement reports.
The staff of the SEC’s Division of Investment Management prepared a list of responses to frequently asked questions about the rule, which was modernized in 2020 with the adoption of amendments to rule 206(4)-1 under the Investment Advisers Act of 1940.
The rule is designed to comprehensively regulate investment advisers’ marketing communications. In one provision, it prohibits any presentation of gross performance without the inclusion of net performance with at least equal prominence, calculated for the same time period, and using the same type of return and methodology as the gross performance.
But in the newly released FAQs and answers, the Division of Investment Management states it 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:
1, the extracted performance is clearly identified as gross performance.
2. the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule.
3. 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
4. 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.
The SEC Staff added it would not recommend any enforcement action if the extracted performance presented as described above is calculated over a single, clearly disclosed period, rather than over the one-, five-, and ten-year periods generally required by the Rrule.
“This is welcome news for advisors who are presenting this type of information and who were going through the motions of calculating these net metrics that they had not been calculating before,” said Julia Reyes, partner at the ACA Group, a regulatory consultant. “I would expect that many advisors are relieved …. they no longer have to keep up with these calculations or question themselves if they made the right calculation.”
Another question pertains to whether gross and net performance shown in an advertisement must always be calculated using the same methodology and over the same time period.
The division replies that yes, the rule requires that any presentation of gross performance be accompanied by a presentation of net performance that has been calculated over the same time period and using the same type of return and methodology as the gross performance.
Another FAQ addresses how to present certain portfolio or investment characteristics under the marketing rule, including yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio and other similar metrics. The division said that if the gross and net performance of the total fund portfolio is shown in equal prominence then that will make the presentation of these other characteristics not misleading when they are shown,
It was noted that the responses to the questions represent the views of the staff of the Division of Investment Management and are not a rule, regulation, or statement of the SEC. The FAQs have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.
The attorneys at Lewitas Hyman were formerly senior attorneys in the SEC’s Division of Enforcement. We have represented clients in regulatory matters while working at Morgan Stanley and in private practice at some of the world’s largest law firms. Therefore, we understand the complexities that come with being the subject of a regulatory inquiry, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact Lewitas Hyman at (888) 655-6002 or through our online contact form for a free consultation.
