The modernization of the SEC Marketing Rule has firms hard at work to comply with new requirements related to the presentation of performance. One of these requirements is referred to as Prescribed Time Periods, where a firm must present a 1-, 5-, and 10-year net returns in any of its marketing materials that show performance. This level of prescription is a significant departure from the SEC’s past performance disclosure requirements. Similar to the GIPS Standards®, this requirement is particularly valuable in that it prevents firms from presenting only the best time periods and also provides prospective clients comparable short-term and long-term performance figures across RIAs. Below, Cascade outlines the requirements for presenting the prescribed time periods, and what this will mean for GIPS Compliant firms.
Beginning November 4, 2022, all performance presented in an SEC-registrant’s marketing materials must include the additional time period requirements. Private funds are currently exempt from the prescribed time periods; however, there is a proposed rule that would require the same time periods for liquid private funds for their current investors.
One-, five- and ten-year net performance must be included in marketing materials when presenting performance. For strategies without ten (or five) years of performance, a since inception return is required. The SEC Marketing Rule does not specify whether cumulative or annualized returns are to be used when calculating these returns. Cascade recommends annualized returns for easier comparison to annual performance and for consistency with industry best practices.
All returns must be updated through an end date no less recent than calendar year-end. The one caveat is if there has been an event which has had a significant negative effect on performance. In that case, performance through the most recent quarter-end is required (if available). If the most recent quarter-end performance is not available, the adviser should include appropriate disclosure on the performance that is presented.
As of now, it’s expected of firms to have updated performance numbers on marketing materials within one month of year-end (or quarter-end when there’s been significant negative performance as mentioned above). While this is not explicitly stated in the SEC’s marketing rule document, it was addressed in an April Q&A which can be found here. If your firm has illiquid products, stay tuned. Future SEC guidance for illiquid investment performance is expected, and we will update this article when/if additional guidance is released for updating performance.
Implications for GIPS Compliant Firms
If your firm claims compliance with the GIPS standards and is SEC registered, additional requirements will apply. Showing a GIPS Report with 10 years of performance is not a substitute for the prescribed time period requirements. Each firm will need to consider how they present their GIPS Report to prospective clients to better understand their options for presenting the SEC required prescribed time periods.
- If the GIPS Report is used as a standalone advertisement, 1-, 5- and 10-year net returns must be added to meet the SEC requirement.
- If the GIPS Report is included as part of a pitchbook, the 1-, 5- and 10-year returns can be presented on a separate page.
Another important consideration is that the GIPS Standards require the presentation of benchmark returns for the same periods that composite returns are presented. If your firm claims compliance with the GIPS standards and adds 5- and 10-year composite gross and net returns to the GIPS Report, benchmark returns must also be shown for those same periods. Further, if your firm follows the GIPS Advertising Guidelines, a 3-year annualized return for the composite and benchmark is required in addition to the 1- 5- 10-year SEC prescribed time periods. Remember that everything on the GIPS Report is subject to your firm’s GIPS error correction policies, including the 5-, and 10-year returns, if added. We recommend firms add error correction policies and procedures for the prescribed time periods, should a firm include them in the GIPS Report.
Example 1-, 5-, and 10-year returns:
If you would like to receive a copy of our template for calculating annualized and cumulative performance, or have any other questions regarding the marketing rule, contact us here.
Cascade Compliance has over 34 years of combined experience working with SEC Regulations, the GIPS standards, and performance. Our employees have worked with hundreds of firms in the U.S. and abroad. One of the best parts of working with clients is getting to share expertise and knowledge of best practices across the industry. Whether you are a client of ours or not, we are here to help you get better at what you do and answer any questions you may have. Contact us at firstname.lastname@example.org.