Frequently Asked Questions
Performance Advertising

Performance advertising by investment advisers generally refers to advertisements that include investment performance, rates of return, benchmark comparisons, hypothetical performance, model performance, predecessor performance, related performance, extracted performance, or similar information designed to demonstrate the results of an investment strategy or advisory service.

Because investors often place significant weight on performance claims, performance advertising is one of the most heavily scrutinized areas by SEC examiners. The SEC expects investment advisers to present performance information in a manner that is fair and balanced and not misleading.

Yes. SEC Rule 206(4)-1 permits investment advisers to advertise investment performance provided the performance presentation complies with the requirements of the Marketing Rule and does not contain misleading statements, omissions, or implications.

Investment advisers are required to maintain appropriate records supporting the performance results and the basis for any material statements contained in the advertisement.

Interestingly, the SEC did not define “performance” by investment advisers. However, it generally refers to investment results achieved by accounts, portfolios, private funds, composites, or other investments where actual trading occurred and actual assets were invested by the investment adviser.

Hypothetical performance generally consists of performance results that were not actually achieved by a portfolio of the investment adviser.

The SEC defines hypothetical performance as performance results that were not actually achieved by a portfolio of the investment adviser.

The SEC’s definition of hypothetical performance specifically includes, but is not limited to:

• Model performance
• Back-tested performance
• Targeted or projected performance returns

Because hypothetical performance was not actually achieved through real-world trading activity, the SEC imposes additional requirements and compliance obligations on advisers utilizing hypothetical performance in advertisements.

Back-tested performance generally refers to the application of an investment strategy, model, or methodology to historical market data after the fact.

Back-tested results are considered hypothetical performance because the results were not actually achieved by a client account, proprietary account, private fund, or other portfolio managed by the investment adviser.

Investment advisers should carefully evaluate disclosures, assumptions, limitations, and documentation before utilizing back-tested performance.

Generally, no.

Subject to limited SEC guidance and specific facts and circumstances, advertisements presenting an investment adviser’s gross performance generally must also present net performance in a manner designed to facilitate comparison between the two presentations.

Investment advisers should carefully review the SEC Marketing Rule requirements and related SEC Frequently Asked Questions when preparing gross and net performance presentations.

Net performance generally refers to performance after the deduction of fees and expenses that reduce investor returns.

The SEC Marketing Rule contains specific requirements governing the presentation of an investment adviser’s net performance and its relationship to gross performance.

Investment advisers should ensure that gross and net performance are presented using comparable methodologies and time periods.

Extracted performance generally consists of performance results relating to a subset of investments extracted from a portfolio.

For example, extracted performance could include performance relating to a particular sector, strategy sleeve, group of holdings, or individual investments taken from a larger portfolio.

Because extracted performance may present only a portion of a portfolio’s overall holdings, investment advisers should carefully evaluate whether additional information is needed to avoid a misleading presentation.

Significant caution by an investment adviser is required.

Advertisements highlighting only profitable recommendations may create concerns regarding cherry-picking, fair and balanced presentation, materially misleading omissions, and the SEC requirements relating to references to specific investment advice.

Investment advisers should carefully evaluate the specific facts and circumstances before utilizing this type of performance presentation.

Predecessor performance generally refers to performance generated while investment personnel were associated with a different advisory firm.

The SEC Marketing Rule permits predecessor performance under certain circumstances. However, investment advisers should carefully evaluate whether the presentation satisfies the requirements and conditions applicable to predecessor performance.

Related performance generally involves the performance of one or more related portfolios having substantially similar investment policies, objectives, and strategies.

The purpose of the Marketing Rule’s related performance requirements is to reduce the risk that an adviser selectively includes only favorable related portfolios while excluding less favorable results.

Investment advisers should maintain documentation supporting any determination that portfolios qualify as related performance.

Benchmark comparisons compare the performance of an investment strategy, account, composite, or portfolio against a market index or other benchmark.

Benchmark comparisons can be useful to investors, but they may also be misleading if important differences between the benchmark and the strategy are not adequately disclosed.

Investment advisers should evaluate whether the selected benchmark is appropriate and whether additional context is necessary to allow investors to understand the comparison.

Yes. One of the most important concepts under the SEC Marketing Rule is that an advertisement can be misleading because of information that is omitted, the context in which information is presented, or the overall impression created by the advertisement.

A technically accurate statement may still be misleading if investors are likely to draw inaccurate conclusions from the presentation.

Although the specific records may vary depending upon the advertisement, investment advisers should generally maintain documentation relating to:

• Copies of advertisements
• Supporting calculations
• Source data
• Benchmark information
• Fee assumptions
• Hypothetical performance assumptions
• Review comments
• Approval records
• Supporting disclosures

Maintaining a complete advertising review file may significantly assist an investment adviser during an SEC examination.

Deficiencies frequently involve:

• Unsupported performance claims
• Missing net performance presentations
• Misleading benchmark comparisons
• Cherry-picked investment results
• Deficient hypothetical performance disclosures
• Inadequate books and records
• Inadequate advertising review procedures
• Failure to maintain substantiation for material factual statements

Investment advisers should periodically review their performance advertising policies and procedures to address these common examination concerns.

No. Although the SEC Marketing Rule is an important regulatory framework, investment advisers may also need to consider state regulatory requirements, contractual obligations, industry standards, custodial requirements, private fund considerations, ERISA-related obligations, Global Investment Performance Standards (GIPS®), and other requirements applicable to their particular business activities.