Track record portability

Portfolio managers and investment professionals often move between firms and want to showcase their past investment success when marketing their new ventures. The SEC allows this practice, called "track record portability," under specific rules outlined in the (Rule 206(4)-1). This rule replaced earlier informal guidance and now provides clear conditions for using past performance records.

For track record portability to be allowed, the funds managed at the previous employer and those currently or potentially managed must have similar investment goals, policies, and strategies. This similarity ensures that the historical performance provides meaningful information to prospective investors considering the new arrangement.

When individual investment professionals join new advisory firms, they may advertise their personal track records from previous firms if they meet specific SEC conditions.

The individual must have been the primary decision-maker responsible for achieving that track record. The investment strategies and objectives of the previous accounts must align with those of the currently managed funds. This alignment ensures that performance results provide relevant information to prospective clients.

All accounts managed using substantially similar approaches must be included in marketing materials. The only exception is when excluding a particular account would not materially increase the reported performance. Clear disclosures must indicate that the performance was achieved while the professional worked at a different firm.

Finally, the presentation must comply with the SEC's fair-and-balanced advertising standards and substantiation requirements. These standards ensure that marketing materials do not mislead potential investors.

Investment advisory firms frequently undergo structural changes. These changes may include shifts in ownership form, legal reorganization, or acquisition by larger advisory companies. When such transitions occur, successor firms must evaluate whether they can legitimately use the performance track records of their predecessor entities.

The SEC permits a successor adviser to carry forward predecessor performance under specific conditions. The individual responsible for investment decision-making at the successor firm must have been the primary architect of the performance achieved at the predecessor firm. The funds managed at the predecessor entity must demonstrate sufficient similarity in investment objectives and strategies to the currently or potentially managed funds. This similarity makes the historical performance relevant to prospective clients.

All accounts managed in substantially similar fashion must be included in the marketing presentation. The only exception is when the exclusion of any account fails to materially reduce the reported performance. The marketing materials must include clear disclosure identifying the results as predecessor performance. Additionally, the presentation must satisfy the SEC's general prohibitions against misleading advertising contained in the Marketing Rule.

When an investment adviser includes an employee's previous track record in its marketing materials, clear and prominent disclaimers are essential. These disclaimers must specify that the performance results represent the employee's work at the prior employer. They should also explain any material differences between the accounts previously managed and those now being managed.

For track records, the current manager must keep all backup documentation supporting the historical performance claimed. This requirement falls under the recordkeeping provisions of . Additionally, the adviser must maintain comprehensive records of all advertisements that include predecessor performance for five years. The SEC requires that records from the first two years be kept in an accessible location for examination purposes.

Beyond the regulatory framework, track record portability raises several practical concerns for hedge funds and investment advisers. The new employer should confirm with the transitioning professional that the prior employer authorizes use of the track record.

This verification often requires reviewing employment agreements, , or similar arrangements. These documents may restrict the use of historical performance data or access to supporting documentation. If these agreements contain no explicit authorization for portability, the transitioning professional may need to negotiate with the former employer. They must seek permission to use the track record and access to the backup data necessary to substantiate reported results.

The employer should also independently verify that the professional's characterization of their role in the investment decisions is accurate. Specifically, the employer should confirm whether the individual had sole decision-making authority or whether decisions required consensus with other investment professionals or .

In some situations, investment decisions for the predecessor firm were made collaboratively through a committee structure rather than by an individual portfolio manager. When this occurs, a substantial identity of the committee members must also be present at the successor firm for track record portability to be permissible.

This requirement recognizes that when decisions are collaborative rather than individual-driven, the performance results reflect the collective expertise of the decision-making group rather than a single manager's skill. The SEC interprets this to mean that most committee members who were responsible for generating the predecessor performance must be part of the current or prospective firm's decision-making process.