GIPS Standards Performance Record Portability

What is Portability?

Portability refers to the ability of a GIPS^®-compliant firm to present a track record that was achieved at another firm. When one firm hires a portfolio manager, there is usually a desire to market the portfolio manager’s track record while employed at the prior firm. The same is true when a firm acquires or lifts out an investment team from another firm. Please note that while this discussion focuses only on the GIPS compliance requirements related to portability, firms must also consider any applicable regulatory requirements relating to the portability of investment track records.

The GIPS standards include three portability tests that must be met for each composite track record that is brought from one firm to another, and each is discussed below. If the three portability tests are met for a specific composite, then the performance of the composite from the prior firm must be linked to the current, ongoing performance at the new firm.

While not explicitly stated in the Guidance Statement on Performance Record Portability, portability considerations are on a composite level as opposed to on an account-by-account basis, or at the firm level. An acquiring firm may not recreate a historical record using the performance of only select portfolios that were managed at the prior firm. The composite’s entire history, which includes all portfolios that were managed at the prior firm, including terminated accounts, must be used.

GIPS Standards Requirements of Portability

1. Substantially all of the investment decision makers who managed the composite at the prior firm must be employed at the new or acquiring firm.
   • An acquiring firm must consider others that played a key role in the management of the composite’s portfolios aside from the portfolio manager alone. Was the strategy managed by a single portfolio manager or by multiple portfolio managers? Were portfolios managed by a team? How was the portfolio management function supported?
   • There is no objective threshold to determine whether the “substantially all” test is met. Each situation is unique and the acquiring firm must assess the facts and circumstances of the acquisition before proceeding.
2. The decision-making process behind the composite’s performance must remain substantially intact and independent within the new or acquiring firm.
   • For example, if a strategy was based on a proprietary research model, that same proprietary research model must be replicated at the new firm.
   • It would not be accurate to interpret this as a requirement for every individual that came from the old firm to stay with the new firm forever. There will often be departures of key personnel shortly after a merger or acquisition closes – the important part is that the investment process continues.
3. The new or acquiring firm must have records to support the performance of the composite from the prior firm.
   • A firm must have records that enable the re-creation of the returns of both the portfolios in the composite and the composite itself.
   • Having summary information from the prior firm would not suffice.
   • It is important to note that accounts do not have to be assigned to the new firm in order to meet portability requirements. It is only the books and records that are required to be available.

Even if the three preceding requirements are met, there can be no break in performance in order to maintain the ability to link the historical track record to the ongoing track record. Even the absence of a single day would negate the firm’s ability to do so. Many firms address this by creating a seed account at the new firm to ensure the continuity of the composite’s performance track record.

Options When Portability Requirements Are Not Met

If a specific composite does not pass all of the portability tests, then the new firm may be able to present the performance from the prior firm as “supplemental information” in the composite’s compliant presentation at the new firm. For example, if only a single client (out of many composite accounts) follows the portfolio team to the new firm and the supporting records are available to the new firm, the firm may be able to present the historical performance of this portfolio. Any SEC requirements must be met that prove the performance of the account for which the firm has the records is not substantially different from the performance of all accounts in the strategy at the prior firm. Even if the firm determines it is appropriate to present this portfolio’s performance history, the performance of this account may not be linked to the current, ongoing performance at the new firm in any fashion, neither mathematical nor presentational.

It is important to note that if the new firm does not meet the GIPS standards recordkeeping requirements, the prior history may not be presented, even as supplemental information.

Survivorship of Track Records

When a firm acquires another firm with similar strategies, there is often a question as to which historical track record should survive. A surviving composite is the composite that represents the continuation of the investment strategy, process, and personnel. In order to be a surviving composite, the decision-making process must remain substantially intact and independent at the new firm. Typically there are three options:

1. If the surviving composite is the acquired composite, and the portability requirements are met, then the acquired track record would be presented as the history of the composite. Portfolios in the acquiring firm’s composites would be moved into the acquired composite on a prospective basis. The acquiring firm’s composite would be terminated.
2. If the surviving composite is the acquiring firm’s existing composite, then the acquiring firm’s history would be presented as the history of the composite. Portfolios in the acquired firm’s composite that move to the new firm would be transferred into the acquiring firm’s composite on a prospective basis. The acquired composite would be terminated.
3. If the acquiring firm determines that there is no clear surviving strategy or if the combination of the two teams produces a new investment strategy and process, then a new composite will be created. The two previously existing composites would be terminated. The history from the two composites could be shown as supplemental information, but must not be linked to the new composite. The history from the two composites may not be combined.

Grace Period for Claim of Compliance

If a GIPS-compliant firm acquires a non-GIPS-compliant firm, then the acquiring firm has one year from the date of acquisition to bring the non-compliant assets into compliance. During this time, the acquiring firm can still claim compliance but must include disclosure regarding the significant event.

If a firm is contemplating a merger, acquisition, or lift-out, we recommend that the firm seek both legal and GIPS compliance related advice on portability requirements prior to completing the transaction. This is true for both parties in the transaction.

Resources

Join ACA Performance Services on June 21 for a complimentary webcast focused on the differences and best practices of both GIPS compliance and SEC requirements. Panelists will discuss a high-level overview of their experiences in tackling some of the regulatory and performance challenges around portability, mergers and acquisitions, and performance advertising. Register Now.

About the Author

Karen Foley is a Partner with ACA Performance Services. In this role, she conducts GIPS compliance verifications and performance examinations and provides various consulting services related to investment performance and performance measurement. Karen has over 22 years of experience in the financial services industry. Prior to joining ACA, she served as a leader in Deloitte & Touche LLP’s Investment Performance Services practice, where she provided attest and consulting services related to investment performance. During her 13-year tenure at Deloitte, she helped many large organizations implement GIPS compliance. She also provided verification, performance examination, and performance measurement consulting services. Her clients included global investment managers of various asset classes such as equity, fixed income, private equity, real estate, insurance, and separately managed assets (WRAP).

Besides her consulting work, Karen has teamed with CFA Institute members to provide GIPS standards training and spoken at several industry conferences on various GIPS standards-related topics. She served as a member of the GIPS Standards Executive Committee’s verification/practitioner subcommittee and also a member of the GIPS Standards Verifier Roundtable, an industry group of verifiers that gathers periodically to discuss the standards and the industry. In addition, Karen participated on the American Institute of CPAs’ task force for performance reporting and served as a standard setter for the Certificate in Investment Performance (“CIPM”) program sponsored by the CFA Institute.