SEC Eases Rules on Marketing

Who’s coming to the private party?

The Securities and Exchange Commission published a set of answers to frequently asked questions last week that confirmed marketing materials can show performance figures and metrics that were previously considered off limits. That followed so-called “no-action” guidance that gave private funds a green light for soliciting a wider range of investors. Those are the latest steps the SEC has taken to give retail investors more access to private investments, said Igor Rozenblit, managing partner of consultant Iron Road Partners.

Nothing But Net

The updated set of FAQs addresses issues in the SEC’s fund marketing rule that went into effect in 2021, which falls under the Investment Advisers Act of 1940. While the guidance isn’t necessarily limited to private investments, it is clearly aimed at those, sources said.

There are two new questions the regulator answered:

• Fund providers can show gross performance for individual investments or groups of investments without having to show performance net of fees for those. 
• They can also cite portfolio metrics such as yield, volatility, Sharpe ratio, and others without adjusting for fees. The SEC gives some examples of metrics that count as performance and need to be presented on a net-of-fees basis.

“To see them at all is really important, because investors do all sorts of analysis,” Rozenblit said. Investors “really want to see item-by-item [performance].”

A caveat is that fund companies must show net performance for the fund as a whole, in a location in the marketing material somewhat near the breakouts for individual investments.

Without the new guidance, private equity shops worked under the assumption they had to adjust the performance of individual holdings for the fees they charge — no easy task, since fees are assessed at the fund level. “People couldn’t figure out how to attribute fees to create nets,” Rozenblit said.

It’s Private. Since assuming his role as acting SEC Chairman, Mark Uyeda has made clear that increasing access to private investments is a priority. The FAQs address “a known bottleneck” in the marketing process for private funds and “should help advisors to present information that they see as useful to investors,” said Adam Bolter, counsel at Katten Muchin Rosenman. And, there may be more on the way: President Trump’s nominee to lead the SEC, Paul Atkins, hasn’t even been confirmed yet. “Under the past administration, it was a lot more challenging for staff to put out guidance,” Bolter said. “We just didn’t see a lot of it.”