SEC Marketing Rule - Hypothetical Performance Presentation

To comply with the sec marketing rule - hypothetical performance presentation requirement, treat any model, backtest, projected, or targeted return as high-risk advertising content and only present it when it is not false or misleading, is fair and balanced, and is supported by documentation you can produce in an exam. Build a repeatable review workflow, investor suitability gating, and a substantiation file for every hypothetical exhibit. (17 CFR 275.206(4)-1)

Key takeaways:

• Hypothetical performance is permitted only if you can show it is not misleading and you can substantiate every material assumption and calculation. (17 CFR 275.206(4)-1)
• Operationalize compliance with pre-dissemination review, audience gating, and immutable recordkeeping tied to each claim and disclosure version. (17 CFR 275.206(4)-1)
• SEC exams continue to focus on Marketing Rule compliance, so treat hypothetical performance controls as exam-ready, not “policy-only.” (2025-exam-priorities)

Hypothetical performance is one of the fastest ways for an SEC-registered investment adviser to create an advertising problem, even when intent is good. The issue is rarely that a team “lied.” The issue is that projections, backtests, model results, and targeted returns can imply a level of certainty, comparability, or real-world investability that the audience will reasonably misunderstand.

Under the SEC Marketing Rule, any advertisement that includes an untrue statement of a material fact, or that is otherwise false or misleading, is treated as a fraudulent, deceptive, or manipulative act. (17 CFR 275.206(4)-1) Hypothetical performance raises that risk because it depends on assumptions: fee loads, transaction costs, data survivorship, reinvestment mechanics, index comparability, rebalancing rules, availability of instruments, and “what would have happened” logic.

Your job as a CCO or GRC lead is to turn that legal standard into a concrete operating system: define what counts as hypothetical performance at your firm, require pre-dissemination compliance approval, gate distribution to appropriate audiences, and retain a substantiation package that ties each chart and statement to supporting workpapers. SEC exam priorities reinforce that Marketing Rule compliance remains a live focus area. (2025-exam-priorities)

Regulatory text

Primary requirement (operator view): You must not disseminate an advertisement containing hypothetical performance if the presentation would be false or misleading to the intended audience, and you must be able to substantiate the material statements and implications the advertisement communicates. (17 CFR 275.206(4)-1)

Regulatory excerpt: “It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business… for any investment adviser to disseminate any advertisement that includes any untrue statement of a material fact, or that is otherwise false or misleading.” (17 CFR 275.206(4)-1)

What this means operationally for hypothetical performance

• Hypothetical performance is not automatically prohibited, but it is easy to make misleading through omission, framing, or unsupported assumptions. Your control design should assume heightened review and documentation requirements. (17 CFR 275.206(4)-1)
• “False or misleading” includes implied messages. A backtest that looks investable when it is not, or a target return that reads like a forecast, can be misleading even if no single sentence is literally false. (17 CFR 275.206(4)-1)
• SEC exam focus increases the likelihood your firm will be asked to produce documentation quickly: drafts, approvals, and backup for assumptions and calculations. (2025-exam-priorities)

Plain-English interpretation of the requirement

If you show performance that did not actually occur in client accounts (or that depends on hypothetical assumptions), you need to:

1. present it in a way that a reasonable investor will not misunderstand, and
2. keep the proof that what you showed is accurate within the assumptions you stated, and that the assumptions themselves are reasonable and disclosed. (17 CFR 275.206(4)-1)

In practice, you are defending two things:

• The math (inputs, methodology, calculation accuracy), and
• The message (the net impression, including what an investor will infer). (17 CFR 275.206(4)-1)

Who it applies to

Entity scope: SEC-registered investment advisers and their supervised persons when disseminating “advertisements” as defined by the Marketing Rule. (17 CFR 275.206(4)-1)

Operational contexts where this comes up

• Pitch decks and DDQs that include model or strategy backtests
• Website pages describing “target returns,” “expected performance,” or “model performance”
• Fact sheets showing simulated composites, pro forma returns, or strategy history before inception
• Emails to prospects with projected outcomes (including illustrations generated by third-party tools)
• RFP responses and consultant databases where performance fields invite projections

Third parties in scope: Marketing agencies, IR consultants, placement agents, and data/analytics providers can create or distribute hypothetical performance on your behalf. Treat them as part of your control environment: you still own the advertisement content and recordkeeping outcome. (17 CFR 275.206(4)-1)

What you actually need to do (step-by-step)

Step 1: Define “hypothetical performance” for your inventory

Create a firm definition that captures, at minimum:

• Backtested performance
• Model/simulated performance
• Targeted, projected, or expected returns
• Performance “since strategy inception” that predates actual trading or account implementation

Add examples and non-examples so marketing and investment teams can self-triage before submitting content.

Step 2: Build a pre-dissemination review gate (non-negotiable)

Implement a workflow where compliance reviews hypothetical performance before it is sent or posted. Minimum checks:

• Classification: Is this hypothetical performance content?
• Audience: Who will receive it and why is it appropriate for them?
• Disclosure mapping: Are assumptions and limitations disclosed clearly and close to the figures?
• Net impression test: Would a reasonable recipient infer certainty, investability, or comparability that you cannot support?
• Substantiation: Can you produce workpapers for every material statement and chart? (17 CFR 275.206(4)-1)

Operational control pattern to adopt:

• Require pre-dissemination compliance approval with explicit claim-by-claim substantiation references. (Regulatory Best Practices)

Step 3: Gate distribution to appropriate recipients

Treat audience gating as a control, not a preference. Practical gating methods:

• Restrict hypothetical performance exhibits to one-to-one or controlled-distribution channels where you can validate recipient category (institutional, consultant, qualified purchaser, etc.).
• Add “do not forward” instructions and controlled portals for access.
• Block posting hypothetical performance on public webpages unless you can defend that the general public will not be misled by the presentation and disclosures. (17 CFR 275.206(4)-1)

Keep this simple: if you cannot confidently describe the audience and their sophistication, your default should be to avoid hypothetical performance or to redesign it.

Step 4: Create a substantiation file for each hypothetical presentation

For each advertisement containing hypothetical performance, assemble a single “exam-ready” package:

• Final approved version (PDF/screenshot) exactly as disseminated
• All disclosures and legends exactly as shown
• Source data files (raw and cleaned), with provenance notes
• Calculation methodology (formula logic, rebalancing rules, fee assumptions, transaction cost assumptions)
• Version history and who changed what
• Reviewer approval record and date
• Evidence of distribution and audience gating (recipient list, portal logs, CRM notes)

Control pattern to adopt:

• Maintain immutable archives of final disseminated communications, approval records, and linked disclosure versions. (Regulatory Best Practices)

Step 5: Run periodic testing across channels

Hypothetical performance problems often come from inconsistency: the deck says one thing, the website another, and a salesperson’s email adds a “typical return” line.

Set up monitoring:

• Sample marketing materials across website, pitch decks, factsheets, RFPs, and email templates
• Confirm the same assumptions and risk language appear wherever the hypothetical results appear
• Track findings and remediation in a log

Control pattern to adopt:

• Run periodic cross-channel sampling to detect inconsistent claims, disclosures, or risk language and log remediation. (Regulatory Best Practices)

Required evidence and artifacts to retain

Keep artifacts in a system that preserves integrity and retrieval. Examiners often care less about the elegance of your policy and more about whether you can produce records quickly.

Minimum artifact list (practical)

• Marketing review policy section covering hypothetical performance decisioning and escalation
• Intake form (or ticket) that captures: purpose, audience, distribution channel, claims list, data owner
• Claim-by-claim substantiation matrix (claim → evidence → file link → owner)
• Final advertisement archive (immutable)
• Approval evidence (who/when/what version)
• Substantiation workpapers (data, calculations, assumptions)
• Distribution evidence and audience gating support
• Testing logs and remediation tickets

Common exam/audit questions and hangups

Expect questions aligned to “prove it” and “show consistency,” especially given Marketing Rule exam focus. (2025-exam-priorities)

Common questions you should be ready to answer with artifacts:

• “Show me all advertisements with hypothetical performance disseminated in the period.”
• “Who approved this piece and what version was approved?”
• “Provide the backup for these figures and assumptions.”
• “Why was this audience appropriate to receive this hypothetical performance?”
• “How do you ensure sales does not create ‘one-off’ projections outside the approved deck?”
• “What testing do you perform to identify inconsistent disclosures across channels?”

Frequent implementation mistakes and how to avoid them

Mistake 1: Treating a disclaimer as a shield.
Disclosures help, but they do not cure a misleading net impression. Run a net-impression review and redesign exhibits that read like promises. (17 CFR 275.206(4)-1)

Mistake 2: No single source of truth for assumptions.
If investment teams update fee assumptions or methodology without synchronizing marketing materials, you create accuracy risk. Use a controlled assumptions memo and force materials to reference the same source package.

Mistake 3: “Shadow marketing” through third parties.
Consultants, placement agents, and marketers may distribute outdated decks. Require third parties to use only compliance-approved materials and store their distribution evidence alongside yours. (17 CFR 275.206(4)-1)

Mistake 4: Inability to reproduce results.
If you cannot re-run the backtest from retained inputs and methodology, you cannot substantiate. Store code, spreadsheets, and data extracts as part of the substantiation file.

Mistake 5: Inconsistent presentation across channels.
Web, deck, and factsheet drift is common. Set a scheduled cross-channel sample review and log fixes. (Regulatory Best Practices)

Enforcement context and risk implications (without guessing case outcomes)

No specific public enforcement cases were provided in the source catalog for this requirement, so this page does not list case examples.

Risk framing you can rely on from provided sources:

• The SEC Division of Examinations states it will focus on compliance with recently adopted SEC rules including the Marketing Rule. (2025-exam-priorities)
• If hypothetical performance contributes to a misleading advertisement, it can be treated as fraudulent, deceptive, or manipulative under the rule text. (17 CFR 275.206(4)-1)

Practical implication: your highest-risk failure mode is not “bad intent.” It is an exam request you cannot satisfy: missing backup, unclear audience gating, and approval records that do not match what was disseminated.

A practical 30/60/90-day execution plan

First 30 days (triage and control minimums)

• Inventory all live materials that include hypothetical performance (website, decks, factsheets, RFP templates, consultant portals).
• Freeze new hypothetical performance publication until pre-dissemination review is in place for those channels.
• Implement an intake + approval workflow with claim-by-claim substantiation links.
• Stand up an immutable archive location and a naming/versioning standard for final ads and substantiation packages.
  Tooling note: Daydream can act as the system of record for approvals, substantiation references, and immutable archives so you can answer exam requests with a single export, instead of searching email threads.

Next 60 days (standardize and reduce variance)

• Publish a hypothetical performance style guide: standard legends, assumption checklist, prohibited phrases, required review steps.
• Train marketing and investment teams on classification and submission rules.
• Add third-party distribution controls: approved-materials repository, contractual guardrails where possible, and periodic attestations of current-version use.

By 90 days (testing and exam readiness)

• Start cross-channel sampling, document findings, and track remediation to closure.
• Run a mock exam request: pick one hypothetical exhibit and prove you can produce approval, distribution, and substantiation within a short internal deadline.
• Present metrics to leadership qualitatively: volume reviewed, exceptions found, time-to-remediate trends, and recurring root causes. (Avoid invented numbers.)

Frequently Asked Questions

What counts as “hypothetical performance” in practice?

Treat backtests, simulated/model performance, and any projected/targeted/expected return as hypothetical performance. If the performance did not occur in actual client accounts as presented, assume it is hypothetical and apply enhanced review and substantiation. (17 CFR 275.206(4)-1)

Can we post backtested returns on our public website?

The rule text prohibits advertisements that are false or misleading, which is a heightened risk for public audiences receiving hypothetical performance. If you cannot defend net impression, disclosures, and substantiation for a broad audience, restrict access or redesign the content. (17 CFR 275.206(4)-1)

What does “substantiation” look like for a hypothetical performance chart?

Keep the source data, methodology, assumptions, calculation workpapers (including code/spreadsheets), and the final disseminated exhibit with the exact disclosure language. Tie each material statement to specific evidence you can produce on demand. (17 CFR 275.206(4)-1)

Do we need compliance pre-approval for one-off emails from senior investment staff?

If the email is an advertisement and includes hypothetical performance or related claims, it creates the same false-or-misleading risk. Route it through the same pre-dissemination approval workflow or prohibit sending hypothetical results outside approved templates. (17 CFR 275.206(4)-1)

How should we manage hypothetical performance created by a third-party analytics provider?

Treat third-party outputs as your advertisement when you distribute them. Require documentation of inputs and methodology, keep the provider’s assumptions package, and archive the exact version disseminated with your disclosures and approvals. (17 CFR 275.206(4)-1)

What should we expect from SEC exams on this topic right now?

Marketing Rule compliance remains an exam focus area, so expect requests for your marketing inventory, review process, and records supporting performance claims, including hypothetical performance. Prepare to produce artifacts quickly and consistently. (2025-exam-priorities)