Net Performance Calculation Standards

To meet the SEC Marketing Rule’s net performance calculation standards, any advertised “net performance” must deduct all fees and expenses a client or investor paid or would have paid, and you must apply a consistent, documented methodology across the relevant portfolios and time periods. Build a fee-and-expense deduction inventory, harden your calculation procedures, and retain evidence that ties outputs to source data. (17 CFR § 275.206(4)-1)

Key takeaways:

• “Net” means net of all client/investor-borne fees and expenses, not just advisory fees. (17 CFR § 275.206(4)-1)
• Your methodology must be consistent and clearly documented, with controls over inputs, overrides, and presentation. (17 CFR § 275.206(4)-1)
• Examiners will test substantiation: fee schedules, fund expense support, calculation workpapers, and approvals that match what was advertised. (17 CFR § 275.206(4)-1)

Net performance claims are a high-frequency exam focus because they are easy to misstate and hard for investors to independently verify. Under the SEC Marketing Rule, if you show “net performance” in an advertisement, the figure must reflect the deduction of all fees and expenses that a client or investor has paid or would have paid, including advisory fees, custodial fees, and sales loads. (17 CFR § 275.206(4)-1) In practice, the risk is rarely a single math error; it is usually a gap between (a) what your calculation engine actually deducted, (b) what your disclosure says you deducted, and (c) what an investor in that strategy would have experienced.

Operationalizing the requirement means treating performance as a controlled reporting process: defined inputs, documented assumptions, consistent application, review/approval, and recordkeeping that allows you to recreate what was shown in the ad. This page gives requirement-level implementation guidance you can hand to Marketing, Performance, Finance, and Compliance to tighten the end-to-end workflow without rewriting your whole performance stack.

Regulatory text

Requirement (excerpt): “Net performance must reflect the deduction of all fees and expenses that a client or investor has paid or would have paid.” (17 CFR § 275.206(4)-1)

What the operator must do:
If you label performance as “net” in marketing materials, you must ensure the calculation deducts all fees and expenses borne by the client/investor for the presented portfolio/strategy and time period, not a subset that is convenient to compute. This includes items such as advisory fees, custodial fees, and sales loads, and it extends to other charges borne by clients or investors. (17 CFR § 275.206(4)-1)

Plain-English interpretation

“Net performance” is the investor’s experience after costs. If an investor would have paid a fee or expense to get the return, that cost must be reflected in the net performance you advertise. (17 CFR § 275.206(4)-1) The safest way to think about this is: your net number should reconcile to a reasonable, supportable “what the investor kept” result for the relevant product structure (SMA, fund, sleeve, composite, model, etc.), based on the fee and expense mechanics that actually apply.

Who it applies to

Entity types: Investment advisers and fund managers that advertise performance. (17 CFR § 275.206(4)-1)

Operational contexts where this shows up:

• Marketing decks, pitchbooks, tear sheets, RFP responses, DDQs, websites, and one-pagers that show “net” returns. (17 CFR § 275.206(4)-1)
• Fund marketing that presents net-of-fees performance where investors bear management fees, performance-based fees (for example, carried interest concepts), fund operating expenses, distribution costs, or other charges. (17 CFR § 275.206(4)-1)
• Separately managed account programs where different clients have different fee schedules, custodial arrangements, or transaction-related charges. (17 CFR § 275.206(4)-1)

If your firm has third parties involved (fund administrator, performance vendor, placement agent, or outsourced marketing), you still own the claim. Treat third-party outputs as inputs that require validation before publication.

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

1) Create a “net deduction inventory” by product and channel

Build a matrix that answers, for each advertised strategy/product:

• What fees apply? Advisory/management fee schedules, performance fees, sales loads/commissions. (17 CFR § 275.206(4)-1)
• What expenses apply? Custodial fees and any fund or account operating expenses borne by the investor. (17 CFR § 275.206(4)-1)
• Who pays them and how? Charged directly to accounts, accrued in NAV, debited quarterly, paid at subscription/redemption, etc. (17 CFR § 275.206(4)-1)
• What “would have paid” means for the ad: For example, if you show model or representative performance, identify the fee schedule and expense assumptions you apply and why they are reasonable for the intended audience. (17 CFR § 275.206(4)-1)

Deliverable: a version-controlled inventory signed off by Finance/Operations and Compliance.

2) Define your net calculation methodology in writing

Document a methodology that a qualified analyst can follow and reproduce:

• Return formula (time-weighted, money-weighted) and when each is used.
• Exact deduction mechanics for each fee/expense category.
• Treatment of fee breaks, tiered fees, performance fee crystallization timing, and whether fees are accrued or debited.
• Treatment of custodial fees and sales loads where applicable. (17 CFR § 275.206(4)-1)
• Rules for representative performance and the “would have paid” assumption set. (17 CFR § 275.206(4)-1)

Keep this as a controlled procedure, not a narrative in a slide footnote.

3) Put controls around inputs and overrides

Net performance errors often come from “small” manual steps. Implement controls such as:

• Source-of-truth mapping: Identify where gross returns come from, where fee schedules live, and where expense data is pulled (GL, admin reports, custodian files).
• Change control: Any update to fee schedules, expense definitions, or calculation scripts requires documented approval.
• Override log: If anyone adjusts an input (for example, a one-off fee waiver treatment), require a written justification and approval.

4) Align disclosures with the actual deductions

Your ad disclosures should match the methodology you used to compute net:

• State what categories were deducted (advisory fees, custodial fees, sales loads/commissions, fund expenses, other investor-borne charges). (17 CFR § 275.206(4)-1)
• If you use “would have paid” assumptions, describe the assumed fee schedule/expense load in plain language consistent with the audience and product. (17 CFR § 275.206(4)-1)
• Ensure footnotes do not imply a broader deduction set than you applied.

5) Pre-publication review and approval workflow

Build a workflow that gates performance publication:

• Performance/Operations prepares calculation package.
• Compliance reviews: (a) “net” label usage, (b) deduction inventory alignment, (c) disclosure alignment, (d) consistency across periods and products. (17 CFR § 275.206(4)-1)
• Marketing publishes only approved versions, with controlled storage to prevent stale decks from recirculating.

Tip: If you use Daydream to manage marketing compliance reviews, configure a checklist item specifically for “net performance fee/expense deduction support” and require attachments (fee schedule, calculation workbook, and disclosure text) before approval.

Required evidence and artifacts to retain

Treat this like substantiation. Retain artifacts that allow you to recreate the advertised net number:

• Net performance calculation procedures and version history. (17 CFR § 275.206(4)-1)
• Fee schedules used (advisory/management, performance-based fees) and effective dates. (17 CFR § 275.206(4)-1)
• Custodial fee schedules and documentation of how custodial fees were reflected in net results when applicable. (17 CFR § 275.206(4)-1)
• Sales load/commission schedules and how they were applied in “net” where relevant. (17 CFR § 275.206(4)-1)
• Fund expense support (administrator reports, audited financial statements extracts, expense accrual schedules) showing investor-borne operating expenses included in net. (17 CFR § 275.206(4)-1)
• Workpapers: spreadsheets, system outputs, code snapshots, and reconciliation notes.
• Approval evidence: reviewer names, dates, comments, and final published material.

Common exam/audit questions and hangups

Expect reviewers to ask:

• “Show me exactly which fees and expenses were deducted to arrive at ‘net’ for this advertisement.” (17 CFR § 275.206(4)-1)
• “Where do those fee and expense inputs come from, and who can change them?”
• “For ‘would have paid,’ why is that assumption appropriate for the intended audience?” (17 CFR § 275.206(4)-1)
• “Do different share classes, fee breakpoints, or negotiated SMA fees change the net figure, and how did you handle that?” (17 CFR § 275.206(4)-1)
• “Can you reproduce this number today from retained records?”

Hangups typically arise when Marketing has multiple versions of a deck, performance was refreshed without re-running the net deductions, or disclosures were copied from a different product.

Frequent implementation mistakes (and how to avoid them)

1. Deducting only advisory fees and calling it net.
   Fix: your deduction inventory must include custodial fees, sales loads/commissions, fund operating expenses, and other investor-borne charges as applicable. (17 CFR § 275.206(4)-1)

2. Inconsistent treatment across periods or accounts.
   Fix: lock a documented methodology and apply it consistently; document any deviations and treat them as exceptions with approvals. (17 CFR § 275.206(4)-1)

3. “Would have paid” assumptions that are not tied to a real fee schedule.
   Fix: anchor assumptions to an actual schedule (or a clearly defined representative schedule) and keep the mapping in the substantiation file. (17 CFR § 275.206(4)-1)

4. Footnotes that overpromise.
   Fix: require Compliance to reconcile disclosures to the actual calculation settings before publication.

Enforcement context and risk implications

The SEC’s standard is embedded in the Marketing Rule’s prohibition framework: advertising net performance without properly deducting investor-borne fees and expenses creates a misleading performance impression risk. (17 CFR § 275.206(4)-1) The operational risk is also real: once performance is distributed, stale versions can persist with consultants and prospects, and later corrections can trigger reputational damage, client complaints, and remediation work.

Practical execution plan (30/60/90-day)

Because the time boxes are your internal targets, treat them as phases you can execute quickly:

First 30 days (stabilize)

• Inventory every place “net performance” appears across channels (web, decks, RFP library).
• Build the net deduction inventory by product and confirm owners for each input source (fees, custodial, expenses).
• Freeze ad-hoc performance publishing; route new materials through a single approval workflow.

Next 60 days (standardize)

• Publish a written net performance calculation procedure with consistent methodology rules. (17 CFR § 275.206(4)-1)
• Implement override logging and change control for fee schedules and calculation logic.
• Update disclosures to match the actual deductions and “would have paid” assumptions. (17 CFR § 275.206(4)-1)

Next 90 days (prove and automate)

• Run a lookback on active materials and re-substantiate the net numbers against the inventory; remediate mismatches.
• Train Marketing, IR, and Performance teams on the new “net means net” checklist.
• In Daydream (or your workflow tool), require fee/expense substantiation attachments and block approvals without them.

Frequently Asked Questions

Does “net performance” have to include custodial fees?

Yes, if the client or investor paid or would have paid custodial fees, net performance must reflect their deduction. (17 CFR § 275.206(4)-1) Document how you sourced custodial fee data and how it is applied in the calculation package.

What does “would have paid” mean in practice?

It means you must deduct fees and expenses that an investor in the advertised product would reasonably incur, even if the shown performance is representative or modeled. (17 CFR § 275.206(4)-1) Tie assumptions to a defined schedule and retain the basis in your substantiation file.

If our fund NAV is already net of fund expenses, do we still need extra deductions?

You still must confirm which expenses are already embedded in the NAV and which investor-borne charges sit outside it (for example, certain sales loads or account-level fees). (17 CFR § 275.206(4)-1) Your deduction inventory should make this explicit for each product.

Can we show gross and net side-by-side?

Yes, but the “net” figure must actually be net of all applicable investor-borne fees and expenses, and the methodology must be consistent and documented. (17 CFR § 275.206(4)-1) Keep substantiation for both figures and ensure disclosures distinguish them cleanly.

How do we handle different SMA fee schedules across clients?

Decide and document a representative fee schedule for “net” advertising or segment net results by fee schedule where appropriate, then apply that approach consistently. (17 CFR § 275.206(4)-1) Retain the mapping of advertised net returns to the chosen schedule(s).

What evidence do examiners usually want first?

Start with the calculation workpapers and the fee/expense inputs that drove the deductions (fee schedules, expense support, custodial/sales load schedules), plus the final approved advertisement. (17 CFR § 275.206(4)-1) The goal is reproducibility from source data to published output.