SEC Footnote 590 FAQ (Jan 2026) & Hypothetical Performance: Key Considerations
More than five years after the SEC adopted the modernized Marketing Rule (adoption date: December 2020; compliance date: November 2022), firms continue to refine how they present both net-of-fees returns and hypothetical performance.
In January 2026, the SEC staff released an FAQ addressing the long debated Footnote 590. Rather than reinforcing a rigid, prescriptive standard, the FAQ recasts Footnote 590 through a principles-based, facts and circumstances lens—giving advisers more flexibility, but also more responsibility, to ensure communications remain fair, balanced, and not misleading.
This post breaks down the new FAQ and answers the most common questions received during a recent webinar, SEC Marketing Rule: Latest Developments and Practical Trends, offered by the CFA Institute. Links to the webinar and slides are available below.
Net Performance: What the New FAQ Really Changes
A Shift Away from Footnote 590’s Rigid Interpretation
Under Footnote 590 (from the 2020 adopting release), advisers were effectively told:
If your intended audience will pay higher fees than the fees embedded in your historical net returns, you must recalculate net-of-fees returns using a model fee equal to the higher audience fee.
This created both operational and conceptual challenges, particularly for firms that charged multiple fee types. In many cases, some fees increased while others decreased, or performance fee allocations changed over time, adding complexity to consistent treatment. Additional complications arose when composites included accounts that paid no fees or benefited from discounted fee arrangements. The SEC staff acknowledged these issues, and the January 2026 FAQ specifically notes industry confusion around mixed fee structures (such as combinations of management and performance fees), the circumstances under which fee increases require recalculation, and how Footnote 590 aligns—or does not align—with the principles-based General Prohibitions.
Key Takeaways from the New Footnote 590 FAQ
The January 2026 Footnote 590 FAQ underscores a shift by the SEC toward principles rather than prescriptive requirements. Instead of mandating recalculation in all cases, the SEC emphasizes a core objective: advisers must ensure that prospective clients are not misled about the impact of fees on performance or how performance will be affected by those fees. Importantly, the method for achieving this objective is flexible. At the same time, one requirement remains unchanged and unambiguous—whenever gross performance is presented, corresponding net performance must also be shown, and the FAQ does not alter this obligation.
Several additional takeaways are particularly relevant for alternative asset managers. The SEC clarifies that there is more than one acceptable way to illustrate fee differences, including both quantitative approaches (presenting numerical impacts) and, in certain cases, tailored qualitative disclosures that explain the effects narratively. The appropriateness of qualitative versus quantitative disclosure depends on the circumstances. Narrative disclosure may be sufficient when fee differences are small or straightforward, the intended audience is sophisticated, and the risk of misunderstanding is low. However, quantitative disclosure is expected when fee differences materially affect results, when performance fees make the impact difficult to intuit, or when narrative explanation alone could be unclear or potentially misleading. Finally, the sophistication of the intended audience is an important consideration. The SEC’s adopting release notes that retail audiences may require more detailed disclosure, whereas institutional or professional investors may require less—provided that the impact of fees is clear and not easily misunderstood.
Do You Need to Restate Historical Net Returns When Fees Change?
If fees increase, advisers are not automatically required to restate historical net returns. However, they are required to ensure that the overall presentation is not misleading in light of several factors, including the magnitude of the fee difference, the complexity of the fee structure, the manner in which the information is disclosed, and the sophistication of the intended audience. By contrast, when fees decrease, there is generally more flexibility to rely on historical net performance calculated using actual fees, because those results already reflect the deduction of fees that are higher than what the prospective client would be expected to pay.
Hypothetical Performance: What It Is and How to Use It
The most frequent questions on this topic continue to fall into two primary categories. First, advisers often ask whether a particular metric they wish to present constitutes “performance.” Because the Marketing Rule does not specifically define the term “performance,” advisers must analyze each metric individually and document their reasoning when concluding that a metric should not be treated as performance. For example, certain portfolio characteristics may fall outside the definition of performance, whereas metrics such as IRR, TVPI, MOIC, and similar measures will generally be considered performance. When an adviser concludes that a metric is not performance, it is important that the analysis be specific, that the reasoning be clearly documented, and that the conclusion be revisited periodically to ensure it remains appropriate.
The second common question is whether, if the metric does constitute performance, it should be considered hypothetical performance. Under the Rule, hypothetical performance is defined as performance results not actually achieved by a portfolio of the investment adviser. This category includes back-tested results, model portfolios, targets and projections, performance that is not representative of an actual investable strategy, and carve-outs derived from multiple portfolios.
Compliance Steps for Hypothetical Performance
Once an adviser determines that hypothetical performance is present, a four-step framework should be followed. First, the adviser must determine whether the communication containing the hypothetical performance qualifies as an advertisement. While many materials that include hypothetical performance will be advertisements, some may not. Examples that may fall outside the definition include reporting provided to existing clients, truly unsolicited one-on-one responses that do not rely on standardized reports distributed to other parties, educational white papers presenting market projections, and private fund investor materials shared in a tailored one-on-one context. As a practical safeguard, however, it is generally safer to presume that hypothetical performance is included in an advertisement unless a clear exception applies.
Second, the adviser must identify the intended audience. Policies and procedures should be in place to ensure that hypothetical performance is provided only to sufficiently sophisticated recipients and is not distributed to mass retail audiences or posted on public websites. Third, the adviser must provide tailored disclosures. These disclosures should address the risks and limitations of the hypothetical performance, the methodology used to calculate the results, and the key assumptions underlying the presentation. Generic boilerplate language is not sufficient; the disclosures should be specifically tailored to the performance shown and the audience receiving it.
Finally, the adviser must maintain appropriate documentation. This should include records of how the calculations were performed, the analysis supporting the suitability of the intended audience, and any specific exceptions relied upon, if applicable. In addition, if the adviser determines that certain recipient groups—such as intermediaries—may receive hypothetical performance, those groups should be expressly identified in the firm’s written policies and procedures.
Q&A: Answers to Top Webinar Audience Questions
Q: Is projected or targeted IRR (gross or net) considered hypothetical performance?
A: Yes. All projected or targeted IRRs are hypothetical performance.
Q: If we show gross hypothetical returns (portfolio or single investment), must we also show net?
A: Yes. Hypothetical performance is excluded from some requirements (e.g., 1 , 5 , and 10 year periods), but not from the gross vs. net rule.
Q: Can composite performance be calculated for a strategy seeded by employees?
A: Yes—employee money = firm money = client money for determining actual performance, as long as the account is invested in a representative way and is large enough to run the strategy as intended. Two caveats apply here: If employee money is fee free or discounted, Footnote 590 principles still apply, and if the strategy cannot be run efficiently at that size (e.g., cannot access 144A securities when a strategy purports to invest in 144A’s), the performance may be considered hypothetical, not actual.
Q: Are More FAQs Coming?
A: The SEC staff indicated that while more FAQs are likely, there are no promises on if or on timing. Keep in mind that the SEC prioritizes issues that are truly “frequently asked.” If a particular aspect of the Marketing Rule is challenging for your firm, the staff encourages reaching out—each inquiry is logged as potential subject matter for future guidance. In addition, you can reach out to Cascade Compliance’s experienced professionals (connect@cascadecompliance.com) for support in navigating Marketing Rule questions and developing practical solutions.
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Watch the Webinar & Download Materials
🎥 Webinar recording:
https://players.brightcove.net/1183701590001/default_default/index.html?videoId=6389817851112
📑 Presentation slides:
