The U.S. Securities and Exchange Commission (“SEC”) has not outlined many specific requirements related to how historical investment performance results should be calculated and presented in advertisements and other forms of marketing, but they do have several general expectations. Investment advisers registered with the SEC who advertise performance should establish objective criteria when constructing their performance track record. Such firms should develop a consistent process for calculating and presenting performance and have documented policies and procedures that address performance advertising. In addition, certain books and records must be maintained to support the performance record presented. There is also a general expectation that an adviser’s performance calculations and presentation practices should be consistent with best practices followed by others in the industry.
Below are steps to consider for investment managers who intend to advertise performance results:
- Develop policies and procedures to document the basis for constructing composites and calculating and presenting performance results. For firms seeking to adopt a GIPS compliance program, these policies must address how the firm will comply with all provisions of the GIPS standards.
- Determine if current systems are sufficient to construct and calculate performance results or if additional systems will be necessary.
- Confirm if records to support performance results are complete and accurate for the entire period for which performance will be presented.
- Determine which portfolios are fully discretionary.
- Determine which composites need to be constructed in order to capture all fee-paying, discretionary portfolios.
- Determine composite placement for all fee-paying discretionary portfolios.
- Document the firm’s complete list of composite descriptions.
- Calculate and validate composite performance.
- Create a policy for the frequency performance will be reported and the minimum information that will be provided to each prospective client. This helps ensure that there is no cherry-picking of select periods or stale information being presented.
- Calculate and compile the statistical inputs for presentations.
- Create and review compliant performance presentation materials.
- Lastly, develop a framework to facilitate the creation of compliant performance presentations on an ongoing basis.
Firms have the option to either manage this process internally or they can outsource the composite construction and maintenance process. Regardless, the process should be documented so that the process is applied consistently.
