Year-End Marketing Material Updates
And a new FAQ from the SEC
RIAs across the country are preparing year-end 2022 performance presentations, and for most GIPS compliant firms, it’s time to update annual performance on your GIPS Reports. Or is it? Below are four timely Q&As as we kick-off annual verifications and performance examinations.
1) Is it better to send updated GIPS Reports to your verifier at the beginning or end of the verification?
Most verifiers provide an initial request list asking for policies, performance data, and GIPS Reports right from the start. However, many firms prefer waiting right until the end of the verification to update their GIPS Reports, in case there are updates made to a composite that could change year-end statistics. At Cascade, we’ll work with your preferences, while also making suggestions to make the process more efficient. We encourage firms to draft GIPS Reports using their best data, generally the performance data being provided as part of the initial request at the beginning of the verification, and send the GIPS Reports along with the performance. That way, your verifier can triangulate the most up-to-date policies, performance, and GIPS Reports from the beginning. Firms may have to make an update to their GIPS Reports at the end of the verification, however more general updates can be communicated from the onset of the initial data review, rather than after multiple rounds of open items at the end of the verification.
2) With the new SEC Marketing Rule in effect, can we distribute GIPS Reports as stand-alone performance presentations with just the performance updated by January 31 (and the rest of the statistics provided through 2021)?
Yes. Only the required time period performance (1-, 5-, and 10 year returns) is required to be updated within 30 days. However, as stand-alone presentations, GIPS Reports must include 5- and 10-year returns (or since inception returns, if 5 or 10 year returns aren’t available) through December 2022, in addition to annual 2022 performance. GIPS Reports must also include benchmark performance for the same time periods composite performance is presented.
January 2023 is the first time firms are required to make annual updates to GIPS Reports while also taking the new Marketing Rule into consideration. For firms that distribute GIPS Reports annually to databases, it’s a great time to consider adding a separate table for SEC required performance time periods, if you haven’t already.
3) With the new SEC Marketing Rule in effect, can we leave 2021 performance in GIPS Reports unchanged until our firm’s AUM is finalized and the GIPS Reports are verified, which is usually during February or March, as long as the GIPS Reports are part of a fair and balanced presentation that includes 2022 performance?
Maybe. Firms may satisfy SEC general prohibitions by documenting procedures for fair and balanced presentations that prominently present SEC required performance time periods, updated through December 2022 by the end of January. It depends on each firm’s appetite for risk, because what a fair and balanced presentation is under the Marketing Rule is still untested. At a minimum, we would recommend including references from GIPS Reports to performance pages that have been updated through 2022 and to include required performance time periods.
Because of the significant differences between strong 2021 performance and bearish 2022 performance, we also recommend firms not updating their GIPS Reports to be prepared with an answer if an SEC examiner asks why they weren’t updated, since the performance numbers were available. Even firms that elect not to include the SEC’s required time period performance on their GIPS Reports this year, may want to update just the annual performance (net and benchmark, and optional gross) through 2022 by the end of January.
The fourth and final Q&A below isn’t our own – it’s an FAQ published by the SEC in January, specifically for firms that manage private funds and want to show investment level returns. Presenting deal level returns to prospective clients net of fees requires firms to make assumptions that aren’t necessarily helpful/meaningful when applied to unrealized gains and losses of individual investments. The SEC knows this and included a statement to that effect in the proposed PF guidance for reporting to existing clients. The new marketing rule FAQ below emphasizes subjective selection of best performers as a concern when reporting to prospective clients, and it addresses case studies and groups of investments, rather than addressing a complete side-by-side presentation of all gross deal level returns. A law firm might argue that such a breakdown of every investment return could still be shown gross of fees in support of fund level returns presented both net and gross of fees. With only three published FAQs, however, we believe the SEC’s decision to not explicitly permit such a presentation speaks volumes.
What do you think? We’re not lawyers, but we’d be happy to help you with straightforward assumptions and methodologies for allocating management fees to deal level returns and documenting calculations in performance disclosures.
From: SEC.gov | Marketing Compliance Frequently Asked Questions
Q. When an adviser displays the gross performance of one investment (e.g., a case study) or a group of investments from a private fund, must the adviser show the net performance of the single investment and the group of investments?
A. Yes. The staff believes that displaying the performance of one investment or a group of investments in a private fund is an example of extracted performance under the new marketing rule.Because the extracted performance provision was intended, in part, to address the risk that advisers would present misleadingly selective profitable performance with the benefit of hindsight, the staff believes the provision should be read to apply to a subset of investments (i.e., one or more). Accordingly, an adviser may not show gross performance of one investment or a group of investments without also showing the net performance of that single investment or group of investments, respectively.In addition, the adviser must satisfy the other tailored disclosure requirements as well as the general prohibitions, including the general prohibition against specific investment advice not presented in a fair and balanced manner, when showing extracted performance.
At Cascade Compliance, we believe that every firm deserves personalized, timely service provided by experienced professionals. 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 email@example.com.
 Extracted performance means “the performance results of a subset of investments extracted from a portfolio.” Rule 206(4)-1(e)(6). See section II.E.5 of the adopting release.
 The rule prohibits any presentation of gross performance in an advertisement unless the advertisement also presents net performance. See section II.E.1 of the adopting release. The gross and net performance requirement applies to not only an entire portfolio but also to any portion of a portfolio that is included in extracted performance. See sections II.E.1(a) and (b) and the definitions of gross and net performance in rule 206(4)-1(e)(7) and (10) (“Net performance means the performance results of a portfolio (or portions of a portfolio that are included in extracted performance…”)). The adopting release also states that the rule requires that advisers that show extracted performance must show net and gross performance for the applicable subset of investments extracted from a portfolio. See section II.E.1.a. of the adopting release (discussing gross performance).
 The adopting release states that “advisers should evaluate the particular facts and circumstances that may be relevant to investors, including the assumptions, factors, and conditions that contributed to the performance, and include appropriate disclosures or other information such that the advertisement does not violate the general prohibitions…or other applicable law.” See section II.E.1 of the adopting release (discussing the net performance requirement). In addition, it would be considered “misleading under the final rule to present extracted performance in an advertisement without disclosing whether it reflects an allocation of the cash held by the entire portfolio and the effect of such cash allocation, or of the absence of such an allocation, on the results portrayed.” See section II.E.5 of the adopting release (discussing extracted performance).