SEC Marketing Rule Private Fund Guide: Performance, Hypotheticals and Testimonials for a Cayman Vehicle

Advisers Act Rule 206(4)-1 has bound every SEC-registered adviser since its compliance date of 4 November 2022. It governs each advertisement a registered adviser disseminates, including a pitch deck for a Cayman fund. The SEC Marketing Rule private fund provisions do not switch off because the vehicle is offshore. For an adviser whose principal office is in the United States, the Commission has stated that the Act and its rules apply to US and non-US clients alike. The Rule therefore decides how that adviser shows gross and net returns, whether it may include backtests or targets, and how a placement agent may be paid. Exempt reporting advisers sit outside the Rule but inside section 206.

"We read a great many pitch decks for Cayman vehicles, and the weakest page is rarely the strategy. It is the performance page: gross returns without net, a backtest labelled as a track record, a single winning trade with no portfolio context. For a registered adviser those are Rule 206(4)-1 questions, and the fund's offshore domicile does nothing to change the answer. We would rather see a shorter deck that can be substantiated line by line than a longer one that cannot survive an examiner's request for the records." David Lloyd, Chief Executive Officer at CV5 Capital

Executive Summary

The Marketing Rule attaches to the adviser, not to the fund's domicile. A US-based registered adviser presenting a Cayman fund's returns is disseminating an advertisement.

• The Rule binds advisers registered or required to be registered with the SEC; exempt reporting advisers are outside it but inside section 206.
• A US-based adviser applies the Rule to its US and non-US clients, so investor geography does not narrow its reach.
• Gross performance may appear only beside net performance of equal prominence, same period, same methodology.
• Private fund performance is excepted from the one, five and ten year periods but not from the fair and balanced standard.
• Backtests, models and target returns are hypothetical performance and require an intended audience policy and full disclosure of assumptions and limitations.
• A compensated placement agent is an endorser, which requires prescribed disclosures, a written agreement and a disqualification check.

Who the Rule Applies To, and Why Domicile Does Not Change It

Rule 206(4)-1 applies by its terms to any investment adviser registered or required to be registered under section 203 of the Advisers Act. The adopting release confirms that exempt reporting advisers and state-registered advisers are not subject to it. That relief is narrower than it looks. Section 206 makes it unlawful for any investment adviser, registered or not, to defraud a client or prospective client or to engage in fraudulent, deceptive or manipulative practices. An exempt reporting adviser is free of the Rule's conditions, not of the standard they codify. Managers unsure of their perimeter should read whether a US investment manager can manage a Cayman fund.

The territorial question is where the offshore vehicle is most often misread. In the adopting release the Commission restated its position on registered advisers whose principal office and place of business is outside the United States. Most substantive provisions of the Act do not apply with respect to their non-US clients, including funds.

It then stated the converse. For an adviser whose principal office and place of business is in the United States, the Act and its rules apply to US and non-US clients. A New York adviser to a Cayman segregated portfolio therefore applies the Rule to its deck whether the recipient sits in Greenwich or Geneva. A London or Dubai adviser registered with the SEC applies it to its US clients; its Cayman fund follows the offshore client position on the facts.

Several provisions turn on whether the vehicle is a private fund. Section 202(a)(29) defines one as an issuer that would be an investment company but for section 3(c)(1) or 3(c)(7) of the Investment Company Act. A Cayman fund admitting US investors under either exclusion sits within it. Digital asset managers should first confirm they are inside the perimeter at all, the question addressed in when a digital asset manager becomes an investment adviser.

What Counts as an Advertisement for a Cayman Fund

The definition has two prongs. The first is any direct or indirect communication to more than one person that offers the adviser's services to prospective clients or prospective investors in a private fund it advises. Offers of new services to current clients or investors are included. A communication to a single person is caught only if it includes hypothetical performance. The second is any testimonial or endorsement for which the adviser provides compensation. A pitch deck, a fact sheet and a conference presentation all sit inside the first prong.

Three exclusions matter. Extemporaneous, live, oral communications are outside the definition, which covers an unscripted answer at a capital introduction meeting but not the slides behind it. Information in a statutory or regulatory filing is outside it. And hypothetical performance is outside the first prong where provided in response to an unsolicited request, or to a prospective or current private fund investor in a one-on-one communication.

A bespoke backtest sent to one prospective investor is therefore not an advertisement, though section 206 still applies; the same backtest in the general deck becomes one immediately. A due diligence data room is not itself an advertisement, although material placed in it can be.

The Seven General Prohibitions and the Substantiation Standard

Paragraph (a) sets out seven prohibitions. An advertisement may not:

• Include an untrue statement of a material fact, or omit a material fact necessary to make the statement not misleading.
• Include a material statement of fact the adviser cannot reasonably expect to substantiate on demand by the Commission.
• Include information reasonably likely to cause an untrue or misleading inference about a material fact relating to the adviser.
• Discuss potential benefits without fair and balanced treatment of the material risks or limitations.
• Refer to specific investment advice in a manner that is not fair and balanced.
• Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced.
• Otherwise be materially misleading.

The second prohibition carries a presumption managers underestimate. The Commission stated in the adopting release that if an adviser cannot substantiate a material claim on demand, it will presume the adviser had no reasonable basis for its belief. For a Cayman fund on a platform the record is partly external: administrator-produced NAV statements and audited financial statements support fund-level returns, while claims about capacity, team and execution rest on the adviser's own files. The April 2024 risk alert shows the prohibitions in use: references to SEC registration implying skill or approval, undefined benchmarks, net returns at fees lower than those offered to the audience, and net figures including only realised positions. Each has an offshore analogue, from describing CIMA registration as an endorsement to showing a founder class fee to investors who will pay the standard fee.

Gross and Net Performance, Time Periods and the Private Fund Exception

Paragraph (d)(1) prohibits any presentation of gross performance unless net performance is also presented with at least equal prominence and in a format designed to facilitate comparison. The net figure must cover the same period and use the same type of return and methodology. Gross means results before all fees and expenses an investor paid or would pay for the adviser's services; net means results after them. A model fee must either produce figures no higher than the actual fee would have, or equal the highest fee charged to the intended audience.

Staff FAQs have refined both edges. In February 2024 the staff confirmed that gross and net must share methodology and period. Its example was a gross internal rate of return calculated before a subscription facility was drawn, paired with a net figure calculated after capital was called. In January 2026 the staff addressed the reverse case, where actual fees charged historically are lower than the fees the intended audience will pay. Footnote 590 of the adopting release states that the adviser must then use a model fee reflecting the anticipated fee; the staff's current view is that the answer depends on the facts and the accompanying disclosure. A fund launching with a founder class and a standard class should treat that FAQ as required reading.

Paragraph (d)(2) requires performance of any portfolio or composite to be shown for one, five and ten year periods with equal prominence, ending no earlier than the latest calendar year-end. The life of the portfolio is substituted where shorter. Private fund performance is excepted; the Commission explained that those periods would not give private fund investors useful insight into performance across market conditions, and extended the exception to every type of private fund. The exception is not a licence to select windows: the same passage confirms that private fund performance remains subject to the prohibition on presenting time periods in a manner that is not fair and balanced.

A since-inception figure, a calendar year table and the worst drawdown, presented consistently deck after deck, satisfies both the Rule and the allocator, a point developed in building and presenting an institutional track record. Paragraph (d)(3) adds that no advertisement may state or imply Commission approval or review of the presentation, which is distinct from any voluntary standard the manager adopts; GIPS compliance for hedge fund managers explains where the two regimes overlap.

Extracted, Related, Predecessor and Hypothetical Performance

Extracted performance is the performance of a subset of investments taken from a portfolio, which is what a case study of a single trade or a sector sleeve amounts to. Paragraph (d)(5) permits it only where the advertisement provides, or offers to provide promptly, the total portfolio's performance. The staff's position on net figures for extracts has moved.

A FAQ posted on 11 January 2023 stated that an adviser showing the gross performance of one investment or a group of investments from a private fund had to show the extract's net performance too. On 19 March 2025 the staff replaced it. The Rule still requires net extracted performance. The staff would not, however, recommend enforcement action where the extract is clearly identified as gross and is accompanied, with at least equal prominence, by the total portfolio's gross and net performance covering the extract's entire period. A parallel accommodation covers gross characteristics such as yield and volatility.

Related performance is the performance of portfolios with substantially similar investment policies, objectives and strategies to the services offered. Paragraph (d)(4) requires all related portfolios to be included unless excluding some would not produce materially higher results and would not alter the prescribed periods. It bites hardest on a manager moving from separately managed accounts into a Cayman fund: the weakest accounts cannot be dropped because they were small or restricted.

Predecessor performance is performance of an account or private fund not advised at all times during the period shown by the advertising adviser: the portable record of a portfolio manager leaving an institution. Paragraph (d)(7) allows it on four conditions. The persons primarily responsible for the prior results must manage accounts at the advertising adviser. The prior accounts must be sufficiently similar. All substantially similar accounts must be advertised unless exclusion is not materially favourable. And the advertisement must clearly and prominently disclose that the results were achieved at another entity.

Hypothetical performance is performance not actually achieved by any portfolio of the adviser, and the definition expressly includes model results, backtests, and targeted or projected returns. Paragraph (d)(6) permits it on three conditions. The adviser must adopt and implement policies and procedures reasonably designed to ensure it is relevant to the likely financial situation and investment objectives of the intended audience. It must provide sufficient information on the criteria and assumptions. And it must provide information on risks and limitations, which for a private fund audience may be offered promptly instead. The Commission stated that hypothetical performance generally could not be included in advertisements directed to a mass audience, and that policies could define the audience by categories such as qualified purchaser.

Testimonials, Endorsements and Paid Introducers

The Rule absorbed the former cash solicitation rule, Rule 206(4)-3. A testimonial is a statement by a current client or private fund investor about its experience, or that solicits or refers others; an endorsement is the same statement by anyone else. Both include soliciting or referring any person to invest in a private fund the adviser advises, so a placement agent or a finder paid per subscription is giving an endorsement whatever the audience size.

Paragraph (b) imposes three conditions. Disclosure at the time of dissemination: clearly and prominently, whether the person is a current investor, whether compensation was provided and a brief statement of material conflicts, plus the material terms of the compensation. Oversight: a reasonable basis for believing the endorsement complies, and a written agreement describing scope and compensation. Disqualification: no compensation to a person the adviser knows, or should know, is ineligible by reference to disqualifying Commission actions or events within the preceding ten years.

The exemptions are specific. Uncompensated or de minimis endorsements, meaning US$1,000 or less in the preceding twelve months, are relieved from the written agreement and disqualification conditions but not from the disclosures. Affiliated personnel are relieved from the disclosure and written agreement conditions where the affiliation is apparent or disclosed. A registered broker-dealer endorsing to a non-retail customer is relieved from the compensation and conflict disclosures, and a person covered by Rule 506(d) of Regulation D is relieved from the disqualification condition.

The consequence is documentary. An investor quotation on a slide is a testimonial and needs the status and conflict disclosures even if uncompensated. A placement agreement must describe scope as well as fees, and the file should show the disqualification check was done.

The Pre-Distribution Checklist for a Cayman Fund Deck

The Rule does not sit alone. Form ADV Part 1A Item 5.L asks a registered adviser whether its advertisements include performance results, hypothetical performance, testimonials, endorsements or third-party ratings. Rule 204-2(a)(11) requires copies of advertisements to be kept, and Rule 204-2(a)(16) the records supporting any performance figure in them. The Division of Examinations issued risk alerts on the Rule in September 2022, June 2023 and April 2024. Its fiscal 2026 priorities list marketing among the core compliance areas reviewed on examination. SEC 2026 exam priorities for offshore managers sets out what that review looks like, and Form PF for managers of Cayman funds covers the reporting layer read alongside the deck.

The platform context changes the evidence base rather than the obligation. On a multi-manager segregated portfolio company such as the CV5 hedge fund platform, the fund-level record is produced by the administrator and audited independently of the investment manager, giving the adviser an external source for substantiation. The adviser remains solely responsible for its advertisements, its policies and procedures, its Form ADV answers and the records behind any backtest or predecessor figure. CV5 Capital provides the regulated platform, governance and service provider architecture; it does not manage the strategy and does not review or approve an adviser's marketing under the Rule.

Key Takeaways

• Decide which row of the scope table the adviser sits in before drafting the deck, and record the answer.
• Build the performance page net first, at the fee the intended audience will pay, and add gross only in a format that facilitates comparison.
• Fix a consistent set of periods and keep them from one deck to the next; the private fund exception removes a prescription, not the fair and balanced standard.
• Classify every figure that is not the fund's own return as extracted, related, predecessor or hypothetical, and apply the matching conditions in writing.
• Put a written intended audience policy behind any backtest or target, and route bespoke hypothetical material one-on-one where the exclusion allows.
• Paper every paid introducer with a written agreement, the prescribed disclosures and a dated disqualification check, and answer Form ADV Item 5.L to match.

Frequently Asked Questions

Does the SEC Marketing Rule apply to a Cayman fund with no US investors?

The Rule applies to the adviser rather than the fund. Where the adviser is SEC-registered with its principal office and place of business in the United States, the Commission has stated that the Advisers Act and its rules apply to its US and non-US clients. The Rule therefore applies to its advertisements for the Cayman fund whoever the investors are. Where the registered adviser's principal office is outside the United States, the Commission's stated position is that most substantive provisions do not apply with respect to its non-US clients, including offshore funds.

Are exempt reporting advisers subject to Rule 206(4)-1?

No. The Rule applies to advisers registered or required to be registered with the SEC. The Commission confirmed in the adopting release that exempt reporting advisers and state-registered advisers are not subject to it. Exempt reporting advisers remain subject to section 206 of the Advisers Act, whose anti-fraud provisions apply to any investment adviser. The conduct the Rule's general prohibitions describe is the conduct those provisions target.

Must a private fund show one, five and ten year performance?

No. Paragraph (d)(2) of the Rule requires those periods for any portfolio other than a private fund, and the Commission extended the exception to every type of private fund. Private fund performance remains subject to the general prohibition on presenting performance results or time periods in a manner that is not fair and balanced. The periods chosen must therefore be consistent and defensible.

Can a hedge fund show gross performance of a single trade without net?

The Rule itself requires net performance wherever gross performance is shown, and a single trade or group of trades is extracted performance. Since 19 March 2025 the SEC staff has said it would not recommend enforcement action where the extract is clearly labelled gross and is accompanied by the total portfolio's gross and net performance. That total must be presented with at least equal prominence and cover the entire period of the extract. That position replaced a January 2023 FAQ which had required net extracted performance in all cases.

Is a target return hypothetical performance under the Marketing Rule?

Yes. The definition of hypothetical performance expressly includes targeted or projected returns for any portfolio or for the advisory services offered, alongside model results and backtests. Advertising a target return therefore requires policies and procedures on the intended audience and sufficient information on criteria and assumptions. Information on risks and limitations is also required, though for private fund investors it may be offered promptly rather than included.

Is a placement agent an endorser under the Marketing Rule?

Yes, where the adviser compensates it. An endorsement includes any statement by a non-client that directly or indirectly solicits or refers a person to become an investor in a private fund the adviser advises. A compensated endorsement requires disclosures at the time of dissemination, a written agreement describing scope and compensation, and a check that the person is not ineligible. Specific exemptions apply to registered broker-dealers dealing with non-retail customers and to persons covered by Rule 506(d).