Restrictions on advertising an adviser’s past performance

A past return can be mathematically accurate yet misleading when costs, time periods, accounts or losing results are hidden. The SEC Marketing Rule treats performance claims as a high-risk form of adviser advertising and sets detailed conditions.

Start with the general anti-misleading standard

An advertisement may not include an untrue material statement, omit a material fact needed to make a statement not misleading, or otherwise be materially misleading. The overall impression matters, not only whether each number is correct in isolation.

Gross and net performance

When an adviser presents gross performance, the rule generally requires corresponding net performance with at least equal prominence and over the same periods, subject to the rule's definitions and exceptions. Net results help investors understand the effect of fees and expenses. A presentation should not make a gross figure visually dominant while burying the return investors would actually have experienced after costs.

Do not cherry-pick

The rule addresses extracted performance, related portfolios and composite construction, and predecessor performance. An adviser cannot select only favorable investments or accounts if the resulting presentation is not fair and balanced or omits required context. For hypothetical performance, the adviser must adopt policies reasonably designed to ensure relevance to the intended audience and provide information about criteria and assumptions as required.

Practical review questions

• Are the time periods and calculation methods clear and consistent?
• Are gross and net figures presented with the required prominence and matching periods?
• Does the sample include relevant accounts and periods rather than only winners?
• Are fees, risks, assumptions, and limitations explained so the impression is balanced?
• Does the adviser have the required substantiation and supporting records?

Build a performance presentation from the rule

First determine whether the communication is an advertisement by an SEC-registered investment adviser under Rule 206(4)-1 and who will receive it. State-registered advisers may be subject to state rules, while broker-dealer communications are governed by separate requirements. A post, pitchbook, testimonial, website chart, or one-to-one presentation can raise advertising issues depending on content and audience. Classify before applying a checklist.

The Marketing Rule includes general prohibitions against material misstatements, unsubstantiated claims, misleading omissions, unfair or unbalanced statements, and discussion of benefits without fair and balanced treatment of material risks. Performance requirements add specific conditions. Gross performance generally must be accompanied by net performance, shown with equal prominence and a comparable time period and methodology. Certain time-period, related-portfolio, extracted-performance, hypothetical-performance, and predecessor-performance provisions also apply.

A reviewer should trace the source data, calculation method, fee assumptions, benchmark, period, account inclusion criteria, and any material market conditions. Confirm that gross and net figures are not selectively paired and that all required portfolios or the appropriate composite are included. If a chart highlights a winning strategy while omitting comparable losing results, assess whether the presentation is misleading even when each displayed number is accurate.

Hypothetical performance needs policies reasonably designed to ensure it is relevant to the intended audience’s likely financial situation and objectives, and the adviser must provide information about criteria and assumptions. A backtest that assumes perfect rebalancing and ignores real fees, taxes, or capacity can mislead if presented as an attainable outcome. Interactive analysis tools are treated separately under the rule; do not assume every projection is exempt.

Testimonials and endorsements have separate disclosure, oversight, and disqualification conditions. If a client quote accompanies a performance chart, the firm must review both sets of requirements. The general prohibition still applies: required labels do not cure an overall misleading impression. Compliance should retain substantiation and approval records for the advertisement.

The exam answer should be scoped: “SEC-registered adviser” and “advertisement” matter. State the general anti-misleading standard, then identify the performance condition implicated. Do not say the SEC approves advertised results or that any particular past return predicts future results.

Governance for the approval process

The adviser should identify who owns the performance data, who validates calculations, who reviews the advertisement, and where substantiation is retained. Compliance review should cover the actual final output, including mobile format and linked pages. A footnote that is hidden in a social post does not balance a prominent performance claim.

Marketing and portfolio teams should agree on definitions for gross, net, benchmark, composite, and hypothetical results before publishing. A spreadsheet error can become a materially misleading claim even when the surrounding disclosure is complete.

When a presentation is revised, preserve the superseded version and approval record. This allows the firm to identify what each recipient saw and to correct a claim promptly if later found inaccurate.

Approval checklist

Classify performance as actual, hypothetical, extracted, predecessor, or related-account results. Check gross/net presentation, periods, benchmark, fees, inclusion criteria, assumptions, and substantiation. Review the final format as the intended audience will see it; a hidden footnote may not balance a prominent claim.

Retain source data, calculations, review notes, and superseded versions so the firm can correct a problem and identify what recipients saw.

Correct errors promptly

If a performance error is identified, stop distributing the ad, assess who received it, correct the calculation, and determine whether the adviser must notify recipients or amend related materials. Preserve the prior version and remediation record.

The general prohibition against misleading statements continues to apply even where a rule provision does not prescribe a specific format. Review the overall impression, not only whether each footnote is technically present.

Treat a performance claim as a recordkeeping obligation as well as a marketing decision. The firm should be able to reproduce the figure, identify its source accounts, explain exclusions, and show that disclosures were prominent in the format distributed.

Exam takeaway

Past performance advertising is governed by the SEC's general anti-misleading standard plus detailed Marketing Rule conditions. Look for balanced gross/net presentation, representative selection, disclosures, substantiation and audience fit.