The SEC marketing rule (effective November 2022) replaced the prior advertising and solicitation rules with a single, modernized framework. It governs how investment advisers, including private fund managers, market their services and present performance. If you produce pitch decks, DDQs, investor letters, or any materials that describe your track record, the marketing rule applies to you.
What Is Covered
The marketing rule defines an "advertisement" broadly. It covers any communication, disseminated by any means, to more than one person (or to one person if it includes hypothetical performance) that offers investment advisory services. This includes:
- Pitch decks and investor presentations
- Due diligence questionnaires (DDQs)
- Quarterly and annual investor letters
- Website content describing your strategy or track record
- Social media posts about performance or investment approach
- Emails to prospective investors with performance data
The scope is intentionally broad. If the communication is designed to attract or retain clients and it describes your advisory services, it is likely an advertisement under the rule.
Performance Advertising Requirements
The marketing rule imposes specific requirements on how you present investment performance. These requirements apply whenever you include performance data in any advertisement:
- Gross and net together. If you show gross performance, you must show net performance with equal prominence. You cannot present gross returns without the corresponding net figures.
- Standardized time periods. Performance must be shown for 1-year, 5-year, and 10-year periods (or since inception if the track record is shorter). You cannot show only your best periods.
- Clear disclosure. You must clearly disclose what the performance represents, including the methodology, any material assumptions, and whether it reflects a composite or a single account.
- No cherry-picking. You cannot selectively present performance from certain accounts, periods, or investments to create a misleading impression of your track record.
- No gross without net. This point bears repeating because it is the most common area where managers make mistakes. Every presentation of gross performance must be accompanied by net performance.
Testimonials and Endorsements
The marketing rule now permits testimonials and endorsements, which were previously prohibited under the old advertising rule. This is a significant change. Fund managers can now use investor quotes, case studies, and third-party endorsements in their marketing materials.
However, the permission comes with conditions. You must disclose whether the person providing the testimonial or endorsement is being compensated, and you must disclose any material conflicts of interest. Solicitation arrangements (where someone is paid to refer investors) are now governed under the marketing rule rather than under a separate solicitation rule.
Written agreements are required for compensated endorsements and solicitations, and the adviser must have a reasonable basis to believe the endorser or solicitor is complying with the rule's requirements.
Hypothetical Performance
The marketing rule permits hypothetical performance, including backtested performance, model performance, and projected performance. This was a major area of concern during the rulemaking process, and the SEC imposed significant guardrails:
- Reasonable basis. The adviser must have a reasonable basis for believing the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience.
- Sufficient disclosure. The advertisement must include information to enable the recipient to understand the criteria and assumptions used in calculating the hypothetical performance.
- Sophisticated audiences only. Hypothetical performance may only be shown to audiences that have the financial expertise to evaluate the risks and limitations of such presentations.
In practice, this means backtested and model performance can appear in pitch decks and DDQs directed at institutional investors, but the disclosures must be thorough. Showing hypothetical returns without adequate context is a violation.
ERAs and the Marketing Rule
The marketing rule technically applies to registered investment advisers (RIAs). Its application to Exempt Reporting Advisers (ERAs) is less clear. ERAs are not "registered" under the Advisers Act, so the rule does not directly apply by its terms.
However, many compliance advisors recommend that ERAs follow the marketing rule as a best practice. The antifraud provisions of the Advisers Act apply to all advisers, including ERAs, and the marketing rule's requirements largely codify what the SEC would consider non-misleading advertising practices. Following the rule provides a clear framework for marketing materials and reduces the risk of antifraud violations.
From a practical standpoint, institutional LPs expect marketing materials that comply with the marketing rule regardless of your registration status. If your pitch deck does not follow these standards, sophisticated investors will notice.
This article is for informational purposes only and does not constitute legal advice. Consult qualified professionals for guidance specific to your situation.