Navigating SEC Guidelines: Unpacking the Latest FAQs on Fund Performance Marketing Compliance

16th February 2024

Earlier this month, the SEC published an updated version of its Marketing Compliance Frequently Asked Questions (FAQ). The FAQ clarifies the provisions of the Marketing Rule (the Rule), covering fund performance marketing requirements related to the use of subscription lines. The SEC occasionally updates this FAQ to include additional responses from the Division of Investment Management staff. However, it is important to note that the FAQs are not statements from the SEC itself.

The newly added question is:

Must gross and net performance shown in an advertisement always be calculated using the same methodology and over the same time period?

In short, yes.

This question arises in response to the Marketing Rule provision that mandates accompanying gross performance presentations with net performance. These presentations should be calculated over the same time period and using the same type of return and methodology. The Rule also requires that net performance is presented in a format designed to facilitate comparison with gross performance.

The updated FAQ focuses on how private funds may wish to present the gross internal rate of return (Gross IRR) and the net internal rate of return (Net IRR). The concern is that the Net IRR may be inflated compared to the Gross IRR due to differences in the time period and methodology used. For example, if the Gross IRR is based on a period during which the fund relies on lines of credit and does not reflect fund borrowing or subscription facilities, presenting the Net IRR including the impact of subscription facilities is inconsistent and therefore in violation of the Rule. As a result, the Net IRR can be inflated, an effect the SEC seems eager to discourage.

As provided in the FAQ, the types of fund-level subscription facilities contemplated include subscription line financing, capital call facilities, capital commitment facilities, bridge lines, or other indebtedness incurred by a private fund. The inclusion of subscription facilities in the Net IRR but not the Gross IRR could also be construed as a use of different methodology as well as different time periods.

This FAQ helps clarify this aspect of the Rule, which does not prescribe the methodology to be used when an advertisement presents net and gross performance. The FAQ advises considering disclosures that discuss the impact of subscription facilities on the Net IRR that is shown.

Based on this new addition to the FAQ, it is advisable for private funds to seriously consider the manner in which they choose to present net and gross performance. Several display methods can ensure the proper disclosures, including:

  • Displaying Gross and Net IRR both commencing from a time prior to the time that capital commitments were called from investors if that is when the display of Gross IRR begins; or
  • Showing four sets of data – Gross and Net IRR both with and without the impact of subscription facilities, so four sets of performance.

Understanding and working within the parameters of the Rule is essential for SEC compliance, and the published FAQ provides valuable insight into the best path forward for private funds. The industry has taken up marketing and advertising material as a concern on a global level, so understanding whether your materials comply is crucial for fund managers.

If you have questions about this newly published guidance in the FAQ, please reach out to our team! For any queries or support for your regulatory and compliance needs, get in touch with our team of specialists.


Madeline Gegg