February 8, 2023

SEC Addresses Frequently Asked Questions on the New Marketing Rule

By Katelyn Castonguay, CPA, Assurance Director, Alternative Investment Group

SEC Addresses Frequently Asked Questions on the New Marketing Rule Alternative Investments

As of late last year, registered investment advisers (RIAs) with the Securities and Exchange Commission (SEC) must comply with the amendments to Rule 206(4)-1 (marketing rule), which was published back in December 2020. The rule went into effect on May 4, 2021; however, the SEC provided an 18-month transition period that expired on November 3, 2022.

Up until this point, private fund advisers who chose to advertise to the public utilized the previous Rule 206(4)-1 (advertising rule) as a guide, but under the new amendments, the marketing rule is now mandatory. In addition, this rule extends the disclosure, oversight, and disqualification provisions of the former Rule 206(4)-3 (cash solicitation rule) to a private fund adviser’s relationships with placement agents. This page contains a more detailed summary of the marketing rule.

On January 11, 2023, the SEC’s Division of Investment Management (the Staff) updated its list of frequently asked questions (FAQs) about adopting and complying with the marketing rule. Similar to all published FAQs, the responses represent the views of the staff and are not rules, regulations, or statements approved by the Commission. The information provides guidance to advisers but has no legal force and does not create any new or additional obligations for advisers. Below is a summary of the relevant FAQs on the SEC’s website.

SEC FAQ: Time Period Requirement

When displaying performance results in an advertisement, the marketing rule requires advisers to include one-, five-, and 10-year results. There is a private fund exclusion for presenting information on that prescribed time frame; however, even private funds must include the most recent calendar year results in an advertisement. This concerned some advisers, who explained that they need more time to calculate performance data immediately after a calendar year-end. The Staff stated they would not object to performance information that is “at least as current as the interim performance information in an advertisement until the adviser can comply with the calendar year-end requirement.” However, the Staff believes that a “reasonable” period to calculate annual performance results would not exceed one month. That may still be a tight window for certain advisers to calculate the required performance results, especially when portfolios include private investments and other hard-to-value securities. As such, we recommend planning early and building policies and procedures to efficiently capture performance information.

SEC FAQ: Gross Versus Net Performance in Advertisements Under the Marketing Rule

The marketing rule allows advisers to disclose extracted performance, but only if the advertisement provides (or offers to provide) the performance of the total portfolio from which the results were extracted. Additionally, advisers cannot present gross performance unless the advertisement also shows net performance of all investment advisory fees and expenses. According to the Staff, this requirement still applies even if the ad only shows the performance of a single investment or investment subset in a private fund. Accordingly, if the adviser receives a performance-based fee, this fee would need to be considered in the net performance results, in addition to management fees and an allocation of general portfolio expenses.

The FAQ did not explain how general portfolio-level expenses should factor into the calculation, leading some advisers to wonder whether general fund expenses be included in the gross versus net figures. It also did not say whether pro-forma performance fees should be calculated on the investment subset if the overall fund or portfolio is below the high water mark and not in carry. It is expected, however, that the presentation of such performance would be similar to the presentation of the performance of the entire portfolio. The Staff does remind advisers to satisfy the other specific disclosure requirements and the general prohibitions when showing extracted performance, including the prohibition against specific investment advice not presented in a fair and balanced manner.

The marketing rule massively overhauled the way private fund advisers can market their funds. Even though the SEC offered a lengthy transition period to comply with the amended rule, it took an extraordinary effort from most private fund advisers to implement the marketing rule by the compliance date. Questions and uncertainly still remain for some when complying with the rule. It is expected the Staff will continue to address and publish FAQs on the topic. Private fund advisers should work with their general counsel and compliance officers to develop policies and procedures to comply with the marketing rule, and they should ensure all marketing materials and advertisements are reviewed before being published. If you have any questions or concerns, please reach out to Marcum LLP.


  1. https://www.sec.gov/investment/marketing-faq

Related Industry

Alternative Investments