Yes, Yield Can Be Presented Gross of Fees!
We now have clearer guidance regarding the application of Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended SEC Marketing Rule, providing registered investment advisers with a clear path for presenting extracted performance and certain portfolio characteristics on a gross basis. Because the SEC Marketing Rule does not explicitly define “performance”, it led to confusion as to whether the net requirement would apply to items such as portfolio characteristics and extracted performance. The first set of FAQs that were released back in 2023 attempted to provide some clarification on extracted performance; however, the Staff still left advisers with open questions, especially pertaining to calculating and presenting portfolio or investment characteristics. Thankfully, necessary clarification has finally been provided.
Below, we breakdown the key takeaways from the latest FAQs released March 19, 2025 by the US Securities and Exchange Commission Staff (“Staff”).
1. Portfolio or Investment Characteristics
This FAQ provides clarification on the presentation of portfolio or investment characteristics (for example, yield, coupon rate, sector or geographic returns, attribution, and other similar metrics). While not definitively specifying whether these characteristics would qualify as performance information, the staff acknowledged that calculating the characteristics net of fees may be impossible in some cases and, therefore, Staff offered options for presenting them on a gross basis. In doing so, the Staff laid out the following requirements when presenting portfolio or investment characteristics gross of fees:
- The portfolio or investment characteristic is presented gross of fees and is clearly disclosed as being calculated without the deduction of fees and expenses.
- Gross and net performance of the total portfolio is shown alongside the gross characteristic.
- The total portfolio gross and net performance is shown in equal prominence to the gross characteristic.
- Gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the gross characteristic is calculated.
Note that the FAQ clearly outlines in one of the corresponding footnotes that the exemptions specified do not apply to the following metrics, which must continue to be presented net of fees: total return, time-weighted return, return on investment (ROI), internal rate of return (IRR), multiple on invested capital (MOIC), and Total Value to Paid in Capital (TVPI).
2. Extracted Performance
This FAQ is meant to replace the FAQ released back in 2023. In the new FAQ, the SEC permits an adviser to present gross only extracted performance if the following conditions (which mirror those for presenting investment characteristics gross of fees) are met:
- The gross only extracted performance is clearly disclosed as being calculated without the deduction of fees and expenses.
- Gross and net performance of the total portfolio is shown alongside the gross only extracted performance.
- The total portfolio gross and net performance is shown in equal prominence to the gross only extracted performance.
- Gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the gross extracted performance is calculated.
The SEC’s recently released FAQs provide much-needed guidance and flexibility to help minimize the risk of advisers providing misleading information. This is a very welcome clarification that permits advisers to present gross only extracted performance as well as portfolio characteristics, so long as it is transparent and fairly presented and disclosed. Investment advisers should proactively adapt their compliance programs to align with these evolving regulations. By staying informed and diligent, firms can market their services effectively while mitigating regulatory risks.
Please contact us if you feel you need help ensuring your firm’s marketing practices align with the SEC Marketing Rule.
