Predecessor Performance in Practice: Navigating the GIPS® Standards and the SEC Marketing Rule

Questions about predecessor performance remain among the most common in performance reporting. GIPS-compliant firms whose portfolio management teams bring established track records from prior organizations must balance those portfolio managers’ hard-earned resumes with compliance under the GIPS® Standards and the SEC Marketing Rule. This article provides practical guidance drawn from the GIPS Standards, the GIPS Handbook, SEC requirements, and our experience in consulting and verification engagements.

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Start with the Foundation: Books and Records

A track record from a prior firm should never be shown unless the new or acquiring firm has the books and records necessary to verify and substantiate the performance. This requirement is fundamental under both the GIPS Standards and SEC regulations.

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Core Rule

No books and records = no predecessor performance.  If the supporting documentation does not exist, the performance cannot be shown—regardless of audience or format.

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To qualify as a portable track record that can be linked to an acquiring firm’s track record, the GIPS Standards require that, in addition to having records to support the full composite track record:

• Substantially all investment decision makerstransition to the new or acquiring firm,
• The investment process remains largely intactand independent,
• The track record must be a composite, not asubset of portfolios, and
• The track record continues withoutinterruption between the prior and new firm.

What happens if the portability criteria are not met? GIPS-compliantfirms may still have options to present predecessor performance both inside andoutside GIPS Reports, including as supplemental information.

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What Is "Supplemental Information” Under the GIPS Standards?

The term supplemental information has a specificmeaning within the GIPS Standards framework.

It generally refers to performance-related data thatsupplements the required composite track record, such as:

• Non-portable predecessor performance
• Carve-out returns
• Model or hypothetical performance
• Representative account information
• Attribution data

However, one key distinction is often overlooked: Theconcept of supplemental information applies only inside a GIPS Report.

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Inside a GIPS Report, supplemental information:

• Must be clearly labeled as supplemental, with required disclosures
• Must not be more prominent than required information
• Must not conflict with the compliant track record

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Outside a GIPS Report:

• The word “supplemental” is not required, nor is it recommended outside a GIPS Report.
• We find firms may use the word to reference predecessor performance in a pitchbook “supplemental to” the GIPS Reports in an appendix, for example. There is     nothing incorrect about such a reference, but it falls outside the scope and the technical definition of supplemental within the GIPS standards.
• Outside the scope of the GIPS standards, regulatory requirements prevail with an emphasis on substantiable, clear, complete, and non-misleading disclosures.

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Labeling Rule

“Supplemental” is a GIPS Report concept. Outside a GIPS Report, clear disclosures matter more than labels.

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PresentingPredecessor Performance

When predecessor results do not meet the criteria for portability, firms must carefully consider how, or if, that performance may be shown, whether within or outside a GIPS Report.

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1.      Special Considerations Inside a GIPS Report

Non-portable predecessor performance cannot be linked to thecomposite track record. However, it may be presented inside a GIPS Report assupplemental information as a stand-alone track record if certainconditions are met.

• It is presented in addition to, not instead of, the required composite track record.
• The presentation follows the principles of fair representation and full disclosure.

The guiding principle is that when predecessor performance isshown as supplemental information it must enhance—not confuse orcontradict—the composite presentation.

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Practical Check

Before including non-portable predecessor performance assupplemental information in a GIPS Report, review the presentation and ask afew questions:

• Isthe compliant track record clearly separate from the supplemental track record?
• Is the compliant track record clearly the primary track record?
• Are disclosures sufficient to prevent any implication that the predecessorperformance is a GIPS-compliant track record?

If not, the predecessor performance information should berevised or removed.

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2.      Special Considerations Outside a GIPS Report

Sometimes a firm may want to share performance results from a team’s prior firm outside of a GIPS Report. These non-portable predecessor results can be reported either linked to ongoing performance or stand-alone under certain conditions—but only when done carefully and transparently. The intent is to provide useful context without giving the impression of a GIPS-compliant track record.

When It May Be Shown

Firms can present linked non-compliant predecessor performance linked to a compliant track record with sufficient disclosures outside a GIPS Report in limited situations, such as:

• When a client or prospective client specifically asks to see the predecessor performance, or
• In one-on-one settings—such as customized presentations, consultant discussions, or RFP responses—provided that:
   
  • The recipient is sophisticated enough to understand the limitations of the prior performance, and
  • A current GIPS Report has already been provided (either with the presentation or within the past year).

When It Is Not Permitted

Certain uses are strictly off-limits, including:

• Presenting the non-compliant track record in a way that implies GIPS compliance.
• Submitting non-portable predecessor performance linked to a compliant composite track record for consultant databases.

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Audience Rule

Share non-portable performance only in one-on-one settings or when specifically requested. Never include it in consultant databases or in broad distributions.

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‍SEC Marketing Rule: Key Overlaps with the GIPS Standards

The SEC Marketing Rule specifies requirements that are fundamentally similar to the GIPS Standards when considering whether or not a firm can present predecessor performance. In most cases, standard performance materials qualify as advertisements, even when used in one-on-one discussions or in response to a specific request.  When a presentation includes predecessor performance in the U.S., it must follow the SEC predecessor performance requirements and the other performance requirementsin the Marketing Rule:

• Net vs. Gross: Prominence Matters- Predecessor performance net returns are required to be shown with equal or greater prominence than gross returns.
• Standard Time Periods- The Marketing Rulerequires consistency in the time periods shown (1-year,5-year,10-year), whereavailable.
• Conditions of Use- Use predecessor performance only if all decision makers responsible for that performance are currently employed at the acquiring firm.

For firms claiming compliance with the GIPS Standards, that third bullet has created much controversy.  The SEC requirement on its face requires linked predecessor performance to be dropped if/when any portfolio manager on the team later retires or otherwise leaves the firm.  In contrast, the GIPS standards require substantially all investment decision makers to join the new firm for the historical performance to be linked, but once this requirement is met, that track record belongs to the acquiring firm and can be linked even if a portfolio manager later retires or leaves the firm.

The more stringent SEC interpretation requires GIPS compliant firms with predecessor performance histories to review historical presentations and reconsider if existing presentations and disclosures are sufficient, if there have been changes to the portfolio management team over the years.

The SEC Marketing Rule also permits an acquiring firm to present a predecessor track record using a single account or a subset of accounts.  This supports supplemental predecessor firm performance within the GIPS Report or such non-portable performance presentations outside a GIPS Report, provided that:

• The subset is representative of the strategy managed at the predecessor firm,
• The performance of the subset is not materially higher than the predecessor firm’s composite,
• The exclusion of any portfolios does not alter the presentation of any prescribed time periods, and
• The returns can be substantiated.

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In summary, the effective use of predecessor performance comes back to the core objective of the GIPS Standards: fair representation and full disclosure. When firms anchor their marketing materials in solid books and records, keep the compliant composite track records at the center, and use clear disclosures that align with both the GIPS Standards and the SEC Marketing Rule, responding to your marketing and sales teams’ requests for predecessor performance becomes much more straightforward. This approach lets firms offer helpful context without creating confusion, overstating results, or taking unnecessary regulatory risks.

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Guiding Principle

When in doubt, return to the core GIPS Standards objective: Fair representation and full disclosure.

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For additional guidance on the use of predecessor performance, please reach out to connect@cascadecompliance.com.

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