The Securities and Exchange Commission (SEC) recently released guidelines on its Marketing Rule, providing critical clarity on performance metrics disclosures for investment advisors. For many advisors, the presentation of performance metrics in advertisements has posed significant challenges, particularly balancing the need to present both gross and net performance. This latest guidance addresses ambiguities and outlines how advisors should approach the presentation of extracted returns and portfolio characteristics.
Navigating Performance Metrics Reporting
Survey data from consultancy Seward & Kissell highlights that a significant 70 percent of SEC-registered investment advisors find the process of advertising performance metrics particularly challenging. One of the key difficulties centers around the reporting of gross versus net performance. Dinon Hughes previously stated to InvestmentNews that advisors often avoid marketing based on performance to prevent setting unrealistic client expectations. The survey results confirm that navigating these reporting requirements remains a major issue for the majority of advisors.
The SEC’s latest guidelines aim to provide clearer directives without introducing new regulatory obligations. This approach helps prevent additional compliance burdens while illuminating existing expectations. Specifically, when advisors advertise extracted gross performance, the SEC mandates that net performance must also be included. Advisors can choose to present the gross and net performance of the entire portfolio alongside the extracted gross performance, provided that both sets of information are equally prominent and cover the same time periods comprehensively.
Iron Road Partners, a compliance consultancy firm, shed light on the implications of these new guidelines. They point out that advisors might need to significantly revamp their existing marketing materials, including websites that have previously left out performance metrics. The SEC also clarified whether characteristics such as yield, volatility, and attribution analysis should be classified under performance metrics. They concluded that showcasing gross-only characteristics is permissible as long as there is appropriate disclosure and the overall gross and net portfolio performance is presented.
Impact on Marketing Materials
The need to restructure marketing materials emerges as a crucial aspect of these new guidelines. Websites and other digital marketing platforms may require substantial adjustments to comply with the SEC’s updated directives. By insisting on both gross and net performance disclosures, the SEC hopes to foster better transparency, thereby helping clients form realistic expectations about investment outcomes. This move is expected to enhance overall trust in the advisory process, as advisors convey a more balanced and comprehensive view of portfolio performance.
The Managed Funds Association has been outspoken in its support of the SEC’s practical approach to these guidelines. Bryan Corbett, the association’s president and CEO, noted the importance of these guidelines in maintaining realistic client expectations and encouraging a more transparent relationship between investors and advisors. By advocating clear and effective policies, the Managed Funds Association signifies its commitment to strengthening capital markets through continuous collaboration with the SEC.
These guidelines therefore represent a pivotal step in addressing practical concerns within the investment advisory industry. As advisors adapt their marketing strategies to fulfill these directives, the emphasis remains on comprehensive performance reporting. Ensuring equally prominent gross and net performance metrics not only aligns with regulatory compliance but also promotes informed decision-making among investors.
Conclusion: Enhanced Transparency and Compliance
The Securities and Exchange Commission (SEC) recently issued new guidelines regarding its Marketing Rule, offering pivotal clarification on performance metrics disclosures for investment advisors. For many advisors, presenting performance metrics in advertisements has been a complex endeavor, especially when trying to balance the disclosure of both gross and net performance figures. This new guidance seeks to resolve existing ambiguities and specifies how advisors should present extracted returns and portfolio characteristics effectively.
By addressing these concerns, the SEC aims to ensure that investors receive transparent and accurate information about investment performance. The guidelines provide detailed instructions on the presentation format, helping advisors adhere to regulatory standards while clearly communicating performance data. These changes are expected to enhance the overall quality of information available to potential investors, fostering more informed decision-making and improving trust in the financial advisory industry.
