The workers (“Workers”) of the SEC’s Division of Funding Administration just lately issued an FAQ (the “FAQ”) to make clear that, beneath Rule 206(4)-1 (the “Advertising and marketing Rule”) of the Funding Advisers Act of 1940, an SEC-registered funding adviser (“adviser”) could not current the gross efficiency of 1 funding (e.g., a case research) or a gaggle of investments from a personal fund in an commercial with out additionally exhibiting the web efficiency of that one funding or group of investments.1
The Advertising and marketing Rule prohibits any presentation of gross efficiency in an commercial except the commercial additionally presents web efficiency. Internet efficiency is outlined partially because the efficiency outcomes of a portfolio, or parts of a portfolio which can be included in extracted efficiency. In line with the Workers, displaying the efficiency of 1 funding or a gaggle of investments in a personal fund is an instance of extracted efficiency. The Workers reasoned that, for the reason that extracted efficiency provision of the Advertising and marketing Rule was supposed to guard traders from advisers that current deceptive selective worthwhile efficiency with the good thing about hindsight, extracted efficiency needs to be learn to use to a subset, or a number of, investments. Accordingly, an adviser exhibiting the gross efficiency of 1 funding or a gaggle of investments should additionally present the web efficiency of that one funding or group of investments.
The Workers added that an adviser should fulfill the opposite tailor-made disclosure necessities and basic prohibitions of the Advertising and marketing Rule when exhibiting extracted efficiency, such because the efficiency outcomes of case research, together with the Advertising and marketing Rule’s basic prohibition in opposition to particular funding recommendation that’s not offered in a good and balanced method.
Dorsey Observations
The FAQ solutions a major open query associated to the Advertising and marketing Rule. Advisers ought to determine ads that current the gross efficiency outcomes of 1 funding, resembling a case research, or a gaggle of investments. In mild of the FAQ, advisers should calculate and current web efficiency outcomes of these investments. Advisers can be well-advised to doc and disclose the assumptions and methodology underlying the calculation of web efficiency outcomes of a single funding or subset of investments.