SEC Marketing Rule — Lessons Learned
The financial landscape is constantly evolving, and so are the regulations governing it. One such significant development is the SEC Marketing Rule, a set of guidelines investment firms must adhere to when presenting performance data to potential investors.
Not surprisingly, the Marketing Rule was one of the hottest topics at this year’s GIPS Standards Conference.
In this blog post, we’ll explore critical aspects of the SEC Marketing Rule to better understand the lessons learned and their implications.
Understanding Performance under the SEC Marketing Rule:
The SEC Marketing Rule mandates that firms showcase net performance alongside gross performance, emphasizing transparency in all aspects of extracted performance, including individual investments. Defining “performance” in policies is crucial, and the SEC views it as a continuum. The categorization between net performance and “performance-derived statistics” is context-dependent, based on facts and circumstances.
In essence, “performance” represents returns directly linked to dollars earned, while “performance-derived statistics” offer insights into performance drivers without a direct monetary correlation. Clarity in presentation and disclosure is essential to avoid misinterpretation.
Investment Level Net Performance:
Many firms are grappling with the calculation of investment-level net returns. While the SEC does not prescribe a specific method, it emphasizes the need for a reasonable and non-deceptive approach. The challenge lies in addressing the limitations of each method. Firms are encouraged to disclose both gross and net returns clearly, describing what they are presenting to ensure transparency.
Private Fund Performance:
The Marketing Rule for private funds doesn’t specify time periods but demands fairness and balance in presenting performance results. Net performance must be given equal prominence and presented for easy comparison when displayed alongside gross performance. Consistency in return type, methodology, and time period is crucial, particularly when dealing with subscription lines.
Hypothetical Performance:
Hypothetical performance, including back-tested, projections, and targeted performance, raises concerns for the SEC due to its potential for being misleading. The SEC requires strict disclosure, warning investors of the risks and stating material assumptions. There’s a need for a written policy when presenting hypothetical performance, and caution is advised when using representative accounts.
Databases and Compliance Challenges:
Compliance with the Marketing Rule becomes challenging when dealing with databases. Not all platforms allow advisers to input both net and gross returns, making it essential for firms to do their best to populate databases accurately. The key is to submit the requested information, whether gross or net, in line with the SEC guidelines.
Recent Enforcement Actions:
The SEC’s enforcement actions against Titan Global Capital Management USA LLC and Wellesley Asset Management, Inc. serve as stark reminders of the consequences of violating the Marketing Rule. The cases highlight misleading hypothetical performance metrics and underscore the importance of having relevant policies, procedures, and transparent disclosures.
Conclusion:
Staying abreast of regulatory changes is crucial for investment firms in a rapidly changing financial landscape. The SEC Marketing Rule, with its focus on transparency and clear presentation of performance data, plays a pivotal role in ensuring fair practices. By learning from recent enforcement actions and understanding the nuances of the SEC Marketing Rule, firms can navigate the regulatory landscape effectively and build trust with investors. Want to learn more? Be sure to contact TSG Performance today!