Performance Advertising Rules Asset Managers Must Follow For Compliance-First Marketing

Performance advertising rules for asset managers represent the regulatory framework governing how investment management firms can promote their track records, returns, and investment strategies to potential investors. These rules, primarily established by the Securities and Exchange Commission (SEC) and enforced through various investment adviser regulations, ensure that asset managers present performance data truthfully, fairly, and with appropriate context to prevent misleading investors. This article explores performance advertising rules for asset managers within the broader context of compliance-first marketing for financial institutions.

Key Summary: Asset managers must follow strict SEC and FINRA rules when advertising performance, requiring standardized calculations, appropriate disclosures, risk warnings, and fair representation of historical returns to protect investors from misleading claims.

Key Takeaways:

• SEC Rule 206(4)-1 governs all performance advertising for investment advisers and asset managers
• Performance data must use standardized calculation methods and include mandatory risk disclosures
• Asset managers cannot cherry-pick favorable time periods or exclude poor-performing accounts without disclosure
• All performance claims require substantiation with audited records and appropriate benchmarking
• Digital and social media advertising must follow the same stringent rules as traditional marketing materials
• Compliance violations can result in significant fines, enforcement actions, and reputational damage

What Are Performance Advertising Rules for Asset Managers?

Performance advertising rules for asset managers are comprehensive regulatory requirements that dictate how investment management firms can market their investment returns and track records to prospective clients. These rules fall primarily under SEC Rule 206(4)-1, which prohibits investment advisers from making false or misleading statements in advertisements, including performance claims.

The regulatory framework covers several critical areas including calculation methodologies, time period selection, client account inclusion criteria, benchmark comparisons, and required disclosures. Asset managers must ensure that any performance data presented accurately reflects their actual investment results and includes sufficient context for investors to make informed decisions.

Performance Advertising: Marketing communications by asset managers that include references to investment returns, track records, or comparative performance data, subject to strict SEC oversight under investment adviser regulations. Learn more from the SEC

These rules apply to all forms of advertising and marketing communications, including websites, social media posts, pitch books, conferences presentations, and third-party platforms. The scope extends beyond traditional advertising to include any public communication that could influence investment decisions.

How Do SEC Investment Adviser Marketing Rules Apply to Performance Claims?

SEC Investment Adviser Marketing Rule 206(4)-1, which became effective in May 2021, establishes the comprehensive framework for how asset managers can advertise performance data. The rule replaced previous advertising restrictions with a principles-based approach focused on preventing misleading communications while providing more flexibility for digital marketing.

Under the current framework, asset managers must ensure all performance advertising is fair and balanced, presents information in a way that is not misleading, and includes appropriate disclaimers about risks and limitations. The rule specifically addresses several areas where performance advertising has historically been problematic:

• Gross vs. Net Performance: Clear disclosure requirements for whether returns are shown before or after fees
• Time Period Selection: Prohibition against cherry-picking favorable periods without proper context
• Benchmark Comparisons: Requirements for appropriate and relevant benchmark selection
• Hypothetical Performance: Strict limitations and disclosure requirements for model or back-tested results
• Third-Party Ratings: Rules governing the use of awards, rankings, and third-party endorsements

Asset managers must maintain detailed records demonstrating compliance with these requirements, including documentation supporting all performance claims and evidence of internal review processes.

What Performance Data Can Asset Managers Advertise?

Asset managers can advertise actual investment performance from real client accounts, provided they follow specific calculation and presentation requirements. The advertised performance must represent actual investment results achieved by the asset manager for client accounts under substantially similar investment strategies, objectives, and restrictions.

Acceptable performance data includes time-weighted returns calculated according to industry standards, typically following Global Investment Performance Standards (GIPS) methodology. Asset managers can present both gross-of-fees and net-of-fees returns, though net returns are generally preferred as they more accurately reflect client experience.

Permissible Performance Advertising Elements:

• Actual historical returns from managed accounts using standardized calculations
• Composite performance representing multiple accounts with similar strategies
• Risk-adjusted performance metrics when properly contextualized
• Benchmark comparisons using appropriate and relevant indices
• Third-party performance verification when properly disclosed
• Awards and rankings with required disclaimers about methodology

Asset managers must ensure that advertised performance reflects a fair representation of their investment capabilities and includes appropriate context about market conditions, strategy evolution, and other relevant factors that may have influenced results.

Which Calculation Methods Must Asset Managers Use?

Asset managers must use standardized, industry-recognized calculation methods when presenting performance data in advertising materials. The SEC requires time-weighted returns calculated according to established industry standards, with many firms adopting Global Investment Performance Standards (GIPS) to ensure consistency and comparability.

Time-weighted returns eliminate the impact of client cash flows and provide a more accurate measure of the asset manager's investment skill. This methodology is mandatory for performance advertising because it isolates the manager's contribution to performance from factors outside their control.

Time-Weighted Return: A calculation method that eliminates the impact of client deposits and withdrawals to measure purely the asset manager's investment performance, required for regulatory compliance in performance advertising. Learn more about GIPS standards

Required Calculation Elements:

• Standardized Time Periods: Performance must be calculated for standard periods (monthly, quarterly, annually)
• Consistent Methodology: Same calculation approach across all time periods and strategies
• Fee Treatment: Clear distinction between gross and net returns with consistent fee deduction
• Valuation Frequency: Regular account valuation to ensure accuracy of return calculations
• Cash Flow Treatment: Proper handling of client deposits and withdrawals in return calculations

Asset managers should maintain detailed documentation of their calculation methodologies and ensure that performance systems can produce auditable results that comply with regulatory requirements.

How Should Asset Managers Handle Benchmark Comparisons?

Asset managers must use appropriate and relevant benchmarks when making comparative performance claims in advertising materials. The selected benchmark should reflect the investment strategy, asset classes, geographic focus, and risk characteristics of the advertised strategy to provide meaningful context for investors.

Benchmark selection requires careful consideration of several factors including the investment universe, strategy constraints, and typical client objectives. Asset managers cannot simply choose the benchmark that makes their performance appear most favorable without regard to appropriateness and relevance.

Benchmark Selection Criteria:

• Asset Class Alignment: Benchmark should reflect similar securities and market exposure
• Strategy Consistency: Index methodology should align with investment approach and constraints
• Geographic Relevance: Benchmark should match the geographic focus of the strategy
• Risk Profile: Similar risk characteristics and volatility expectations
• Availability and Transparency: Benchmark data should be readily available and methodology transparent
• Investability: Benchmark components should be reasonably investable by asset managers

When presenting benchmark comparisons, asset managers must include appropriate disclosures explaining the benchmark selection rationale, any limitations or differences between the strategy and benchmark, and warnings that benchmark performance does not reflect actual investment costs or constraints.

What Disclosures Are Required for Performance Advertising?

Asset managers must include comprehensive disclosures in all performance advertising to ensure investors have sufficient context to evaluate the presented information. These disclosures serve to prevent misleading impressions and provide essential information about risks, limitations, and methodology.

Required disclosures vary depending on the type of performance data presented, the format of the advertisement, and the target audience. However, certain core disclosures are mandatory across all performance advertising materials.

Mandatory Disclosure Categories:

• Past Performance Warning: Standard disclaimer that past performance does not guarantee future results
• Risk Disclosures: Information about investment risks and potential for losses
• Fee Impact: Explanation of how fees affect returns and investor experience
• Calculation Methodology: Description of how performance was calculated and any limitations
• Time Period Context: Information about market conditions during the performance period
• Account Selection: Disclosure about which accounts are included or excluded from performance
• Benchmark Limitations: Explanation of differences between strategy and benchmark

Performance Disclaimer: Required regulatory language warning investors that historical investment returns do not guarantee future performance and that investments may lose value, mandated by SEC rules for all performance advertising by asset managers.

Disclosures must be prominent, clear, and presented in plain English that investors can readily understand. Asset managers cannot bury important disclaimers in fine print or use technical jargon that obscures critical information.

How Do Rules Apply to Digital and Social Media Marketing?

Performance advertising rules apply equally to digital and social media marketing, requiring asset managers to maintain the same level of compliance oversight for online communications as traditional marketing materials. This includes websites, social media posts, email campaigns, video content, and any other digital marketing channels.

Digital platforms present unique challenges for compliance due to character limits, format constraints, and the interactive nature of social media. However, regulatory requirements remain unchanged, and asset managers must find creative ways to include necessary disclosures while meeting platform limitations.

Agencies specializing in financial services marketing, such as WOLF Financial, build compliance review processes into every digital campaign to ensure adherence to SEC performance advertising rules while maximizing marketing effectiveness across social media platforms.

Digital Marketing Compliance Considerations:

• Character Limits: Strategies for including required disclosures in limited-character formats
• Visual Content: Compliance requirements for infographics, charts, and performance visualizations
• Interactive Elements: Rules for polls, Q&A sessions, and other engagement features
• User-Generated Content: Liability for client testimonials and third-party posts
• Linking Strategies: Acceptable methods for directing users to full disclosures
• Archive Requirements: Recordkeeping obligations for social media content

Asset managers must implement robust approval processes for all digital marketing content and ensure that compliance teams review materials before publication across any digital channel.

What Records Must Asset Managers Maintain?

Asset managers must maintain comprehensive records supporting all performance advertising claims, as required under SEC recordkeeping rules. These records serve as evidence of compliance and must be readily available for regulatory examinations or client inquiries.

The recordkeeping requirements extend beyond simple performance calculations to include documentation of compliance processes, approval workflows, and the rationale for presentation decisions. Asset managers must be able to demonstrate that their performance advertising reflects actual results and follows required methodologies.

Required Performance Advertising Records:

• Calculation Workpapers: Detailed documentation of how performance figures were derived
• Account Data: Underlying account information supporting composite or representative performance
• Benchmark Data: Documentation supporting benchmark selection and comparative calculations
• Approval Records: Evidence of compliance review and approval for all advertising materials
• Distribution Records: Documentation of where and how performance advertising was distributed
• Supporting Documentation: Any additional materials used to substantiate advertising claims

Records must be maintained for the period specified in SEC rules, typically five years with the first two years in an easily accessible location. Asset managers should implement systematic recordkeeping procedures to ensure compliance with these requirements.

How Can Asset Managers Avoid Common Compliance Violations?

Asset managers can avoid common performance advertising violations by implementing systematic compliance processes, conducting regular training, and staying current with regulatory guidance. Most violations occur due to inadequate oversight rather than intentional misconduct, making prevention through proper procedures essential.

Common violations include presenting misleading performance data, failing to include required disclosures, using inappropriate benchmarks, and inadequate recordkeeping. These issues can be prevented through careful attention to regulatory requirements and robust internal controls.

Best Practices for Compliance:

• Comprehensive Policies: Written procedures covering all aspects of performance advertising
• Pre-Approval Processes: Mandatory compliance review before any marketing material distribution
• Regular Training: Ongoing education for marketing and investment teams on regulatory requirements
• Documentation Standards: Clear requirements for supporting all performance claims
• Periodic Reviews: Regular audits of advertising materials and compliance processes
• External Consultation: Access to regulatory expertise for complex situations

Asset managers should also monitor regulatory updates and industry guidance to ensure their compliance programs remain current with evolving requirements and enforcement priorities.

What Are the Consequences of Performance Advertising Violations?

Performance advertising violations can result in significant regulatory sanctions, financial penalties, and reputational damage for asset managers. The SEC takes performance advertising compliance seriously and regularly examines investment advisers for violations in this area.

Enforcement actions can include censure, fines, disgorgement of profits, and restrictions on business activities. In severe cases, asset managers may face criminal referrals or loss of registration. Beyond regulatory penalties, violations can damage client relationships and competitive positioning.

Potential Consequences:

• Regulatory Sanctions: Formal enforcement actions and public censure
• Financial Penalties: Significant fines and disgorgement of assets under management fees
• Business Restrictions: Limitations on marketing activities or client solicitation
• Reputational Damage: Public disclosure of violations affecting client confidence
• Increased Scrutiny: More frequent regulatory examinations and heightened oversight
• Legal Costs: Substantial expenses for legal defense and remediation efforts

The cost of violations typically far exceeds the investment required for proper compliance programs, making prevention through appropriate controls and procedures essential for asset managers.

How Do Performance Rules Differ for Various Asset Manager Types?

Performance advertising rules apply differently depending on the type of asset manager and their registration status. Registered investment advisers, private fund managers, and broker-dealer asset management divisions face varying requirements under different regulatory frameworks.

SEC-registered investment advisers face the most comprehensive performance advertising requirements under the Marketing Rule, while state-registered advisers may have additional state-specific requirements. Private fund managers have certain exemptions but still face restrictions on general solicitation and advertising.

Asset Manager Category Differences:

• SEC-Registered RIAs: Full Marketing Rule compliance including performance advertising restrictions
• State-Registered RIAs: State requirements plus applicable federal regulations
• Private Fund Managers: Limited advertising capabilities with specific disclosure requirements
• Broker-Dealer Affiliates: FINRA rules in addition to SEC investment adviser requirements
• Bank Investment Divisions: Banking regulations alongside SEC requirements
• Family Offices: Limited requirements but increasing regulatory scrutiny

Asset managers should ensure they understand which regulatory framework applies to their specific situation and implement compliance programs appropriate for their registration status and business model.

Frequently Asked Questions

Basics

1. What is considered performance advertising for asset managers?

Performance advertising includes any marketing communication that references investment returns, track records, comparative performance data, or implies investment success. This covers websites, social media, pitch books, presentations, and any client-facing materials mentioning historical results.

2. Do performance advertising rules apply to all asset managers?

Yes, performance advertising rules apply to all registered investment advisers managing client assets. The specific requirements vary by registration type (SEC vs. state-registered) and business model, but fundamental principles of truthful, non-misleading advertising apply universally.

3. Can asset managers advertise hypothetical or model performance?

Asset managers can advertise hypothetical performance under strict conditions, including prominent disclosure that results are not based on actual trading, explanation of methodology limitations, and warnings about the inherent difficulties of predicting future performance from models.

4. How often must performance data be updated in advertising materials?

Performance data should be updated regularly to remain current and not misleading. While no specific frequency is mandated, quarterly updates are common practice, and asset managers must ensure advertised performance remains representative of current capabilities.

5. What constitutes misleading performance advertising?

Misleading performance advertising includes cherry-picking favorable time periods, excluding poor-performing accounts without disclosure, using inappropriate benchmarks, failing to disclose fees, or presenting hypothetical results as actual performance without proper disclaimers.

How-To

6. How should asset managers calculate composite performance for advertising?

Composite performance should include all discretionary accounts following substantially similar investment strategies, use time-weighted returns, and follow consistent methodology. Asset managers should document account inclusion criteria and maintain records supporting composite construction.

7. How can asset managers include performance data in social media posts?

Social media performance posts must include essential disclosures, though asset managers can use linking strategies to direct users to full disclaimer information. Key warnings about past performance and risks should be included directly in the post when possible.

8. How should asset managers select appropriate benchmarks?

Select benchmarks that match the strategy's asset class, geographic focus, risk profile, and investment constraints. Document the selection rationale and disclose any material differences between the strategy and benchmark to ensure meaningful comparison.

9. How long must asset managers retain performance advertising records?

Asset managers must retain performance advertising records for five years, with the first two years in an easily accessible location. This includes calculation workpapers, supporting account data, approval documentation, and distribution records.

10. How can asset managers ensure compliance across multiple marketing channels?

Implement centralized compliance review processes, maintain consistent disclosure standards across all channels, provide regular training to marketing teams, and establish clear approval workflows for all performance-related content regardless of distribution method.

Comparison

11. What's the difference between gross and net performance presentation?

Gross performance shows returns before deducting advisory fees, while net performance reflects returns after fee deduction. Net performance provides a more accurate representation of client experience, though both can be advertised with proper disclosure.

12. How do SEC rules differ from FINRA requirements for performance advertising?

SEC rules focus on investment adviser marketing under the Marketing Rule, while FINRA Rule 2210 governs broker-dealer communications. Asset managers affiliated with broker-dealers must comply with both frameworks, which have overlapping but distinct requirements.

13. What's the difference between actual and hypothetical performance advertising?

Actual performance reflects real investment results from client accounts, while hypothetical performance uses models or back-testing. Hypothetical performance requires additional disclosures and limitations on presentation to prevent misleading investors.

Troubleshooting

14. What should asset managers do if they discover errors in published performance data?

Immediately correct the error in all current materials, notify affected parties, document the correction process, and review internal controls to prevent recurrence. Consider consulting counsel if the error was material or widely distributed.

15. How should asset managers handle client requests for customized performance reports?

Client-specific performance reports must follow the same accuracy and calculation standards as advertising materials. While not subject to all advertising rule restrictions, reports should include appropriate disclosures and use standardized methodologies.

16. What if benchmark data becomes unavailable for historical periods?

Asset managers should disclose benchmark changes clearly, provide context for the substitution, and ensure the replacement benchmark is appropriate for the strategy. Avoid benchmark changes that make performance appear more favorable without economic justification.

Advanced

17. How do performance rules apply to separately managed account platforms?

SMA platform performance follows the same basic rules but may involve coordination between asset managers and platform sponsors. Clear agreements should specify responsibility for compliance, disclosure requirements, and recordkeeping obligations.

18. Can asset managers advertise performance during fund closures or capacity constraints?

Asset managers can continue advertising closed strategies but should disclose capacity constraints clearly. Advertising strong performance for unavailable strategies may be misleading if it suggests investment opportunities that don't exist.

19. How do performance rules apply to ESG or sustainable investing strategies?

ESG performance advertising follows standard rules but should include additional disclosures about ESG methodology, screening criteria, and any impact on returns. Asset managers should be prepared to substantiate ESG claims and investment processes.

Compliance/Risk

20. What documentation should support performance advertising compliance?

Maintain calculation workpapers, account data, benchmark information, compliance approvals, distribution records, and supporting documentation for all advertised performance. Records should demonstrate adherence to regulatory requirements and internal policies.

21. How can asset managers prevent inadvertent performance advertising violations?

Implement comprehensive training programs, establish pre-approval processes for all marketing materials, conduct regular compliance reviews, maintain current policies and procedures, and consult regulatory experts for complex situations.

22. What should asset managers consider when hiring third-party marketing firms?

Ensure marketing partners understand financial services regulations, establish clear compliance oversight responsibilities, require pre-approval of all materials, provide regulatory training, and maintain ultimate accountability for compliance regardless of outsourcing arrangements.

Conclusion

Performance advertising rules for asset managers represent a critical compliance area that requires systematic attention to regulatory requirements, calculation methodologies, and disclosure obligations. Asset managers must balance marketing effectiveness with strict adherence to SEC rules that protect investors from misleading performance claims. Key considerations include using standardized calculation methods, selecting appropriate benchmarks, including comprehensive disclosures, and maintaining detailed supporting records. Success requires implementing robust compliance processes, conducting regular training, and staying current with evolving regulatory guidance to avoid costly violations while effectively communicating investment capabilities.

When evaluating performance advertising compliance, asset managers should consider:

• Comprehensive policies covering all marketing channels and performance presentation methods
• Systematic approval processes ensuring regulatory review before any performance advertising distribution
• Regular training programs keeping marketing and investment teams current with regulatory requirements
• Robust recordkeeping systems supporting all performance claims with auditable documentation
• Ongoing monitoring of regulatory updates and industry best practices

For asset managers seeking to develop compliant performance advertising strategies that effectively communicate investment capabilities while meeting regulatory requirements, explore WOLF Financial's specialized compliance and marketing services for institutional finance clients.

References

1. Securities and Exchange Commission. "Marketing Rule for Investment Advisers." Federal Register, 2020. https://www.sec.gov/rules/final/2020/ia-5653.pdf
2. Securities and Exchange Commission. "Investment Adviser Marketing Rules." SEC.gov. https://www.sec.gov/rules/final/ia-2628.htm
3. CFA Institute. "Global Investment Performance Standards (GIPS®)." CFA Institute, 2020. https://www.cfainstitute.org/en/ethics-standards/codes/gips-standards
4. Securities and Exchange Commission. "Advertising by Investment Advisers." Code of Federal Regulations, Title 17, Section 275.206(4)-1. https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206-1
5. Investment Adviser Association. "Marketing Rule Implementation Guide." IAA, 2021. https://www.investmentadviser.org/publications/marketing-rule-implementation-guide
6. Securities and Exchange Commission. "Books and Records Requirements for Investment Advisers." Code of Federal Regulations, Title 17, Section 275.204-2. https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.204-2
7. Financial Industry Regulatory Authority. "Communications with the Public." FINRA Rule 2210. https://www.finra.org/rules-guidance/rulebooks/finra-rules/2210
8. Securities and Exchange Commission. "Staff Guidance on Marketing Rule Implementation." SEC.gov, 2022. https://www.sec.gov/investment/marketing-rule-faq
9. Investment Company Institute. "Performance Presentation Standards for Mutual Fund Advertising." ICI Guidelines, 2021. https://www.ici.org/system/files/2021-07/21_ici_performance_presentation.pdf
10. Securities and Exchange Commission. "Examination Priorities for Investment Advisers." SEC Office of Compliance Inspections and Examinations, 2023. https://www.sec.gov/files/2023-exam-priorities.pdf

Important Disclaimers

Disclaimer: Educational information only. Not financial, legal, medical, or tax advice.

Risk Warnings: All investments carry risk, including loss of principal. Past performance is not indicative of future results.

Conflicts of Interest: This article may contain affiliate links; see our disclosures.

Publication Information: Published: 2024 · Last updated: AUTO_NOW

About the Author

Author: Gav Blaxberg, Founder, WOLF Financial
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