SEC Clarifies Marketing Rule: Gross-of-Fee Returns Allowed Under Certain Conditions

Sean P. Gilligan
Author
March 27, 2025
15 min
SEC Clarifies Marketing Rule: Gross-of-Fee Returns Allowed Under Certain Conditions

The investment management industry has spent significant time grappling with the SEC’s Marketing Rule and the question of whether gross-of-fee returns can be presented without corresponding net-of-fee returns in certain cases. Many firms have invested resources in trying to allocate fees to individual securities and sectors in an effort to comply. However, the SEC has now issued two FAQs (March 19, 2025) that provide much appreciated clarity on extracted performance and portfolio characteristics. The key takeaway? It is possible to present gross-of-fee returns without net-of-fee returns—if certain conditions are met.

Extracted Performance: Gross Returns Can Stand Alone Under Specific Criteria

Investment advisers often present the performance of a single investment or a subset of a portfolio (“extracted performance”) in marketing materials. Historically, the SEC required both gross and net performance to be shown for such extracts. The new guidance provides a pathway for firms to display only gross-of-fee extracted performance, provided the following conditions are met:

  1. The extracted performance must be clearly identified as gross performance.
  2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
  3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the extracted performance.
  4. The total portfolio’s performance must be calculated over a period that includes the entire period of the extracted performance.

If these conditions are satisfied, the SEC staff has indicated they will not recommend enforcement action, even if the extracted performance is presented without corresponding net returns. This is a notable shift, as it allows firms to avoid the complex and often impractical task of allocating fees at the investment or sector level.

Portfolio and Investment Characteristics: Net-of-Fee Not Always Required

Another common industry question has been whether certain portfolio or investment characteristics—such as yield, volatility, Sharpe ratio, sector returns, or attribution analysis—constitute “performance” under the marketing rule, and if so, whether they must be presented net of fees.

The SEC’s latest guidance acknowledges that calculating these characteristics net of fees can be difficult and, in some cases, may lead to misleading results. As a result, the staff has confirmed that firms may present gross characteristics alone, without net characteristics, if they meet the following criteria:

  1. The characteristic must be clearly identified as calculated without the deduction of fees and expenses.
  2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
  3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the gross characteristic.
  4. The total portfolio’s performance must be calculated over a period that includes the entire period of the characteristic being presented.

As with extracted performance, these conditions help ensure that the presentation is not misleading, reducing the risk of enforcement action.

Bottom Line: A Practical Path Forward

This updated SEC guidance provides much-needed flexibility for investment managers, allowing for the presentation of gross-of-fee returns in a compliant manner. Firms that clearly disclose their approach and follow the specified conditions can reduce compliance burdens while still meeting investor protection standards. While this does not eliminate all complexities of the Marketing Rule, it does offer a practical solution that allows for more straightforward and meaningful performance reporting.

For firms navigating these changes, ensuring clear disclosures and maintaining compliance with the general prohibitions of the rule remains critical. Those who align their advertising materials with these guidelines can now confidently use gross-of-fee performance in a way that is both transparent and in compliance with regulatory requirements.

Questions?

If you have questions about calculating or presenting investment performance in a manner that complies with regulatory requirements or industry best practices, we would love to talk to you. Please feel free to email us at hello@longspeakadvisory.com.

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ColoradoBiz Names Longs Peak’s Jocelyn Gilligan, CFA, CIPM as a GenZYZ Top Young Professional
Longs Peak is pleased to announce that Partner and Co-Founder, Jocelyn Gilligan has been named a GenXYZ Top Young Professional by ColoradoBiz Magazine. As ColoradoBiz states, “They’re uncommon achievers, whether as entrepreneurs, CEOs, nonprofit leaders, visionaries critical to their companies’ success or, in some cases, all of those roles. This year’s Top 25 Young Professionals figure to continue making a difference professionally and in their communities for years to come.”
March 14, 2023
15 min

Longs Peak is pleased to announce that Partner and Co-Founder, Jocelyn Gilligan has been named a GenXYZ Top Young Professional by ColoradoBiz Magazine.

As ColoradoBiz states, “They’re uncommon achievers, whether as entrepreneurs, CEOs, nonprofit leaders, visionaries critical to their companies’ success or, in some cases, all of those roles. This year’s Top 25 Young Professionals figure to continue making a difference professionally and in their communities for years to come.”

Jocelyn grew up in Boulder, CO and graduated from the University of Colorado. She started her career at Ernst & Young in New York City where she worked on their Financial Services Transfer Pricing Team. She transferred with EY to their office in Shanghai and then eventually to Hong Kong. Jocelyn left EY as a Manager and relocated back to Colorado where she and her husband started a family. Soon thereafter, Jocelyn and Sean founded Longs Peak out of a small one-car garage in their home in Longmont, CO. Now running a thriving team of 14, Jocelyn has weathered the ups and downs of entrepreneurship. She credits a lot of their success to their amazing team and the community of entrepreneurs they live near and network with (Longs Peak is an active member of EO (Entrepreneurs Organization)).

Jocelyn is a voting member of the PTO at her children’s school and a member of Women in Investment Performance Measurement, a group recently founded to support women in the investment performance industry.

Please join us in celebrating this year’s ColoradoBiz Top Young Professionals nominees. You can view the complete list of nominees here

About ColoradoBiz’s Top 25 Young Professionals

The 13th annual Gen XYZ awards is open to those under 40 who live and work in Colorado — numbered in the hundreds, making for difficult decisions and conversations among judges, as always. Applications were judged by our editorial board based on career achievement, community engagement and their stories of how they got to where they are now.

About Longs Peak

Longs Peak is a purpose and values-driven company. It is our mission to make investment performance information more transparent and reliable—empowering investors to make better, more informed investment decisions.

At the onset, we were looking to help smaller investment managers by giving them access to professional performance experts and tools typically only available to very large firms. We know that our work enables emerging managers to compete with the big guys and helps facilitate their growth. We strive to be our clients’ most valued outsource partner and to be known for our exceptional client service. We know that providing exceptional client service means that we must first create a culture that lives by the ideals we are trying to create for our clients. A place where incredibly talented individuals are empowered to put their best work into the hands of clients that truly value what we do. As a firm, we recognize that our greatest asset is people – both those we work with and those we work for. We continue to evolve into something that represents the needs of both of these groups and hope someday a GIPS Report is provided to every prospective investor in the world.

New GIPS Standards Guidance for OCIOs: What You Need to Know
The Global Investment Performance Standards (GIPS®) have released a new Guidance Statement for OCIO Portfolios, bringing greater transparency and consistency to the way Outsourced Chief Investment Officers (OCIOs) report performance. This update is a significant milestone for firms managing OCIO Portfolios and asset owners looking to evaluate their OCIO providers.
February 3, 2025
15 min

The Global Investment Performance Standards (GIPS®) have released a new Guidance Statement for OCIO Portfolios, bringing greater transparency and consistency to the way Outsourced Chief Investment Officers (OCIOs) report performance. This update is a significant milestone for firms managing OCIO Portfolios and asset owners looking to evaluate their OCIO providers.

What is an OCIO?

An Outsourced Chief Investment Officer (OCIO) is a third-party fiduciary that provides both strategic investment advice and investment management services to institutional investors such as pension funds, endowments, and foundations. Instead of building an in-house investment team, asset owners delegate investment decisions to an OCIO, which handles everything from strategic planning to portfolio management.

Who Does the New Guidance Apply To?

The Guidance Statement for OCIO Portfolios applies when a firm provides both:

  1. Strategic investment advice, including developing or assessing an asset owner’s strategic asset allocation and investment policy statement.
  2. Investment management services, such as portfolio construction, fund and manager selection, and ongoing management.

This ensures that firms managing OCIO Portfolios follow standardized performance reporting, making it easier for prospective clients to compare OCIO providers.

Who is Exempt from the OCIO Guidance?

The guidance does not apply in the following scenarios:

  • Investment management without strategic advice – If a firm only manages investments without advising on asset allocation or investment policy.
  • Strategic advice without investment management – If a firm provides recommendations but does not manage the portfolio.
  • Partial OCIO portfolios – If a firm only manages a portion of a portfolio, rather than the full OCIO mandate.
  • Retail client portfolios – The guidance is specific to institutional OCIO Portfolios and does not apply to retail investors including larger wealth management portfolios.

Key Change: Required OCIO Composites

Previously, OCIO firms had flexibility in defining their performance composites. Now, the GIPS Standards introduce Required OCIO Composites, which categorize portfolios based on strategic asset allocation.

Types of Required OCIO Composites

  1. Liability-Focused Composites – Designed for portfolios aiming to meet specific liability streams, such as corporate pensions.
  2. Total Return Composites – Focused on capital appreciation, commonly used by endowments and foundations.

Firms must classify OCIO Portfolios based on their strategic allocation, not short-term tactical shifts. This standardization enhances comparability across OCIO providers. The specific allocation ranges for the required composites are as follows:

Required OCIO Composites for OCIO Portfolios

Required OCIO Composites
Source: Guidance Statement for OCIO Portfolios

Performance Calculation & Reporting

To ensure transparency, firms must follow specific rules for return calculations and fee disclosures:

  • Time-weighted returns (TWR) are required, even for portfolios with private equity or real estate holdings.
  • Both gross and net-of-fee returns must be presented to clarify the true cost of OCIO management.
  • Fee schedule disclosures must include all investment management fees, including fees from proprietary funds and third-party placements.

Enhanced Transparency in GIPS Reports

The new guidance also requires OCIO firms to disclose additional portfolio details, such as:

  • Annual asset allocation breakdowns (e.g., growth vs. liability-hedging assets).
  • Private market investment and hedge fund exposures.
  • Portfolio characteristics, such as funding ratios and duration for liability-focused portfolios.

By providing these details, OCIO firms enable prospective clients to make better-informed decisions when selecting an investment partner.

When Do These Changes Take Effect?

The Guidance Statement for OCIO Portfolios is effective December 31, 2025. From this date forward, GIPS Reports for Required OCIO Composites must follow the new standards. However, firms are encouraged to adopt the guidance earlier to improve transparency and reporting consistency.

Why This Matters

With OCIO services growing in popularity, this new guidance ensures that firms adhere to best practices in performance reporting. By establishing clear rules for composite classification, return calculation, and fee disclosure, the guidance empowers asset owners to compare OCIO providers with confidence.

As the December 31, 2025 deadline approaches, OCIO firms should begin aligning their reporting practices with this new guidance to stay ahead of the curve.

Don’t miss CFA Institute’s webinar scheduled for this Thursday February 6, 2025 to hear more on this guidance statement.

Questions?

If you have questions about the Guidance Statement for OCIO Portfolios or the Standards in general, we would love to talk to you. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping firms maintain their compliance with the GIPS Standards on an ongoing basis. Please feel free to email us at hello@longspeakadvisory.com.

Key Takeaways from the 28th Annual GIPS® Conference
The CFA Institute hosted its 28th Annual Global Investment Performance Standards (GIPS®) Conference on September 17-18 in San Diego, CA. As always, the opportunity to reconnect with industry peers and colleagues was a highlight. We are grateful to all the speakers and panelists who shared their insights. Here are some key takeaways we found valuable from this year’s event.
October 2, 2024
15 min

The CFA Institute hosted its 28th Annual Global Investment Performance Standards (GIPS®) Conference on September 17-18 in San Diego, CA. As always, the opportunity to reconnect with industry peers and colleagues was a highlight. We are grateful to all the speakers and panelists who shared their insights. Here are some key takeaways we found valuable from this year’s event.

The SEC Marketing Rule

The SEC Marketing Rule continues to be a topic of discussion, especially as we continue navigating the nuances of the rule and its implications for investment performance advertising. During the panel discussion, two presenters clarified several points:

Model vs. Actual Fees

It seems that there is rarely a case when the use of actual fees will adequately satisfy the marketing rule. This is a major development as at least 30% of the participants in the audience claim to still be using actual fees in their marketing.

According to the SEC marketing rule, when calculating net returns you can use actual or model fees. However, to satisfy the general prohibitions, an advisor generally should apply a model fee that reflects either the highest fee that was charged historically or the highest potential fee that it will charge the prospect receiving the advertisement (not a reasonable fee or an average). Footnotes 590 and 593 further clarify that there may be cases when using actual fees would specifically violate the marketing rule.

Footnote 590: “If the fee to be charged to the intended audience is anticipated to be higher than the actual fees charged, the adviser must use a model fee that reflects the anticipated fee to be charged in order not to violate the rule’s general prohibitions.”

and

Footnote 593: “…net performance that reflects a model fee that is not available to the intended audience is not permitted under the final rule’s second model fee provision.”

As a result, we recommend that anyone using actual fees in advertisements compare their net returns to the net returns that would have been achieved using the highest fee a prospect would pay as the model fee. If your actual net returns result in materially better performance than what the performance would be using the highest model fee, this is likely problematic. The rules do not define materiality, but the panelists did provide an example where the difference was only 25bp and they indicated that would likely be considered material.

If you do not have tools for calculating model fees, don’t worry, we are here to help. Reach out to one of our performance experts if you need help calculating model fees - we have tools that can simplify this for you.

Showing Multiple Net Returns in a Single Advertisement

Standardized marketing materials that show multiple net return results (including net of actual fees) may be presented in a single advertisement. This seems like a change of tone from what we heard last year, but this greatly simplifies what we thought previously. Since the adoption of the marketing rule, firms have struggled with how to standardize marketing materials, especially when they have different fee schedules and investor types.

Many firms now manage several versions of the same marketing document that show only the gross-of-fee returns and net-of-fee returns relevant to the specific audience receiving the advertisement. This can be logistically challenging to manage. Based on the discussion and case studies provided, it seems that firms are permitted to create a single document that shows various net-of-fee returns based on the fees charged to different investor types. The example provided looked something like this:

This shift in approach may be a huge relief for firms that are managing multiple investor types and are trying to track and update performance under various fee schedules. If electing to do this, it is important to ensure the fee proposed for the prospective investor is clear – especially when presenting a table like this to a retail investor. It is essential that your prospects can easily identify the net-of-fee return stream that is applicable for them.

Attribution & Contribution – Which is Performance?

Attribution is not considered performance while contribution likely is. Because Attribution is not considered performance, the use of a representative account is generally accepted. However, careful consideration should be applied in selecting an appropriate rep account and documentation to support its selection should be maintained. While the performance-related requirements of the Marketing Rule may not apply, the overarching requirement for the advertisement to be “fair and balanced” applies and must be considered when determining what account to use to represent the strategy.

A separate case study discussed how to handle situations when the rep account closes. Using the old rep account historically and linking its data to a new rep account is considered hypothetical, so if your rep account ceases to exist, it’s best to re-evaluate and select a different rep account to be used for the entire track record of the strategy.

Presenting Sector Contribution Returns Net-of-Fees

When presenting extracted performance, such as contribution or returns at the sector-level, this is treated as performance and must be presented net-of-fees. Since some firms have been mistakenly reducing each sector by a prorated portion of the percentage fee when determining the net-of-fee results, the panelists emphasized that when netting down sector returns, firms must deduct the full percentage fee from each sector. If allocating the dollar amount of the fee, that would be prorated by weighting the dollar amount of the fee by the weight the sector represents in the portfolio, but prorating a percentage will not create the same result and will overstate the sector-level net-of-fee returns.

The following example was provided to demonstrate how to apply model fees to sector returns and contribution in an advertisement:

Private Fund Gross & Net Returns

The calculation of gross and net returns for private funds must be consistent. For example, you cannot report a gross-of-fee return that excludes the impact of a subscription line of credit while reporting a net-of-fee return that includes it. Firms must disclose the effect of leverage, specifying the impact of subscription lines of credit rather than just stating that returns will be lower.

Per the marketing rule: gross- and net-of-fee returns must be calculated over the same time period, using the same type of return methodology. For example, it is not appropriate to calculate gross IRR using investment-level cash flows and net IRR using fund-level cash flows as that would be considered different methodologies.

Hypothetical Performance

Firms should be prepared to defend the classification of hypothetical or extracted performance. Hypothetical performance is defined as “performance that no specific account received.” Panelists made a point of noting that the return stream of a composite is not considered hypothetical, even though no specific account received the performance.

Along similar lines, a case study was presented where a firm wanted to show recommended funds to an existing client in a marketing presentation. The question was whether presenting a recommendation like this is considered hypothetical. Not surprisingly, the answer was “it depends on how the information was presented.” Presenting the information in a way that implied what the investor “could have received” would likely be hypothetical. Simply showing how these funds performed historically (so long as it complies with the marketing rule – showing prescribed time periods etc.) appeared acceptable.

AI in Investment Performance Reporting

The integration of AI into performance measurement and reporting continues to gain momentum. Of particular interest was how quickly our jobs may be changing and whether we need to be concerned about job security.

Jobs that focus on data gathering, prepping and cleaning are expected to be replaced by AI in the near future.  We’ll likely see fewer new job postings for these entry-level roles, with a shift towards more value-added positions, such as data scientists, becoming more prevalent. Panelists suggested that many roles within the performance measurement function, including auditing, will likely be augmented, automating repetitive tasks (often performed by more junior professionals) and enhancing data analysis functions. Higher-level human oversight will still be essential for exercising judgment and interpreting information within the context of real-world scenarios – at least for now.

Panelists recommended preparing performance teams by encouraging them to take basic courses in Python and SQL to help prepare and empower them for the shift to a future with AI. AI platforms already exist that can perform detailed performance attribution and risk assessments by simply asking a question – much like one would with ChatGPT. It is likely that performance measurement professionals will continue to be needed to develop these platforms, and they will likely remain reliant on some human oversight for the foreseeable future.

Updates on the GIPS Standards

There were not a lot of updates on the GIPS Standards at the conference. As of July 31, 2024, 1,785 organizations across 51 markets claim compliance with the GIPS standards. This includes 85 of the top 100 global firms, and all 25 of the top 25 firms. The top five markets include the US, UK, Canada, Switzerland, and Japan, with Brazil emerging as a new market entrant in 2024.

The conference also provided updates on recent changes to the GIPS Standards. Key updates included:

  • The Guidance Statement for OCIO Strategies will be released by year-end, providing more clarity for firms managing OCIO portfolios. It appears that gross-of-fee and net-of-fee returns will need to be presented for OCIO composites.
  • The Guidance Statement for Firms Managing Only Broadly Distributed Pooled Funds(BDPFs) became effective on July 1, 2024. The new guidance offers increased flexibility for firms managing BDPFs, allowing them to avoid preparing GIPS Reports for prospective investors and instead focus on reporting for consultant databases or RFPs. While input data and return calculation requirements generally still apply, composite construction and report distribution are only required if the firm chooses to prepare GIPS Reports.
  • The GIPS Technical Committee is forming a working group to address after-tax reporting. For now, firms should refer to the USIPC After-Tax Performance Standards, which were issued in 2011. Additionally, as there is little consensus on how to calculate private fund returns, the committee plans to provide further guidance—though a timeline was not specified.

These takeaways underscore the evolving nature of the investment performance landscape. If you have any questions, please don’t hesitate to reach out to us. We would be happy to share additional insights from the conference as well as jump start your firm in complying with the GIPS Standards.

GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.