Even as the November 4, 2022, deadline has come and gone for registered investment advisers to comply with the SEC’s new Marketing Rule, private fund sponsors have continued to grapple with implementing one of the rule’s more consequential requirements. As a general matter, the new rule prohibits any presentation of gross performance in an advertisement unless the advertisement also presents net performance (i) with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance, and (ii) calculated over the same time period and using the same type of return and methodology as, the gross performance. Under the rule, “net performance” means performance results after the deduction of all fees and expenses that a client or investor has paid or would have paid.

While relatively straight-forward to calculate net performance in the context of an entire investment fund portfolio, how should a manager be expected to do the same for a single investment or group of investments extracted for illustrative purposes? For example, what if a case study is extracted from a private equity portfolio that is subject to multiple fee classes, multiple closings, cash reserves, several unrealized investments, a deal-by-deal waterfall and potential for clawback? Layer in the Marketing Rule’s overarching requirement that all advertisements be “fair and balanced,” and many managers were left taking the position that case studies could show gross performance so long as the net performance of the overall portfolio was shown as well.

On January 11, 2023, SEC staff dispelled this position when it answered “yes” to the following question in an update to its Marketing Rule FAQs:

Q: When an advisor displays the gross performance of one investment (e.g., case study) or a group of investments from a private fund, must the advisor show the net performance of the single investment and the group of investments?

Staff reasoned that, when read together, the gross/net and extracted performance provisions of the Marketing Rule require that “an adviser may not show gross performance of one investment or a group of investments without also showing the net performance of that single investment or group of investments, respectively.”

While the foregoing staff position is not binding on the SEC itself, the SEC Examinations division has singled out the gross/net performance requirement of the Marketing Rule as a specific area of focus for its next round of routine examinations. Accordingly, registered investment advisers would be wise to revisit their marketing materials and ensure any case studies highlighting gross performance results feature net performance results as well. Given the complexity of calculating the net performance of a case study in a “fair and balanced” manner, advisers should make every effort to “evaluate the particular facts and circumstances that may be relevant to investors, including the assumptions, factors, and conditions that contributed to the performance, and include appropriate disclosures or other information” so that the performance results are not misleading.