It has been almost two years since the compliance deadline of the Securities and Exchange Commission’s (SEC’s) Marketing Rule, Rule 206(4)-1, under the Investment Advisers Act of 1940. Now that investment firms have had time to implement their advertising policies and procedures under those guidelines, they want to know what the common practices in the industry are to determine if they should refine their own approach.

In response, the CFA Institute United States Investment Performance Committee (USIPC) and the Investment Adviser Association (IAA) conducted a survey in March 2024 of investment management firms to identify current practices for complying with the performance requirements of the SEC Marketing Rule. We hope that the findings from our “Survey Report on SEC Marketing Rule Compliance Practices” will help investment firms assess their Marketing Rule advertising policies.

In April 2024, the SEC’s Division of Examinations issued a risk alert on Marketing Rule compliance, which included observations on Form ADV reporting and on advertisements. IAA’s analysis of recent Form ADV Part 1A filings made by SEC-registered advisers reveals that larger advisers were more likely to engage in the specified advertising practices than smaller advisers. For example, 89.4% of respondents with more than $100 billion in assets answered “yes” on Form ADV to at least one question, whereas only 31.6% of advisers with less than $100 million in assets indicated that they engage in any of the specified marketing activities. Inclusion of performance results is the most common advertising practice of advisers (almost 41%), followed by the inclusion of hypothetical performance (almost 23%).

Our Survey

Our Marketing Rule Compliance Practices survey was open to all investment management firms that are subject to the Marketing Rule; 189 firms participated, with respondents representing firms of all sizes. Smaller firms (AUM of USD1 billion–USD5 billion) and mid-size firms (AUM of USD50 billion–USD250 billion) constituted the largest groups of survey participants.

Key Takeaways:

• When calculating net returns, model fees are more popular than actual fees, but 37% of firms are still primarily using actual fees.

• Roughly half of the respondents do not include contribution to return in marketing materials, and roughly half do not include attribution effects either. Many comments indicate that this information was removed because of the Marketing Rule.

• There is no predominant policy for classifying attribution effects, contribution, or yield as performance.

• Most firms that are calculating investment-level net IRRs use the spread method.

• Approximately 74% of responding firms treat information submitted to databases as an advertisement that is subject to Marketing Rule requirements.

• Approximately 39% of firms do not present hypothetical performance.

• Of those firms that present hypothetical performance, most do so only on a one-on-one basis or in response to unsolicited requests.

• Firms take a variety of approaches for defining which prospect types qualify to receive hypothetical performance; 36% classify institutional investors as qualified.

• According to survey respondents, the biggest challenge for complying with the Marketing Rule is determining which information is “performance” that must be presented on a net basis.

Global Investment Performance Standards (GIPS®)

Investment performance is crucial for assessing progress against objectives, selecting managers, and calculating incentives. Adopting the GIPS standards demonstrates a commitment to ethics and transparency, bolstering investor confidence. The GIPS standards, developed by CFA Institute with global experts, ensure ongoing relevance in the investment industry.