On February 6, 2024, the U.S. Securities and Exchange Commission (“SEC”) issued an updated FAQ for investment advisers relating to SEC Rule 206(4)-1 (the “Marketing Rule”), and the reporting of gross and net performance within advertisements. Under the new FAQ, SEC staff noted that while the Marketing Rule does not prescribe a specific methodology or calculation for performance, in situations where gross and net performance returns are used by an investment adviser, net returns must be calculated “over the same time period and using the same type of return and methodology as gross performance.”

The staff notes in the new FAQ that certain investment advisers to private funds may wish to present a gross internal rate of return (“Gross IRR”) for an investment from the time that such investment is made (using capital call lines or other similar borrowing, but excluding the effect of such facilities in the calculation of Gross IRR), while presenting the net internal rate of return (“Net IRR”) calculated from the time that investor capital is called to repay the borrowing that was used to make the investment. The FAQ further notes for advisers to private funds that, where Gross IRR and Net IRR are used in an advertisement: (i) it would violate the Marketing Rule to present Gross IRR without the impact of the applicable borrowing compared only to Net IRR that is calculated with the impact of the borrowing as it would present IRR calculations being made across different time periods, and (ii) it would further violate the provisions of the Marketing Rule requiring presentations of performance in a format “designed to facilitate comparison between gross and net performance.” The staff concluded that if an advertisement were to show Gross IRR commencing from a time prior to the time that capital commitments were called from investors, Net IRR must be presented from the same initial time.

Finally, the staff notes that an adviser would violate the general prohibitions of the Marketing Rule if Net IRR were presented including the impact of fund-level subscription facilities, without including either (i) Net IRR without the impact of such facilities, or (ii) appropriate disclosures describing the impact of such facilities on the net performance shown.

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