The Securities and Exchange Commission (SEC) on Wednesday updated its guidance on how registered investment advisors (RIAs) should report investment performance with marketing materials.
The agency expanded its rules on gross and net performance with marketing materials, and specifically on extracted performance and portfolio and investment characteristics.
One update queries the definition of investment “performance” under the marketing rule for RIAs and asks whether advisors would be subject to “enforcement action” if “an adviser displays characteristics calculated without reflecting the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio(s) [“gross characteristics”],” or “without also showing the corresponding characteristics calculated after the deduction of all fees and expenses [“net characteristics”].”
In its response, the SEC agreed that advisors may be unsure on whether characteristics like yield, coupon rate, contribution to return, volatility, sector, and other factors are regarded as “performance” under the rule. As a result, the agency lightened this responsibility for advisors, adding that even if these characteristics qualified as “performance,” calculating them net of fees and expenses may be “impossible or lead to misleading or confusing results.”
Further, the agency adds that if an advisor were to show the gross and net performance of the total portfolio, pursuant to marketing rule requirements, and were to present it without being materially misleading to clients, then there is slight risk that investors could be misled on return fees and expenses.
Similarly, advisors who also show the gross performance of an investment in an advertisement must also show its net performance. If advisors showcase both performances of a total portfolio in a manner than is not materially misleading, then there is little risk that the SEC would recommend enforcement action.
Under the amended rules, investment advisors would be subject to enforcement action by the SEC if:
- the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
- the characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
- the total portfolio’s gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the gross characteristic; and
- the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated.
Additional details on the SEC’s latest marketing rules can be found here.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
