More than two years into the enforcement of the SEC Marketing Rule, firms are continuing to adapt to the challenges of satisfying these regulatory requirements. According to attendees and panelists at the latest Global Investment Performance Standards (GIPS®) Conference, firms seek insight into navigating the nuances of performance calculation, presentation, and attribution under the Rule and the SEC’s ongoing oversight, enforcement, and guidance.
The SEC Marketing Rule governs investment adviser advertisements. This framework for regulating advisers’ marketing communications includes specific requirements for presenting performance information. The Rule is designed to restrict or place conditions on specific practices the SEC believes may cause investors to be misled without appropriate conditions or limitations.[1]
As advisers continue to adapt to the Marketing Rule, we asked Mark Elliot, Director SS&C, to discuss the investment performance requirements of the SEC Marketing Rule, and share his insights on the regulation and his suggestions for firms to ensure compliance. Below is our conversation.
Can you describe the SEC Marketing Rule and how it relates to GIPS compliance?
The SEC Marketing Rule regulates how investment advisors advertise their services, including performance data, to ensure that marketing practices are not misleading. It covers aspects such as the calculation and presentation of investment performance, along with guidelines on areas beyond the scope of performance, such as client testimonials and third-party ratings.
GIPS is a voluntary framework that aims to standardize investment performance reporting globally so investors can make apt comparisons between investment options.
When it comes to performance reporting, the SEC Marketing Rule and GIPS share many similarities in terms of calculations and including all similar-type portfolios together in aggregate to prevent choosing the best results.
However, there are some fundamental differences:
- Net Performance: With GIPS, firms can optionally report net performance; however, with the SEC Marketing Rule, net performance must be displayed in any advertisement along with the gross performance.
- Reporting Periods: GIPS requires a ten-year view of yearly returns, whereas the SEC Marketing Rule requires you to report performance across one, five, and ten-year cumulative periods.
Does being GIPS-compliant facilitate performance advertising compliance with the SEC rule?
Achieving GIPS compliance provides everything you need to ensure your performance calculations comply with the SEC Marketing Rule. Although additional requirements exist under the Rule, like mandatory net performance reporting and specific reporting periods, firms compliant with GIPS are well-positioned to meet these standards.
Have you noticed a trend of firms pursuing GIPS compliance to aid SEC Marketing Rule compliance?
I have seen more interest in the market. For example, firms that didn’t need to be GIPS-compliant to win new business are now looking to achieve compliance, so they have results that are calculated in accordance with the SEC Marketing Rule. For firms that would like to advertise investment performance, GIPS compliance is a good pre-step on the path to compliance.
How have our solutions supported meeting SEC Marketing Rule requirements?
SS&C Sylvan and Vision FI support our clients and help them satisfy these requirements. For example, one of our GIPS-compliant clients wanted to use their own GIPS presentation to advertise for prospective clients. To help achieve this, we added in gross and net returns for the one, five, and ten-year periods. In this case, our solution already handled all the various performance calculation requirements.
Any final recommendations or insights to share with readers?
For firms advertising their performance, the SEC will examine the performance calculations to ensure accordance with the requirements and determine that the background material is available to reconcile and prove the returns. It’s important to have proof of sound processes and records of the distribution of the materials.
Performance and reporting to satisfy SEC Marketing Rule requirements
Leveraging robust solutions like SS&C Sylvan, serving as a true “Performance Book of Record,” and SS&C Vision FI for reporting will ensure that your firm can provide proof in your calculation and distribution. Coupled with SS&C managed services, Sylvan and Vision FI deliver best-in-breed solutions and services supporting firms as they navigate regulatory compliance and client reporting.
Learn more about our performance and reporting solution in this brief.
[1] Han, J., Roland, E., Russ, A., Schleppegrell, C., et al. U.S. Securities & Exchange Commission (SEC). Final Rule: Investment Adviser Marketing. (2020, December 22). Retrieved from: https://www.sec.gov/files/rules/final/2020/ia-5653.pdf
