Marketing Rule review: net of fees, hypothetical performance, and testimonials

Under the SEC Marketing Rule, Rule 206(4)-1 under the Investment Advisers Act, an adviser may not show gross performance in an advertisement unless net-of-fees performance sits beside it, may not show hypothetical performance without three conditions in place, and may not use a testimonial or endorsement without the disclosures, oversight and eligibility checks the rule sets out.

This answer runs in seven parts:

• What “net of fees” means in adviser marketing: the rule, what the staff has said since, and what a clean presentation looks like.
• Hypothetical performance: what counts, how it changes what counts as an advertisement, and the three conditions.
• Testimonials and endorsements: which is which, the conditions, the exemptions, and what the staff has found.
• How a Marketing Rule review runs, from the general prohibitions to Redan’s positions.
• How it’s actually done, reading the claim, the footnote, the disclosure and the file together.
• The record it should leave.
• Frequently asked questions, then the sources.

What “net of fees” means in adviser marketing

The rule. An advertisement may not present gross performance unless it also presents net performance “with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance” and “calculated over the same time period, and using the same type of return and methodology” (206(4)-1(d)(1)(i) and (ii)).

Net performance is defined as performance “after the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio” (206(4)-1(e)(10)). Two details in that definition decide most net-of-fees questions:

• Custodian fees paid to a bank or other third party for safekeeping may be left out (206(4)-1(e)(10)(i)).
• A model fee may be used instead of actual fees, but only if it produces figures no higher than the actual fee would, or equals the highest fee charged to the intended audience (206(4)-1(e)(10)(ii)(A) and (B)).

Performance of a portfolio other than a private fund also has to show one-, five- and ten-year periods, each with equal prominence and ending no earlier than the most recent calendar year-end (206(4)-1(d)(2)).

What the staff has said since. In a January 15, 2026 update to its Marketing Compliance FAQ, the staff of the Division of Investment Management addressed advertising net performance calculated with actual fees when the audience will be charged more. Some advisers had read footnote 590 of the adopting release as requiring a model fee in that case. In the staff’s view, “whether the use of actual fees violates the general prohibitions depends on all of the facts and circumstances of a specific advertisement, including, but not limited to, relevant disclosures.” That is a staff statement, not a rule. In a March 19, 2025 update to its Marketing FAQ, the staff said it would not recommend enforcement action where the performance of one investment or a group of investments is shown gross without its net, if it is clearly identified as gross and the total portfolio’s gross and net performance is presented with it, at equal prominence and over a period that includes the extract’s.

What a clean presentation looks like. The figures below are invented for this illustration and are not the performance of any portfolio.

Net of fees reflects the deduction of a model advisory fee of 1.00% a year, the highest fee charged to the audience this material is intended for.

Gross and net sit in the same row, at the same size, over the same periods, and the line under the table says which fee was deducted and why it is the right one for this audience.

Hypothetical performance

What counts. Hypothetical performance is “performance results that were not actually achieved by any portfolio of the investment adviser” (206(4)-1(e)(8)). It includes model portfolio performance, backtested performance, and targeted or projected returns (206(4)-1(e)(8)(i)(A) to (C)). It excludes an interactive analysis tool used by the client, if the adviser meets four disclosure conditions, and predecessor performance shown in compliance with the predecessor provisions (206(4)-1(e)(8)(ii)).

It changes what counts as an advertisement. A communication usually becomes an advertisement when it goes to more than one person. A communication that includes hypothetical performance is an advertisement when it goes to one person (206(4)-1(e)(1)(i)), unless it answers an unsolicited request or goes one-on-one to a private fund investor (206(4)-1(e)(1)(i)(C)).

The three conditions. Hypothetical performance may appear in an advertisement only if the adviser (206(4)-1(d)(6)):

1. adopts and implements policies and procedures reasonably designed to ensure the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience;
2. provides enough information for the audience to understand the criteria used and assumptions made; and
3. provides enough information for the audience to understand the risks and limitations of using hypothetical performance in making investment decisions.

The first condition calls for policies and procedures for deciding which audience the hypothetical performance is relevant to. A footnote, however complete, does not meet it.

What the staff has found. In its April 17, 2024 risk alert, the Division of Examinations observed advisers that reported on Form ADV Part 1A that their advertisements contained no hypothetical performance when their advertisements did.

Testimonials and endorsements

Which is which. A testimonial is a statement by a current client or private fund investor about their experience with the adviser, or one that solicits or refers business to it (206(4)-1(e)(17)). An endorsement is the same kind of statement from anyone else (206(4)-1(e)(5)). A compensated testimonial or endorsement is itself an advertisement (206(4)-1(e)(1)(ii)).

The conditions. An advertisement may include a testimonial or endorsement, and an adviser may pay for one, only if three conditions are met (206(4)-1(b)):

• Disclosure at the time it is disseminated. Clearly and prominently: whether the person is a current client, whether they were paid, and a brief statement of any material conflict. Beside those, the material terms of the compensation and a description of the conflicts (206(4)-1(b)(1)).
• Oversight. A reasonable basis for believing the testimonial or endorsement complies with the rule, and a written agreement with the person describing the activities and the compensation (206(4)-1(b)(2)).
• Eligibility. No compensation to a person the adviser knows, or should know, is an ineligible person at the time (206(4)-1(b)(3)).

The exemptions. Compensation of $1,000 or less in total over the preceding 12 months is de minimis (206(4)-1(e)(2)), and it removes the written agreement and the eligibility check, not the disclosures (206(4)-1(b)(4)(i)). A testimonial or endorsement by the adviser’s own partners, officers, directors or employees is relieved of the disclosure and agreement conditions, if the affiliation is readily apparent or disclosed and the adviser documents the person’s status (206(4)-1(b)(4)(ii)).

What the staff has found. The Division of Examinations’ December 16, 2025 risk alert reported that the most common reason a testimonial or endorsement failed was that the disclosures were not provided when it was disseminated. It also observed:

• disclosures behind a hyperlink, or in a smaller or lighter font than the testimonial they belong to;
• gift cards given to clients for reviews on third-party websites, where the advisers did not appear to have a basis for believing the reviewer made the required disclosures;
• referral payments each under $1,000 that together passed $1,000 in 12 months, so the de minimis exemption never applied; and
• affiliations with a promoter disclosed only when the prospect was introduced, not when the endorsement was disseminated.

How a Marketing Rule review runs

The rule every review checks against. The seven general prohibitions apply to every advertisement, with or without performance (206(4)-1(a)(1) to (7)). The one that decides what a review has to keep is 206(4)-1(a)(2): an advertisement may not include “a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.”

A review works through the piece in this order:

1. Is it an advertisement? Apply the definition (206(4)-1(e)(1)), remembering the one-person test for hypothetical performance.
2. List every claim the piece makes, numeric and qualitative.
3. Check each claim against its evidence, and each performance figure against the performance conditions in 206(4)-1(d).
4. Check each testimonial, endorsement and third-party rating against its own conditions.
5. Write the disclosures the claims need, and only those.
6. Approve, or send it back, with the reasoning written down.
7. Keep the record the books and records rule requires.

Redan’s position: a review also reads the program behind the piece. A marketing review checks whether the firm has a policy covering the claim. A missing policy gets written up as a finding.

The rule on backup. For performance, the books and records rule sets the floor. The adviser keeps every record necessary to form the basis for or demonstrate the calculation of the performance it shows (204-2(a)(16)), for five years from the end of the fiscal year in which the piece was last published or disseminated (204-2(e)(3)(i)). For any other material statement of fact, the Marketing Rule requires a reasonable basis for believing the firm will be able to substantiate it upon demand by the Commission (206(4)-1(a)(2)).

Redan’s position: backup depends on what the claim is. A soft qualitative claim is carried by the reviewer’s written reason for believing it fair, and that is the minimum Redan recommends. Anything with a number under it (performance, an asset figure, a client count, a ranking) is carried by the source, the calculation and the approval, kept together and produced without anybody having to be asked.

Redan’s position: a comparison is what makes a qualitative claim expensive. “A more rigorous research process than most managers our size” is hard to support because of the comparison, not because it has no number in it. Evidence the comparison, or take it out and say what the firm can show about itself.

Redan’s position: every page with performance carries its own disclosure. A disclosure at the back of the deck does not cure a claim at the front. The disclosure sits on the page itself, or the page carries a pointer someone holding only that page could act on.

Redan’s position: cite the accepted source, at its current edition. For a number the firm does not generate, cite the source the profession accepts for it, at its current edition, and note beside the claim where that source is itself derivative.

Redan’s position: a licensed figure needs permission as well as substantiation. A market figure from a commercial study is licensed material. Being able to substantiate it and being permitted to publish it are two separate questions, and the second belongs to whoever holds the license agreement.

How it’s actually done

A careful reviewer reads four things together: the claim on the page, the footnote under it, the disclosure at the back and the document in the file. Most failures are a footnote that says something narrower than the headline, or a disclosure describing a fee arrangement the piece does not use. Where they disagree, the claim is changed to match the evidence.

In an advertisement, gross performance appears with net beside it, at equal prominence, over the same period and by the same method. Two situations work differently. Extracted performance, one investment or a group of investments shown on its own, can be presented gross if it is clearly identified as gross and the total portfolio’s gross and net performance is presented with it, at equal prominence and over a period that includes the whole period of the extract. That is a staff position in the Marketing FAQ, not the rule, and the rule’s general prohibitions still apply. And a communication to one person isn’t an advertisement unless it includes hypothetical performance, so the net-beside-gross condition doesn’t attach, though the anti-fraud provisions still do and nothing in it can mislead. Net on its own is acceptable, because it is the conservative number. The fee assumption behind the net figure is part of the claim, so the file says which fee was deducted and why it fits the audience.

Disclosures are written from the claims. The standard block appended to every deck fails both ways: it carries disclosures for claims the piece does not make, which teaches readers to skip it, and it misses the one claim that needed something specific. When the design argument comes, the claim moves and the disclosure stays. Shrinking, graying or relocating a disclosure to keep a page clean is the same problem as leaving it out.

A claim needs a footnote only if it would mislead without a qualification. If the reviewer cannot write the footnote a claim would need, the claim has to change.

When the staff asks a firm to substantiate a page, the answer is the record: the investments, the periods, the calculation and the reasoning that made the claim fair when it was written. A disclaimer added at that point reads as a retreat.

The record it should leave

The books and records rule sets the minimum:

• A copy of each advertisement the adviser disseminates (204-2(a)(11)(i)(A)).
• For performance, every account, book, internal working paper and other record “necessary to form the basis for or demonstrate the calculation” of the performance shown, including the information provided under the hypothetical performance conditions (204-2(a)(16)).
• For testimonials, endorsements and third-party ratings, documentation substantiating the reasonable basis for believing they comply (204-2(a)(15)(ii)), a record of the compensation and conflict disclosures if they were not in the advertisement (204-2(a)(15)(i)), and the names of affiliated persons relying on the affiliate exemption (204-2(a)(15)(iii)).
• For a third-party rating, a copy of the questionnaire or survey used to prepare it, where the adviser obtained one (204-2(a)(11)(ii)).

The advertisement, the performance records and the rating questionnaire are kept for five years from the end of the fiscal year in which the adviser last disseminated the advertisement (204-2(e)(3)(i)). The testimonial, endorsement and rating records under 204-2(a)(15) are kept for five years from the end of the fiscal year of their last entry (204-2(e)(1)). Both run the first two years in an appropriate office of the adviser.

Beyond the minimum, a record holds up when a stranger can follow each claim, the evidence under it, the reviewer who approved it and the reasoning in their own words, all dated when the decision was made.

Frequently asked questions

What does net of fees mean under the Marketing Rule? Performance after deducting all fees and expenses a client paid or would have paid for the adviser’s services to that portfolio (206(4)-1(e)(10)). Custodian fees may be left out, and a model fee may be used under two conditions (206(4)-1(e)(10)(i) and (ii)).

Can an adviser advertise gross performance? Only with net performance beside it, at least as prominent, in a format built for comparison, over the same period and by the same method (206(4)-1(d)(1)). In a March 19, 2025 update to its Marketing FAQ, the staff said it would not recommend enforcement action where the performance of one investment or a group of investments is shown gross without its net, if it is clearly identified as gross and the total portfolio’s gross and net performance is presented with it, at equal prominence and over a period that includes the extract’s. Net performance on its own is permitted.

Is a backtest hypothetical performance? Yes. Performance produced by applying a strategy to past periods when it was not in use is hypothetical performance (206(4)-1(e)(8)(i)(B)), and it can appear in an advertisement only under the three conditions in 206(4)-1(d)(6).

What is the difference between a testimonial and an endorsement? Who gives it. A testimonial comes from a current client or private fund investor (206(4)-1(e)(17)). An endorsement comes from anyone else (206(4)-1(e)(5)). The conditions on using either are the same (206(4)-1(b)).

Does a referral paid under $1,000 need disclosure? Yes. De minimis compensation, $1,000 or less in total over the preceding 12 months (206(4)-1(e)(2)), removes the written agreement and the eligibility check. The disclosures still apply (206(4)-1(b)(4)(i)).

Where is the Marketing Rule FAQ, and the adopting release? The staff of the Division of Investment Management publishes a Marketing Compliance FAQ on sec.gov. This answer cites its January 15, 2026 update. The rule was adopted in Release IA-5653 on December 22, 2020, with a compliance date of November 4, 2022.

Sources