Investment Management
AUGUST 2002
Proposed AIMR-PPS Wrap-Fee Performance Guidelines
By: Michael S. Caccese*
The Association for Investment Management and
Research (“AIMR”) recently issued proposed
guidelines for the presentation of performance for wrapfee programs, referred to as the Wrap-fee Performance
Guidelines (“Guidelines”). The proposed Guidelines
seek to clarify and interpret the original AIMR
Performance Presentation Standards (“AIMR-PPS” or
“Standards”) wrap-fee provisions published by the
AIMR Wrap-Fee Subcommittee in 19951. Comments on
the proposed Guidelines should be received at AIMR
by October 31, 2002.
The Guideline are controversial, especially as to their
record keeping requirements, and the requirements
governing the delivery of investment performance to
wrap-fee program sponsors. The Guidelines, if adopted
in their current form, may force many AIMR-PPS
compliant firms to no longer claim AIMR-PPS
compliance or redefine their “firm” so that their wrap-fee
business is a separate division that does not claim
AIMR-PPS compliance.
OVERVIEW
The Guidelines address several issues with respect to
the calculation and presentation of wrap-fee
performance in compliance with the AIMR-PPS
standards. They are intended to ensure that existing
and prospective wrap-fee clients receive all necessary
performance information that fairly represent a wrap-fee
product performance history. In doing so, the
Guidelines clarify and interpret the current AIMR-PPS
standards relating to the calculation and presentation of
wrap-fee performance from the perspective of the
investment management firm and not the wrap-fee
program sponsor.
Under the Guidelines, AIMR sets forth three guiding
principals for applying the Standards to wrap-fee
performance, including:
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investment management firms are required to comply
with all applicable law and regulation;
performance must be presented always after the
deduction of actual trading expenses; and
actual net-of-fees wrap-fee performance must be
shown to prospective wrap-fee sponsors and/or
clients.
1 The author of this piece was the Co-Chair of the AIMR-PPS Wrap-Fee Subcommittee that issued the January 1995 AIMR-PPS report. This article is for
information purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts
or circumstances without first consulting a lawyer.
* Michael S. Caccese is a partner in the Boston Office of Kirkpatrick & Lockhart LLP. He works extensively with investment firms on
compliance issues, including the AIMR-PPS and GIPS. He was previously the General Counsel to AIMR and was responsible for overseeing
the development of AIMR-PPS, GIPS and other standards governing the investment management profession and investment firms. He can
be reached at 617.261.3133 and at mcaccese@kl.com.
Kirkpatrick & Lockhart LLP
The Guidelines focus on several issues relating to the
use of wrap-fee performance, including the definition of
“firm” record keeping requirements, the establishment
of an initial simulated performance track record, and the
presentation of actual wrap-fee performance.
DEFINITION OF FIRM
As stated in the Guidelines, the first choice that all firms
must consider when becoming compliant with the
AIMR-PPS standards is how to define the firm. The
Guidelines offer three alternatives for a firm that
manages wrap-fee program accounts.
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A firm defines the entire organization as the AIMR
firm. This includes all organizations in the corporate
structure that manage wrap-fee and non-wrap-fee
accounts. This approach enables the firm to
increase its assets under management, create
combined and separate composites of both wrap-fee
and non-wrap-fee accounts, and use non-wrap-fee
account historical performance to simulate a wrapfee composite history.
A firm defines its non-wrap-fee investment business
as the AIMR firm2. This approach requires the firm
to include only non-wrap-fee accounts in its
composites and assets under management. It also
prevents a firm from including wrap-fee accounts in
its non-wrap-fee performance to composites.
However, the Guidelines permit the AIMR-PPS
compliant firm to present as supplemental
performance the wrap-fee account performance of
the firm’s non-AIMR-PPS compliant division. Such
performance may not be linked to the non-wrap-fee
composite performance. Accordingly, under this
alternative, so long as the wrap-fee division does not
claim AIMR-PPS compliance, it is free to calculate
and present performance in any manner so long as
the firm does not violate applicable law and
regulation, including linking the wrap-fee and nonwrap-fee fee performance composites.3
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A firm defines its wrap-fee investment business as
the AIMR firm.4 This approach requires the firm to
include only wrap-fee accounts in its composites
and assets under management. The firm may present
as supplemental performance the performances of
non-wrap-fee accounts managed by the firm’s
AIMR-PPS compliant divisions. Such performance
may not be linked to the wrap-fee composite’s
performance.
RECORDKEEPING REQUIREMENTS
The most controversial aspect of the Guidelines is the
record keeping requirements. AIMR-PPS requires a
compliant firm to maintain, or have access to,
appropriate records to support its performance
presentation. The Guidelines recommend two options
for a firm that relies on the wrap-fee program sponsor’s
performance records. A firm may either use “shadow
accounting” on its own systems to track the wrap-fee
accounts, or the sponsor’s records, including entering
into an agreement with the sponsor in order for the firm
to have access to the sponsor’s records. In addition, if
the firms selects verification, the verify must also have
access to the sponsor’s records.
ESTABLISHING AN INITIAL TRACK RECORD
A firm may use a non-wrap-fee performance history to
simulate a wrap-fee composite history; provided,
however, that the firm reduces the historical, non-wrapfee gross-of-fees performance by the highest total wrapfee charged to clients by the applicable program
sponsor. The firm may include the gross-of-fees
simulated wrap-fee composite performance as
supplemental information to the adjusted net-of-fee
simulated wrap-fee composite performance. The
Guidelines require this presentation of gross-of-fees
performance only after the deduction of actual
transaction costs incurred by the non-wrap-fee
accounts included in the simulated wrap-fee composite.
Thus, the simulated wrap-fee composite performance
2 The firm must be able to comply with the AIMR-PPS firm definition that requires the non-wrap-fee investment business to operate as a separate “subsidiary
or division held out to its clients or potential clients as distinct business units.”
3 Since the wrap-fee division does not claim AIMR-PPS compliance, AIMR cannot dictate the performance used by the wrap-fee division.
4 See footnote 2.
reflects a double layer of transaction costs. Firms may
only make an adjustment to back out the extra
transaction costs if it is able to determine the actual
transaction expenses.
If a firm uses a simulated wrap-fee performance
composite, the firm must include actual wrap-fee
accounts in its composites once an actual wrap-fee
track record begins. The firm when presenting such
performance must:
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redefine the simulated wrap-fee performance
composite to include only actual wrap-fee accounts,
thereby maintaining a historical track record;
continue to combine the ongoing performance of the
non-wrap-fee accounts with the actual wrap-fee
accounts; or
discontinue the simulated non-wrap-fee composite
and create a new composite to represent only actual
wrap-fee accounts (with a new composite inception
date), thereby ending any historical track record.
The firm may not retroactively back out non-wrap-fee
accounts from its composites in order to create a
composite reflecting only wrap-fee accounts.
When presenting non-wrap-fee program accounts in its
wrap-fee composite to prospective sponsors or clients,
a firm must disclose for each year presented: (i) the
dollar amount of the non-wrap-fee assets included, and
(ii) the fee deducted (e.g., the maximum wrap-fee). In
addition, firms can no longer define composites based
on a program’s sponsor. A firm must include all wrapfee accounts with substantially similar investment
strategies in the same composite, regardless of sponsor.
When presenting its composites to existing sponsors, a
firm may create a “composite” consisting only of the
accounts managed for a particular sponsor and still
claim AIMR-PPS compliance. When reporting gross-offees performance to non-wrap-fee prospective clients, a
firm must either (i) deduct actual trading costs from the
pure gross-of-fees return, or (ii) actual trading costs if
they are determinable. The firm must use a net-of-fees
performance return using the highest wrap-fee charged
under the wrap-fee programs included in the composite.
EFFECTIVE DATE
PRESENTATION OF PERFORMANCE
AIMR-PPS requires that wrap-fee program performance
be presented net-of-fees. Net-of-fees means net-oftrading expenses as well as the investment firm’s and
wrap-fee program sponsor’s portions of the wrap-fee.
Gross-of-fees performance (but after transaction costs)
or partial net-of-fees performance (only deducting the
investment firm’s portion of the wrap-fee) may be
provided without net-of-fees performance only to wrapfee program sponsors. If such performance
presentation will be shown to clients, the performance
must be adjusted to reflect complete net-of-fees returns.
Firms will need to take steps to ensure that wrap-fee
program sponsors comply with this firm obligation. The
gross-of-fees or partial net-of-fees performance may be
shown to the client as supplemental information only.
The Guidelines are effective January 1, 2003 and earlier
compliance is encouraged. The Guidelines set forth the
requirements for a firm claiming compliance with AIMRPPS standards to accurately present wrap-fee program
performance to sponsors and/or clients. Investment
firms should carefully review the proposed Guidelines
and keep apprised of the AIMR Guidelines as they are
finalized. Because of the controversy surrounding the
Guidelines, firms should consider commenting on the
Guidelines prior to October 31, 2002.
If you would like to discuss the proposed Guidelines, or
any other issues relating to your AIMR-PPS
compliance, please contact Michael S. Caccese at
617.261-3133 or mcaccese@kl.com or your primary K&L
contact.
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting with a lawyer.
© 2002 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.
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