Books and Records for Portability

By Nadeem Aftab, CPA

The first half of 2016 saw a record number of M&A transactions with Registered Investment Advisors – according to a study done by Financial Advisor Magazine. As a verifier, I am seeing more questions on the GIPS® rules surrounding a firm’s portability and the same question always comes up. What is sufficient for books and records?

What is sufficient for books and records?

The answer is often not straight forward because there are multiple factors to consider, including but not limited to:

  • the type of strategy,
  • the portfolio accounting system,
  • methodologies with which the strategies were managed, etc.

A good rule of thumb is to gather enough records to support the items presented on the GIPS compliant presentation. This can include the following:

  • account-level performance files,
  • composite performance files,
  • information on external cash flows,
  • membership changes report, dispersion calculation,
  • calculation of three-year annualized standard deviation, and
  • number of accounts and assets at year-end.

In addition, documentation from a third party is generally considered the gold standard. This would include custodian statements, broker statements, client emails, trade tickets/confirms, and client signed contracts and termination letters. Putting together an exact list of documents to obtain is not feasible, so when beginning the project of gathering the documents, a firm should keep in mind the ultimate goal of supporting items included in the firms marketing presentations.

An example of records would be a report from the system showing the monthly performance and market values of each portfolio within the composite that can be used to support composite performance, number of accounts at year-end, assets at year-end, and calculation of three-year annualized standard deviation. This type of file is a good start, but a firm should look to obtain at least the underlying account and composite performance details to back into the annual composite statistics. This is because performance related data cannot be substantiated in any other method. For example, in lieu of the contract a firm can use an email from the account holder documenting the strategy of the account or a statement showing the holdings are in line with the definition. However, there is no substitute for performance data. It generally cannot be obtained or supported using by using alternative means. Once the firm has obtained the underlying performance data, it can build up the inventory with the remaining elements.

Do the books and records for all the portfolios need to transfer in order for firms to link the track records?

Supporting documentation for all the accounts managed according to the strategy at the prior firm need to transition to the new firm in order for the new firm to claim portability. Firms are not allowed to note that “substantially” all the books and records were transferred over. A good way to test this is to compare the statistics noted on the GIPS compliant presentation to the books and records that the team has gathered.

Are custodian statements enough?

Although, a custodian statement is usually considered the gold standard when it comes to books and records, since the statement is produced by an independent third party, there are drawbacks to using a custodian statement as the only source of books and records. The first reason of concern is that the custodian statement is usually produced monthly. If the firm needs to revalue portfolios during the month due to large cash flows, the custodian statement would not contain that data. Firms would have to calculate the total portfolio value on the dates on all large cash flow using a different method. Secondly, the statement might not show accruals for fixed income securities. Firms are required to include interest accruals within portfolio valuation when calculating performance. If the statement does not show that information, a firm might be forced to perform manual calculation.

Maintenance of books and records is at the core of GIPS standards and firms should ensure that they have the back-up to anything that’s included in the firms’ marketing books.

GIPS is a registered trademark of CFA Institute.


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