Improving Data Performance to Meet the SEC’s Updated Marketing Rule

May 3, 2024
Read Time: 8 minutes

[An update to content originally published on September 13, 2022]

Regulatory change is here for private markets managers and investors. Are your data systems up to the task?

In February 2024, the Securities and Exchange Commission (SEC) announced the adoption of broad, sweeping new rules for the private fund industry around performance-related advertisements. The changes further update the SEC’s marketing rule for investment advisers and focus on even greater transparency for clients. These amendments are on top of reforms that went into effect on May 4, 2021.

The revisions are so significant that the SEC changed the definition of what an “advertisement” is. The amended definition contains two prongs: one that captures communications traditionally covered by the advertising rule and another that governs solicitation activities previously covered by the cash solicitation rule.

The first prong includes traditional “advertising,” such as “any direct or indirect communication an investment adviser makes that offers:

  • 1.The investment adviser’s services for securities to prospective clients or private fund investors, and
  • 2.New investment advisory services for securities to current clients or private fund investors.”

Increased scrutiny demands greater compliance

Increased scrutiny from the SEC combined with accelerated marketing activities by private funds make it essential that firms understand how to stay compliant under the updated marketing rule.

Most crucial, the updated marketing rule has created new disclosure requirements for third-party ratings and for use of performance data in advertisements. The marketing rule is platform neutral. Regardless of which social media platform a firm posts its advertisements, compliance with the updated rule is mandatory.

Increased and better data performance is likely the best way to support compliance, in our view. The volume of recordkeeping required under the updated mandate will have a substantial effect on the complex amounts of data firms manage and analyze. Recordkeeping requirements are a significant departure from the prior rule. As a result, the updated marketing rule will require constant review of recordkeeping policies to remain in compliance.

Being prepared is a strategic imperative

Data management processes will require more sophisticated technology that is able to digest and analyze data more quickly and also make far more complicated calculations.

In light of substantially greater regulatory requirements, private markets managers will have to find new ways to calculate and manage data. Making sure systems can handle the required updates to the marketing rule will enable a seamless transition, and will also help avoid last-minute rushes, challenges, and potential oversights.

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The growing need to address data challenges

In the SEC’s update, the marketing rule FAQs don’t require any particular methodology for calculating performance. However, the rule does require that presentations of gross performance must present net performance calculated over the same time period using the same methodology. The presentation must be in a format that facilitates comparison of net performance with gross performance.

The rule also focuses on the use of subscription facilities. For example, private fund sponsors must review their performance presentations to ensure net IRR presented with the impact of any subscription facilities includes one of the following:

  • Net IRR without the impact of any subscription facilities
  • Gross IRR with the impact of any subscription facilities

The SEC recognizes many managers present gross IRR using cash flows between the assets and the fund (this is inherently without the impact of the subscription facility); managers typically present net IRR using cash flows between the fund and investors (this is inherently with the impact of the subscription facility). Funds will now be considered in violation of the Rule if they do not disclose one of the above IRRs in their performance presentations.

Good faith approach to compliance will result in an explosion of data

With an updated approach to “advertising,” the amended rules mean the SEC has more clearly articulated marketing and fundraising guidelines for private markets funds – a change that adds regulatory clarity to this fast-growing investment segment.

The purpose of the updated rule is not to punish or play “gotcha,” but to ensure that advisers are aware of the amended rule and have engaged in good faith efforts to comply. Under the updated rule, private markets funds are prohibited from, among other things, including hypothetical performance in their advertisements. This rule applies unless funds have adopted and implemented policies and procedures reasonably designed to ensure hypothetical performance is relevant to the likely financial situation and investment objectives of the advertisement’s intended audience.

Updated rules require more advanced technology

To respond to the numerous changes, firms will need ever-more flexible tools to ingest large volumes of information, resolve data quality issues, and aggregate and organize their data. Access to various metrics will also be vital to calculate and present performance results. Firms will need flexible, auditable data and analytics platforms as a response to increasing complexity and industry demands in how they report their performance track record to various audiences. Tools that deliver powerful analytics and the ability to create dynamic reporting will become even more invaluable as firms respond to an ever-evolving regulatory environment.

CASE STUDY: Unifying Data to Understand Performance Track Record

External partners are critical as complexity increases

While support to manage increasing amounts of data often begins in the back office, an experienced partner can ease the transition to digesting and managing substantially greater amounts of data. A strong technology partner can provide much-needed support when it comes to complex data ingestion, reporting, and disclosures that often require a quick turnaround. A successful partner will also be able to collaborate across teams and with experienced professionals.

Actions to take now:

  • Meet with key technology and service partners
  • To stay on top of compliance mandates, firms will have to meet transparency requirements and stay on top of calculating the performance metrics put into effect by the updated rules. They will need help from their technology partners to maintain their capacity to capture granular-level data, in addition to extracting and configuring the data efficiently into customizable reports and automating complex calculations.
  • Become disciplined about capturing data
  • It’s important for firms to have methods to capture and maintain detailed data that can be analyzed, configured, and extracted easily and efficiently, and in turn, securely circulated to appropriate parties. Understanding and closing any gaps in areas such as data gathering, scope, and granularity of current and historical data, reporting capabilities, secure document sharing, and data automation should be key near-term goals to ensure successful compliance.

RELATED READING: Connecting the Front to Back Offices for Private Markets

A trusted partner can smooth the road ahead

Increased regulation of private funds continues to trend upward. Firms must remain adaptable to regulatory changes and make strategic choices that help them remain compliant, productive, and high performing.

As fund managers expand their portfolios and as the regulatory environment becomes increasingly complex, firms must be able to quickly digest information and produce accurate reporting. With high volumes of data and a quick disclosure turnaround, there is a higher risk of errors on crucial reporting requirements.

Arcesium’s unified data platform can help your firm confidently address the SEC’s updated and extensive marketing rule. The platform is designed to manage large volumes of data across asset classes and administrators and can also drill down into underlying operational and referential information.

Our pre-defined data model is engineered to normalize your incoming raw information, which you can extend per each fund’s needs. Powerful data validation tools can deliver a golden source of truth that’s consistent, auditable, and readily available to help your firm scale operations and turn information into insight.

Working with your team, Arcesium can help establish your connectivity, data mastering, and analytics to automate reporting with the click of a button. Flexible BI tools allow you to configure a range of performance metrics made more complex by the updated SEC marketing rules. The benefit to your firm is the ability to calculate and present performance in various dimensions and with greater agility.

To learn more about how Arcesium can help your firm confidently meet the requirements of the updated SEC marketing rule, contact us.

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Cesar Estrada
Cesar EstradaPrivate Markets Segment Head

Cesar is responsible for overseeing Arcesium’s application of its core competencies in data integration and harmonization to the investment lifecycle of managers in private capital markets, including private equity, private debt, real estate, and infrastructure.

Previously, he served as Senior Managing Director and Alternatives Segment Head for North America at State Street – a role in which he drove the growth agenda for a business with approximately $1 trillion in Assets Under Administration (AUA) by leading new product launches, expansion into new client segments, strategic partnerships, and acquisitions. Prior to that, as a Managing Director at J.P. Morgan, Cesar led the Private Equity & Real Estate Funds Services business from launch to $350Bn AUA. While at J.P. Morgan, he also held investment banking roles in New York, London, and Hong Kong.

Education & Credentials

  • MBA, Kellogg School of Management at Northwestern University
  • BS in Chemical Engineering, ITESM

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