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PORTABILITY: Use of Historical Performance at a Predecessor Firm

By James E. Grand, The Securities Law Group (Guest Contributor) | Thursday, August 25th, 2016

The following article was written and contributed by James E. Grand, Esq. of The Securities Law Group, a specialized boutique law firm dedicated exclusively to representing investment advisers.

We are often asked by advisers who are switching firms whether they can use in their own performance presentation or the predecessor firm’s performance record at their new firm. There are two separate questions here: First; if Jill Doe moves from one firm to another, can Jill use her own performance record while she worked at the old firm in the new firm’s advertising? Second, can Jill use the old firm’s overall performance record in the new firm’s advertising?

A number of SEC staff no-action letters address these questions. These no-action letters generally take the position that an advertisement that includes prior performance of accounts managed by advisors at their prior place of employment will not, in and of itself, be deemed to be misleading so long as:

1. The advertisement is consistent with SEC staff interpretations with respect to the advertisement of performance results.

2. All accounts that were managed in a substantially similar manner are advertised unless the exclusion of any account would not result in materially higher performance. For example, in one case we know of the SEC allowed a newly registered adviser solely owned by an employee to use performance data of several accounts managed by the employee prior to registration. In other words, Jill could advertise the performance of some but not all of her prior client accounts so long as such performance is not materially higher than her accounts’ overall performance.

3. The accounts managed at the old firm are so similar to the accounts currently under management at the new firm that the performance record would provide relevant information to prospective clients.

4. The person(s) managing accounts at the new firm are also those primarily responsible for achieving the prior performance results at old firm. In other words, the individual(s) primarily responsible for achieving the prior performance results must also be the individual(s) primarily responsible for the accounts at the new firm. To put in another way, it would be misleading for an adviser to advertise the performance results of accounts managed at her prior place of employment when she was one of several persons responsible for selecting the securities for the adviser’s clients. The question is whether she was actually responsible for making investment decisions without the need for consensus from other advisers (e.g., an investment committee, etc.).

5. The advertisement includes all relevant disclosures, including that the performance results were from accounts managed at another firm.

6. Important note about GIPS Standards. Subject to some exceptions, GIPS standards take the position that performance is generally the record of the firm, and not of the individual adviser.

7. RELATED RECORDKEEPING REQUIREMENT: If Jill is seeking to use her old firm’s performance data, she must obtain from the old firm all of the records necessary to form the basis for or calculate the performance data and the new firm must maintain all such records.

CONCLUSION

In the current environment, advisers with prior performance and a solid book of business are in high demand. If such advisers (or team of advisers) were solely responsible for achieving prior performance at a predecessor firm, the fact that the performance track record was established at a predecessor firm would not, in and of itself, bar the portability of the prior performance record.

This article is published as a source of information only for clients and friends of The Securities Law Group and should not be construed as legal advice or opinion on any specific facts or circumstances. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorneyclient relationship.

For more information, contact James Grand/The Securities Law Group at jgrand (at) tslg-law.com or 415-644-9501.


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