Performance Presentations

What can’t you say?

It goes without saying that false or misleading statements are prohibited in performance presentations. But money managers should also be aware of the following specific legal restrictions in reporting their track records to existing or prospective investors:

no client testimonials

no ‘cherry-picking’ of securities or clients

no graphs, charts or formulas for investors to follow

no gross returns only

no simulated results

All but the first of these prohibitions have exceptions, but each should be treated as a hard-and-fast rule unless you have explicit advice from counsel or a compliance professional to do otherwise. Violations of the rules could result in both civil and criminal penalties.

Client testimonials in your marketing materials are deemed to be inherently misleading because they ignore unfavorable reviews. The same can be said of highlighting profitable investments (‘cherry-picking’) or listing only clients who experienced gains in their portfolios. Past investments and client lists, however, may be used if they are all-inclusive or, if partial, based on objective criteria other than performance.

Charts, graphs or formulas which are intended for clients to use in making their personal trading decisions must be accompanied by disclosure of the difficulties or limitations inherent in their use.

Gross returns are ordinarily reported net of transaction costs but not net of management fees. Unless they are specifically requested by an existing or prospective client or you are in a one-on-one meeting with a prospective client, presenting your gross returns alone is impermissible. Even when gross returns alone are permitted, they must be accompanied by a hypothetical example of the compounded effect of applicable fees. The required disclosure in performance presentations directed at two or more existing or prospective clients are returns calculated net of both applicable fees and transaction costs. Net returns may be accompanied by gross returns as long as they are equally prominent in the presentation. Also required is an indication of whether the results include dividend and income reinvestments.

Simulated results of an investment strategy obtained through the use of back-tests may not be used in marketing funds or managed accounts by registered broker-dealers and, for that reason, should not be used by money managers without specific approval of counsel or a compliance professional.

In addition to observing these specific restrictions, money managers should understand that the general rule prohibiting false or misleading statements in performance presentations requires that (1) every statement be supported by demonstrable facts, (2) all material facts relevant to investment returns be disclosed (such as influential market or economic conditions and index comparisons), (3) presentations be balanced (e.g., claims about profit potential matched with potential for loss) and (4) if reported returns are based on the performance of a model portfolio, the limitations inherent in calculating and interpreting model results and any strategic changes in the model during the period presented be disclosed.