SEC Staff Says It’s OK to Just Be Gross

On March 19, 2025, the staff of the U.S. Securities and Exchange Commission’s Division of Investment Management (the “Staff”) amended its FAQ page on marketing compliance and reversed its stand on a contentious issue with respect to the presentation of gross and net performance by investment advisers in the context of extracted performance (defined as “the performance results of a subset of investments extracted from a portfolio”). In addition, the Staff provided guidance on what metrics may or may not be viewed as “performance” under the marketing rule.

It is Okay to Be Gross… Again

As a reminder, the adoption of the new marketing rule left many in the private funds industry wondering whether the requirement to present net performance side-by-side with gross applies to single investments (or, on a more technical level, whether the definition of “extracted performance” includes single investments). Prior to the new marketing rule, it was a universally accepted practice in the private funds space to present gross and net performance at the fund level and to present only gross performance for individual investments. In January 2023, the Staff clarified through an FAQ that the gross and net requirement applies to the presentation of the performance of a single investment or any other extracted performance.

Although the latest FAQ notes that the substantive requirements of the marketing rule remain the same (“if an adviser shows the gross performance of an extract in an advertisement, the rule requires the adviser to also show the net performance of such extract in the advertisement”), it goes on to state that presenting only gross performance information for a single position or a group of investments presents little risk of being misleading so long as the manager prominently displays the gross and net performance of the total portfolio from which the single position or group of positions was extracted in a manner compliant with the marketing rule with appropriate information accompanying the gross performance. The Staff enumerated the following conditions:

• the extracted performance is clearly identified as gross performance;
• the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
• the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance; and
• the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance is calculated.

Interestingly, to meet the requirements of the third condition, the gross and net performance of the total portfolio does not need to be presented on the same page of the advertisement as the extracted performance -- presenting the gross and net performance of the total portfolio prior to the extracted performance in the advertisement would be sufficient to achieve equal prominence and facilitate comparison between the gross and net performance of the total portfolio and the extracted performance.

The Staff further stressed that presentation of gross performance of one or more extracts under the FAQ’s framework remains subject to the general prohibitions of the marketing rule as well as the antifraud provisions of the Investment Advisers Act of 1940.

What is “Performance”?

Although requirements around performance presentation in advertisements are a major part of the marketing rule, it does not define what metrics constitute “performance”. The FAQ acknowledged this uncertainty, noting that advisers are frequently unsure whether characteristics such as yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics constitute “performance” for the purposes of the marketing rule. By the Staff’s own admission, if such metrics were to qualify as performance, it may be misleading (if not impossible) to calculate these metrics net of fees and expenses.

To provide some clarity, the FAQ offers a “safe harbor” consisting of similar conditions to those discussed above with respect to extracted performance. If such conditions were met, the FAQ states that the Staff would not recommend enforcement action to the SEC under the marketing rule if an adviser presents in an advertisement one or more gross characteristics of a portfolio or investment without including the corresponding net characteristics.

Furthermore, while the Staff made it clear that it is not taking a position on whether any particular characteristic should be considered “performance” for purposes of the marketing rule, it did clarify that the following metrics are considered to be “performance” (regardless of how they may be labeled in the advertisement): total return, time-weighted return, return on investment (RoI), internal rate of return (IRR), multiple on invested capital (MOIC), or Total Value to Paid in Capital (TVPI).

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The new guidance from the Staff represents a welcome development for private fund managers who would be well advised to revisit their marketing materials and ensure their compliance with the frameworks outlined in the updated FAQs.