Q&A: How Sensr® Analytics Simplifies the SEC Marketing Compliance Rule

Authored by: Peter Rosenstein, Chief Product Officer, Digital Solutions
Updated on: July 9, 2024

Q: What regulations must private equity investment advisers comply with when marketing their services?

A: Investment advisers must comply with SEC rules, safeguarding investors and ensuring transparency. The Marketing Rule (Rule 206(4)-1 of the Investment Advisers Act of 1940) requires the presentation of net investment performance calculations, such as the Internal Rate of Return (IRR) and Multiple on Invested Capital (MOIC) whenever gross investment performance is presented to investors.

Both net and gross performance should be calculated over the same time period and using the same type of return and methodology. In addition, the net investment performance presentation must have equal prominence to the gross performance presentation in all marketing materials, and be presented in such a way as to facilitate comparison.

Sensr® Analytics, Gen II’s web-based solution, aids in these compliance efforts by accurately calculating and presenting investment performance metrics like IRR.

Q: What practices are prohibited by the SEC in investment marketing?

A: The SEC prohibits misleading or false statements in marketing materials. This includes misrepresentations about performance, qualifications, or risks associated with investments.  In addition, while there is no requirement to present performance metrics in marketing, the SEC Marketing Rule states a Sponsor may not present gross performance without also presenting the corresponding net performance.

Additionally, extracted performance may not be presented unless accompanied by the performance results of the total portfolio from which the performance was extracted (or an offer to provide such information). Hypothetical performance calculations are prohibited unless they meet relevance and disclosure requirements.

Q: How should investment performance be detailed in marketing materials?

A: Investment performance, such as IRR, must be accurately presented, disclosing the specific period, calculation methodology, and any relevant limitations. IRR calculations, such as Net Investor IRR and Gross Portfolio IRR, should comply with SEC guidelines.

Sensr® Analytics streamlines this by automating performance calculations and integrating data presentation across platforms, ensuring consistent and compliant reporting.

Q: How should net investment performance be calculated to comply with the SEC’s rule?

A: While the SEC has not provided specific guidance regarding calculation methodologies, some common themes are seen throughout the industry.  Whether utilizing a ratio or spread method, or performing a more complex fee and expense allocation, Sensr® Analytics can help Sponsors automate those calculations to systematically comply with the rule.

Q: Did the SEC’s January 2024 FAQ have any impact on the net performance calculation methodology?

A: Yes. The SEC did clarify that net performance calculations must use dates consistent with those for gross performance calculations. This eliminated some common calculation methodologies that rely on either the difference or ratio of the Net Fund IRR to the Gross Portfolio IRR, where dates can be materially different due to the impact of leverage.

Further, such net IRR that includes the impact of fund-level subscription facilities must be accompanied by net IRR calculated without the impact of such subscription facilities or, disclosure describing the impact of such facilities.

Published on: July 9, 2024