In this article, we explore the importance of internal policies and procedures—especially as it pertains to hypothetical performance under the SEC Marketing Rule (MR).  The adopting release for the MR notes that hypothetical performance can be useful, and it isn’t banned.  However, firms not only need to document how they are managing the risk of showing returns with “attention-grabbing power”[1] and ensuring those returns are relevant, they also need to be following those internal procedures.

Whether firms are claiming compliance with the GIPS standards or not, well-written performance calculation and distribution policies tailored to your firm with input from all departments to ensure relevance and increase firmwide adoption/implementation is an opportunity to raise operational efficiencies, not a cost center.  The inclusion of detailed actual and hypothetical performance requirements in the MR has created an opportunity for firmwide dialogue in order for your firm to adopt updated regulatory compliance policies that reflect the MR requirements that aim to ensure performance is relevant.

[1] SEC.gov | SEC Sweep into Marketing Rule Violations Results in Charges Against Nine Investment Advisers

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