Under the SEC Marketing Rule, firms are limited in how they are allowed to distribute and use presentations that include hypothetical performance.
All materials that include hypothetical performance – even if only distributed to one individual in a one‐on‐one setting – must be viewed as advertisements. Further, investment advisers are prohibited from advertising hypothetical performance unless the firm:
- Adopts and implements policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement,
- Provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating such hypothetical performance, and
- Provides sufficient information to enable the intended audience to understand the risks and limitations of using such hypothetical performance in making investment decisions.
The Adopting Release addresses that the SEC intends “for advertisements including hypothetical performance information to only be distributed to investors who have access to the resources to independently analyze this information and who have the financial expertise to understand the risks and limitations of these types of presentations.” Given this, it is unlikely that advisers will be allowed to use hypothetical performance as part of standard marketing communications.
The Adopting Release further clarifies that the Marketing Rule does not require an investment adviser to inquire into the specific financial situation and investment objectives of the intended audience in all cases. Instead, the investment adviser’s past experiences with particular types of investors should lead the investment adviser to design reasonable policies and procedures that distinguish among investor types. These criteria may include, for example, whether an investor is an existing client of the investment adviser, the net worth or investing experience of the investor (if such information is available to the investment adviser), certain regulatory categories (e.g., qualified purchasers, qualified clients, or even qualified institutional buyers), or whether the investor type includes only natural persons or only sophisticated institutions. An investment adviser may also reference requests the investment adviser has previously received from an investor or class of investors to determine that certain hypothetical performance presentations are relevant to the likely financial situation and investment objectives of such investors.
Click here for the Final SEC Marketing Rule Adopting Release.
