Around the Peak.

The investment management industry has spent significant time grappling with the SEC’s Marketing Rule and the question of whether gross-of-fee returns can be presented without corresponding net-of-fee returns in certain cases. Many firms have invested resources in trying to allocate fees to individual securities and sectors in an effort to comply. However, the SEC has now issued two FAQs (March 19, 2025) that provide much appreciated clarity on extracted performance and portfolio characteristics. The key takeaway? It is possible to present gross-of-fee returns without net-of-fee returns—if certain conditions are met.

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Extracted Performance: Gross Returns Can Stand Alone Under Specific Criteria

Investment advisers often present the performance of a single investment or a subset of a portfolio (“extracted performance”) in marketing materials. Historically, the SEC required both gross and net performance to be shown for such extracts. The new guidance provides a pathway for firms to display only gross-of-fee extracted performance, provided the following conditions are met:

1. The extracted performance must be clearly identified as gross performance.
2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the extracted performance.
4. The total portfolio’s performance must be calculated over a period that includes the entire period of the extracted performance.

If these conditions are satisfied, the SEC staff has indicated they will not recommend enforcement action, even if the extracted performance is presented without corresponding net returns. This is a notable shift, as it allows firms to avoid the complex and often impractical task of allocating fees at the investment or sector level.

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Portfolio and Investment Characteristics: Net-of-Fee Not Always Required

Another common industry question has been whether certain portfolio or investment characteristics—such as yield, volatility, Sharpe ratio, sector returns, or attribution analysis—constitute “performance” under the marketing rule, and if so, whether they must be presented net of fees.

The SEC’s latest guidance acknowledges that calculating these characteristics net of fees can be difficult and, in some cases, may lead to misleading results. As a result, the staff has confirmed that firms may present gross characteristics alone, without net characteristics, if they meet the following criteria:

1. The characteristic must be clearly identified as calculated without the deduction of fees and expenses.
2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the gross characteristic.
4. The total portfolio’s performance must be calculated over a period that includes the entire period of the characteristic being presented.

As with extracted performance, these conditions help ensure that the presentation is not misleading, reducing the risk of enforcement action.

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Bottom Line: A Practical Path Forward

This updated SEC guidance provides much-needed flexibility for investment managers, allowing for the presentation of gross-of-fee returns in a compliant manner. Firms that clearly disclose their approach and follow the specified conditions can reduce compliance burdens while still meeting investor protection standards. While this does not eliminate all complexities of the Marketing Rule, it does offer a practical solution that allows for more straightforward and meaningful performance reporting.

For firms navigating these changes, ensuring clear disclosures and maintaining compliance with the general prohibitions of the rule remains critical. Those who align their advertising materials with these guidelines can now confidently use gross-of-fee performance in a way that is both transparent and in compliance with regulatory requirements.

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Questions?

If you have questions about calculating or presenting investment performance in a manner that complies with regulatory requirements or industry best practices, we would love to talk to you. Please feel free to email us at hello@longspeakadvisory.com.

The Global Investment Performance Standards (GIPS®) have released a new Guidance Statement for OCIO Portfolios, bringing greater transparency and consistency to the way Outsourced Chief Investment Officers (OCIOs) report performance. This update is a significant milestone for firms managing OCIO Portfolios and asset owners looking to evaluate their OCIO providers.

What is an OCIO?

An Outsourced Chief Investment Officer (OCIO) is a third-party fiduciary that provides both strategic investment advice and investment management services to institutional investors such as pension funds, endowments, and foundations. Instead of building an in-house investment team, asset owners delegate investment decisions to an OCIO, which handles everything from strategic planning to portfolio management.

Who Does the New Guidance Apply To?

The Guidance Statement for OCIO Portfolios applies when a firm provides both:

1. Strategic investment advice, including developing or assessing an asset owner’s strategic asset allocation and investment policy statement.
2. Investment management services, such as portfolio construction, fund and manager selection, and ongoing management.

This ensures that firms managing OCIO Portfolios follow standardized performance reporting, making it easier for prospective clients to compare OCIO providers.

Who is Exempt from the OCIO Guidance?

The guidance does not apply in the following scenarios:

• Investment management without strategic advice – If a firm only manages investments without advising on asset allocation or investment policy.
• Strategic advice without investment management – If a firm provides recommendations but does not manage the portfolio.
• Partial OCIO portfolios – If a firm only manages a portion of a portfolio, rather than the full OCIO mandate.
• Retail client portfolios – The guidance is specific to institutional OCIO Portfolios and does not apply to retail investors including larger wealth management portfolios.

Key Change: Required OCIO Composites

Previously, OCIO firms had flexibility in defining their performance composites. Now, the GIPS Standards introduce Required OCIO Composites, which categorize portfolios based on strategic asset allocation.

Types of Required OCIO Composites

1. Liability-Focused Composites – Designed for portfolios aiming to meet specific liability streams, such as corporate pensions.
2. Total Return Composites – Focused on capital appreciation, commonly used by endowments and foundations.

Firms must classify OCIO Portfolios based on their strategic allocation, not short-term tactical shifts. This standardization enhances comparability across OCIO providers. The specific allocation ranges for the required composites are as follows:

Required OCIO Composites for OCIO Portfolios

Performance Calculation & Reporting

To ensure transparency, firms must follow specific rules for return calculations and fee disclosures:

• Time-weighted returns (TWR) are required, even for portfolios with private equity or real estate holdings.
• Both gross and net-of-fee returns must be presented to clarify the true cost of OCIO management.
• Fee schedule disclosures must include all investment management fees, including fees from proprietary funds and third-party placements.

Enhanced Transparency in GIPS Reports

The new guidance also requires OCIO firms to disclose additional portfolio details, such as:

• Annual asset allocation breakdowns (e.g., growth vs. liability-hedging assets).
• Private market investment and hedge fund exposures.
• Portfolio characteristics, such as funding ratios and duration for liability-focused portfolios.

By providing these details, OCIO firms enable prospective clients to make better-informed decisions when selecting an investment partner.

When Do These Changes Take Effect?

The Guidance Statement for OCIO Portfolios is effective December 31, 2025. From this date forward, GIPS Reports for Required OCIO Composites must follow the new standards. However, firms are encouraged to adopt the guidance earlier to improve transparency and reporting consistency.

Why This Matters

With OCIO services growing in popularity, this new guidance ensures that firms adhere to best practices in performance reporting. By establishing clear rules for composite classification, return calculation, and fee disclosure, the guidance empowers asset owners to compare OCIO providers with confidence.

As the December 31, 2025 deadline approaches, OCIO firms should begin aligning their reporting practices with this new guidance to stay ahead of the curve.

Don’t miss CFA Institute’s webinar scheduled for this Thursday February 6, 2025 to hear more on this guidance statement.

Questions?

If you have questions about the Guidance Statement for OCIO Portfolios or the Standards in general, we would love to talk to you. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping firms maintain their compliance with the GIPS Standards on an ongoing basis. Please feel free to email us at hello@longspeakadvisory.com.

Achieving compliance with the Global Investment Performance Standards (GIPS®) is a powerful way to demonstrate commitment to transparency and best practices in investment performance reporting. But is it always easy? Recently, we’ve heard several institutions, particularly in regions with limited compliance, express concerns that adhering to the standards would be challenging due to conflicting local laws and regulations.

Although local regulations can sometimes differ from the GIPS standards, we have found that direct conflicts with the GIPS standards tend to be rare. The GIPS standards were designed with a global framework in mind, enabling prioritization of stricter local laws and management of potential conflicts transparently.

The GIPS Compliance Framework

To achieve GIPS compliance while adhering to local regulations, firms and asset owners must understand how the GIPS standards prioritizes regulatory alignment. The guidance stresses adherence to the stricter of the two standards:

• If local laws impose stricter rules than the GIPS standards, firms should follow local laws.
• If the GIPS standards are stricter than local regulations, firms must adhere to the GIPS standards.
• In situations where direct conflicts arise between local regulations and the GIPS standards, local law takes precedence.

Again, direct conflicts tend to be rare. Most often we see situations where the GIPS standards may be stricter than the local law or vise versa. We have provided some examples in the sections that follow to help demonstrate how you might handle either situation.

Managing Conflicts Between the GIPS Standards & Local Regulations

Key principle: GIPS compliance can be maintained while respecting local regulations. When differences or conflicts occur, firms can continue to claim GIPS compliance by carefully disclosing deviations required by local regulations. This ensures transparency and maintains the integrity of performance reporting.

The first step for institutions is to identify any inconsistencies between the GIPS standards and their local regulatory requirements. If local laws prevent compliance with certain provisions of the GIPS standards, firms should:

1. Follow the local laws and regulations.
2. Document and disclose any necessary deviations from the GIPS standards in their GIPS reports, including:
   • A clear description of the conflict.
   • Specific details on how compliance was adjusted to adhere to local regulations.

Direct conflicts with the GIPS standards must be disclosed transparently in GIPS reports to ensure stakeholders understand the nature and impact of modifications made to meet local requirements. This commitment to openness preserves the credibility of the firm’s compliance efforts.

Practical Example 1: Stricter SEC Requirements and GIPS Compliance

A relevant example where a local law is more strict includes the SEC’s marketing rule for firms registered in the United States. The SEC requires net-of-fee performance reporting, which is stricter than the GIPS standards allowance for either gross-of-fee or net-of-fee returns. For firms registered with the SEC, this means including net-of-fee returns in GIPS reports. Although additional disclosure in this case may not be required, it illustrates how firms can remain GIPS compliant by adhering to the GIPS standards and also the stricter local rule.

Practical Example 2: Conflicting Local Requirement & Disclosure

The GIPS Handbook (see page 256) provides an example of a conflict where the local law prohibits the presentation of returns for periods less than one year to prospective clients. In this scenario, the GIPS standards requires disclosure of the conflict and an explanation for the manner in which the local laws or regulations conflict with the GIPS standards. The following sample disclosure language is provided:

"Local laws do not allow the presentation of returns of less than one year to prospective clients, which is in conflict with the GIPS standards. Therefore, no performance is presented for this composite for the period from 1 July 2018 (the inception date of the composite) through 31 December 2018."

Global Applicability of the GIPS Standards

The GIPS standards were developed with the flexibility needed for global adoption, enabling firms worldwide to achieve compliance while respecting local regulatory environments. By following all the requirements of the GIPS standards, identifying conflicts with local laws, and disclosing deviations where necessary, firms can ensure they uphold both local and global standards for performance reporting. This means that even for firms concerned about these conflicts, compliance with the standards is achievable.

Next Steps for Investment Managers

If you would like to be among the group of investment firms or asset owners claiming GIPS compliance and upholding the highest standard for investment performance reporting then please consider the following actions:

1. Conduct a thorough review of local regulations to identify any inconsistencies with the GIPS standards.
2. Document potential conflicts and stricter local requirements.
3. Develop clear disclosures for any necessary deviations to comply with local laws.
4. Ensure that GIPS reports transparently reflect adherence to both local laws and the GIPS standards.
5. Seek expert guidance to navigate complex regulatory intersections.
6. Regularly review and update compliance strategies as regulations evolve.

Achieving GIPS compliance is possible, even when local regulations do not perfectly align. With careful planning, transparent disclosure, and a commitment to upholding the highest standards, it is possible to comply with the GIPS standards no matter where you’re located. Reach out to Longs Peak if you would like help getting started.

GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

The CFA Institute hosted its 28th Annual Global Investment Performance Standards (GIPS®) Conference on September 17-18 in San Diego, CA. As always, the opportunity to reconnect with industry peers and colleagues was a highlight. We are grateful to all the speakers and panelists who shared their insights. Here are some key takeaways we found valuable from this year’s event.

The SEC Marketing Rule

The SEC Marketing Rule continues to be a topic of discussion, especially as we continue navigating the nuances of the rule and its implications for investment performance advertising. During the panel discussion, two presenters clarified several points:

Model vs. Actual Fees

It seems that there is rarely a case when the use of actual fees will adequately satisfy the marketing rule. This is a major development as at least 30% of the participants in the audience claim to still be using actual fees in their marketing.

According to the SEC marketing rule, when calculating net returns you can use actual or model fees. However, to satisfy the general prohibitions, an advisor generally should apply a model fee that reflects either the highest fee that was charged historically or the highest potential fee that it will charge the prospect receiving the advertisement (not a reasonable fee or an average). Footnotes 590 and 593 further clarify that there may be cases when using actual fees would specifically violate the marketing rule.

Footnote 590: “If the fee to be charged to the intended audience is anticipated to be higher than the actual fees charged, the adviser must use a model fee that reflects the anticipated fee to be charged in order not to violate the rule’s general prohibitions.”

and

Footnote 593: “…net performance that reflects a model fee that is not available to the intended audience is not permitted under the final rule’s second model fee provision.”

As a result, we recommend that anyone using actual fees in advertisements compare their net returns to the net returns that would have been achieved using the highest fee a prospect would pay as the model fee. If your actual net returns result in materially better performance than what the performance would be using the highest model fee, this is likely problematic. The rules do not define materiality, but the panelists did provide an example where the difference was only 25bp and they indicated that would likely be considered material.

If you do not have tools for calculating model fees, don’t worry, we are here to help. Reach out to one of our performance experts if you need help calculating model fees - we have tools that can simplify this for you.

Showing Multiple Net Returns in a Single Advertisement

Standardized marketing materials that show multiple net return results (including net of actual fees) may be presented in a single advertisement. This seems like a change of tone from what we heard last year, but this greatly simplifies what we thought previously. Since the adoption of the marketing rule, firms have struggled with how to standardize marketing materials, especially when they have different fee schedules and investor types.

Many firms now manage several versions of the same marketing document that show only the gross-of-fee returns and net-of-fee returns relevant to the specific audience receiving the advertisement. This can be logistically challenging to manage. Based on the discussion and case studies provided, it seems that firms are permitted to create a single document that shows various net-of-fee returns based on the fees charged to different investor types. The example provided looked something like this:

This shift in approach may be a huge relief for firms that are managing multiple investor types and are trying to track and update performance under various fee schedules. If electing to do this, it is important to ensure the fee proposed for the prospective investor is clear – especially when presenting a table like this to a retail investor. It is essential that your prospects can easily identify the net-of-fee return stream that is applicable for them.

Attribution & Contribution – Which is Performance?

Attribution is not considered performance while contribution likely is. Because Attribution is not considered performance, the use of a representative account is generally accepted. However, careful consideration should be applied in selecting an appropriate rep account and documentation to support its selection should be maintained. While the performance-related requirements of the Marketing Rule may not apply, the overarching requirement for the advertisement to be “fair and balanced” applies and must be considered when determining what account to use to represent the strategy.

A separate case study discussed how to handle situations when the rep account closes. Using the old rep account historically and linking its data to a new rep account is considered hypothetical, so if your rep account ceases to exist, it’s best to re-evaluate and select a different rep account to be used for the entire track record of the strategy.

Presenting Sector Contribution Returns Net-of-Fees

When presenting extracted performance, such as contribution or returns at the sector-level, this is treated as performance and must be presented net-of-fees. Since some firms have been mistakenly reducing each sector by a prorated portion of the percentage fee when determining the net-of-fee results, the panelists emphasized that when netting down sector returns, firms must deduct the full percentage fee from each sector. If allocating the dollar amount of the fee, that would be prorated by weighting the dollar amount of the fee by the weight the sector represents in the portfolio, but prorating a percentage will not create the same result and will overstate the sector-level net-of-fee returns.

The following example was provided to demonstrate how to apply model fees to sector returns and contribution in an advertisement:

Private Fund Gross & Net Returns

The calculation of gross and net returns for private funds must be consistent. For example, you cannot report a gross-of-fee return that excludes the impact of a subscription line of credit while reporting a net-of-fee return that includes it. Firms must disclose the effect of leverage, specifying the impact of subscription lines of credit rather than just stating that returns will be lower.

Per the marketing rule: gross- and net-of-fee returns must be calculated over the same time period, using the same type of return methodology. For example, it is not appropriate to calculate gross IRR using investment-level cash flows and net IRR using fund-level cash flows as that would be considered different methodologies.

Hypothetical Performance

Firms should be prepared to defend the classification of hypothetical or extracted performance. Hypothetical performance is defined as “performance that no specific account received.” Panelists made a point of noting that the return stream of a composite is not considered hypothetical, even though no specific account received the performance.

Along similar lines, a case study was presented where a firm wanted to show recommended funds to an existing client in a marketing presentation. The question was whether presenting a recommendation like this is considered hypothetical. Not surprisingly, the answer was “it depends on how the information was presented.” Presenting the information in a way that implied what the investor “could have received” would likely be hypothetical. Simply showing how these funds performed historically (so long as it complies with the marketing rule – showing prescribed time periods etc.) appeared acceptable.

AI in Investment Performance Reporting

The integration of AI into performance measurement and reporting continues to gain momentum. Of particular interest was how quickly our jobs may be changing and whether we need to be concerned about job security.

Jobs that focus on data gathering, prepping and cleaning are expected to be replaced by AI in the near future.  We’ll likely see fewer new job postings for these entry-level roles, with a shift towards more value-added positions, such as data scientists, becoming more prevalent. Panelists suggested that many roles within the performance measurement function, including auditing, will likely be augmented, automating repetitive tasks (often performed by more junior professionals) and enhancing data analysis functions. Higher-level human oversight will still be essential for exercising judgment and interpreting information within the context of real-world scenarios – at least for now.

Panelists recommended preparing performance teams by encouraging them to take basic courses in Python and SQL to help prepare and empower them for the shift to a future with AI. AI platforms already exist that can perform detailed performance attribution and risk assessments by simply asking a question – much like one would with ChatGPT. It is likely that performance measurement professionals will continue to be needed to develop these platforms, and they will likely remain reliant on some human oversight for the foreseeable future.

Updates on the GIPS Standards

There were not a lot of updates on the GIPS Standards at the conference. As of July 31, 2024, 1,785 organizations across 51 markets claim compliance with the GIPS standards. This includes 85 of the top 100 global firms, and all 25 of the top 25 firms. The top five markets include the US, UK, Canada, Switzerland, and Japan, with Brazil emerging as a new market entrant in 2024.

The conference also provided updates on recent changes to the GIPS Standards. Key updates included:

• The Guidance Statement for OCIO Strategies will be released by year-end, providing more clarity for firms managing OCIO portfolios. It appears that gross-of-fee and net-of-fee returns will need to be presented for OCIO composites.
• The Guidance Statement for Firms Managing Only Broadly Distributed Pooled Funds(BDPFs) became effective on July 1, 2024. The new guidance offers increased flexibility for firms managing BDPFs, allowing them to avoid preparing GIPS Reports for prospective investors and instead focus on reporting for consultant databases or RFPs. While input data and return calculation requirements generally still apply, composite construction and report distribution are only required if the firm chooses to prepare GIPS Reports.
• The GIPS Technical Committee is forming a working group to address after-tax reporting. For now, firms should refer to the USIPC After-Tax Performance Standards, which were issued in 2011. Additionally, as there is little consensus on how to calculate private fund returns, the committee plans to provide further guidance—though a timeline was not specified.

These takeaways underscore the evolving nature of the investment performance landscape. If you have any questions, please don’t hesitate to reach out to us. We would be happy to share additional insights from the conference as well as jump start your firm in complying with the GIPS Standards.

GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

Using Exchange-Traded Funds (ETFs) as benchmarks instead of traditional indices has become a common practice among investors and fund managers. ETFs offer practical advantages, such as reflecting real-world trading costs, and incorporating management fees and tax considerations. These aspects make ETFs a more accurate and accessible benchmark as they are an actual investible alternative to the strategy being assessed.

However, this approach is not without its drawbacks. Understanding both the advantages and disadvantages of using ETFs as benchmarks is crucial for making informed investment decisions and ensuring accurate performance comparisons.

This article discusses the pros and cons of using an ETF as a benchmark and considerations for making an informed decision on how to go about selecting one that is meaningful.

The Advantages:

Using an ETF as a benchmark rather than the underlying index has several advantages. These include:

Cost:

The decision to use an ETF rather than an actual index as a benchmark often stems from the costs associated with using index performance data. While index providers typically charge licensing fees for access to their indices, these fees can be cost-prohibitive for some firms, especially smaller ones, or those with limited resources.

ETFs offer a more accessible and cost-effective alternative, as they provide readily available, real-time performance data and can be traded easily on stock exchanges and accessed by anyone. By using an ETF as a benchmark, firms can circumvent the barriers to entry associated with marketing index performance directly, allowing them to still compare performance against a relevant benchmark.

Practical Investment Comparison:

ETFs represent actual investment vehicles that investors can buy and sell, thus providing a more practical and realistic performance comparison. Indices, on the other hand, are theoretical constructs that do not account for real-world trading costs, whereas ETFs do. Additionally, ETFs are traded on stock exchanges and can be bought and sold throughout the trading day at market prices, unlike indices which cannot be directly traded.

Incorporation of Costs:

ETFs include trading and management expenses and other costs associated with managing the pool of securities. When using an ETF as a benchmark, you get a more accurate reflection of the net returns an investor would actually receive after these costs. In addition, ETF performance considers the costs of buying and selling the underlying assets, including bid-ask spreads and any market impact, which indices do not.

Dividend Reinvestment:

ETFs may account for the reinvestment of dividends, providing a more accurate measure of total return. Indices often do not factor in the practical aspects of dividend reinvestment, such as timing delays, transaction costs, and tax implications, leading to a potentially less realistic depiction of investment returns.

Tax Considerations:

ETFs may have different tax treatments and efficiencies compared to the theoretical index performance. Using an ETF as a benchmark will reflect these considerations, providing a potentially more relevant comparison for taxable investors.

Replication and Tracking Error:

ETFs can exhibit tracking error, which is the deviation of the ETF's performance from the index it seeks to replicate. While tracking error may be perceived as a limitation, it also reflects the real-world challenges and frictions involved in managing an investment portfolio. Thus, using an ETF as a benchmark encompasses this aspect of real-world performance—which acknowledges the practical complexities of investing and serves to enhance transparency and accountability in investment decision making.

Transparency and Real-time Data:

ETFs provide real-time pricing information throughout trading hours, allowing investors to monitor and compare performance continuously as market conditions fluctuate. This real-time data enables more informed and timely decision-making, as investors can react instantly to market events, manage risks more effectively, and capitalize on opportunities as they arise.

Advantages Summary

In summary, using an ETF as a benchmark provides a less-costly, more realistic, practical, and accurate measure of investment performance that includes real-world considerations like costs, liquidity, tax implications, and dividend reinvestment, which are not fully captured by indices. ETFs are a true investable alternative, while indexes are not directly investible.

The Disadvantages:

While using an ETF as a benchmark has several advantages, there are also some potential drawbacks to consider:

Downside of Tracking Error:

ETFs may not perfectly track their underlying indices due to various factors such as imperfect replication methods, sampling techniques, and management decisions. This tracking error can result from differences in timing, costs, and portfolio composition between the ETF and its benchmark index.

This deviation can lead to discrepancies when comparing the ETF's performance to the actual index and can affect investors' expectations, portfolio management decisions, and performance evaluations. Thus, it is prudent to evaluate and monitor tracking error of ETFs when they are used as a benchmark.

Tracking Method: Full Replication vs. Sampling

ETFs employ different replication strategies to track their underlying indices, with some opting for full replication, while others utilize sampling techniques. These differences can lead to varying levels of tracking error and performance differences from the underlying index.

Full replication involves holding all of the securities in the index in the same proportions as they are weighted in the index, aiming to closely mirror its performance. In contrast, sampling techniques involve holding a representative subset of securities that capture the overall characteristics of the index.

While full replication theoretically offers the closest tracking to the index, it can be more costly and logistically challenging, especially for indices with a large number of securities. Sampling, while potentially more cost-effective and manageable, introduces the risk of tracking error, as the subset of securities may not perfectly reflect the index's performance.

Non-Comparable Expense Ratios:

ETFs incur management fees, which reduce returns over time. While these fees are part of the real-world costs, they can make the ETF's performance look worse compared to the theoretical performance of the index, especially when compounded over time. This may be problematic when using an ETF as a comparison tool (think expense ratios dragging down ETF benchmark performance thus making the strategy appear to have performed better than it would have against the actual index). This has the potential to influence investment decisions and performance evaluations. To address this concern, the GIPS Standards now require firms that use an ETF as a benchmark to disclose the ETF’s expense ratio.

Many active managers might argue that it’s “unfair” that the SEC requires them to compare net returns against an index that has no fees or expenses. However, if the strategy’s goal is to beat the index with active management, the manager should be doing this even after fees, otherwise passive investing (with lower fees) is a better option.

Liquidity Constraints:

Some ETFs may suffer from lower liquidity, leading to wider bid-ask spreads and higher trading costs, especially for large transactions. This can affect the ETF's performance and make it less ideal as a benchmark.

Selection Dilemma

Multiple ETFs may track the same index, each with different structures, expense ratios, and tracking accuracy (e.g., check out the differences between SPY, IVV, VOO, SPLG). As a result, choosing the most appropriate ETF as a benchmark should involve consideration of factors such as cost-effectiveness, liquidity, tracking error, and the strategy’s specific investment objectives. As a result, some due diligence should be done to ensure that the selected ETF aligns closely with the desired index and makes sense for the investment strategy.

Some firms have made it a habit to mix the use of different ETFs in factsheets, often because their data sources lack all the data needed for one ETF. While it may seem like it’s all the same, for many of the reasons discussed in this post, not all ETFs are created equal. We do not recommend mixing benchmarks, even when using actual indices (e.g., comparing performance returns to the Russell 1000 Growth, but then showing other statistics like sectors compared to the S&P 500). Similarly, we wouldn’t recommend doing that with ETFs either (e.g., comparing performance returns to IVV but using sector information from SPY). Mixing benchmark information in factsheets is messy and likely to be questioned by regulators, especially when doing so makes strategy performance look better.

Regulatory and Structural Issues:

ETFs are subject to evolving regulatory oversight that might affect their operations, costs and performance as benchmarks. This is not the case for indices.

In addition, the structural differences between ETFs, particularly regarding whether they are physically backed or use synthetic replication through derivatives, can significantly impact their risk profile and performance relative to their underlying indices.

Physically backed ETFs typically hold the actual securities that comprise the index they track, aiming to replicate its performance as closely as possible. In contrast, synthetic ETFs use derivatives, such as swaps, to replicate the index's returns without owning the underlying assets directly. While synthetic replication can offer cost and operational advantages, it also introduces counterparty risk, as the ETF relies on the financial stability of the swap provider.

As a result, it’s best to consider the structure of the ETF before using it as a benchmark.

Market Influences:

ETFs can trade at prices above (premium) or below (discount) their net asset value (NAV), which can introduce short-term performance differences that are not reflective of the underlying index performance.

These premiums and discounts arise due to supply and demand dynamics in the market, as well as factors such as investor sentiment, liquidity, and trading volume. These fluctuations can affect the ETF's reported returns and introduce discrepancies when comparing its performance to the benchmark index. Therefore, investors must consider the impact of these premiums and discounts on the ETF's short-term performance and recognize that these variances may not accurately represent the true performance of the underlying index.

When material differences in price vs. NAV exist, some firms believe that the NAV is a better representation of the fair value rather than the price and have used NAV for performance calculations. Please note that when this is done, it is important to document how fair value is determined and if the performance is based on the change in NAV or change in trading price.

Currency Risk:

Investors utilizing ETFs tracking international indices face the added complexity of currency fluctuations, which can significantly influence the ETF's performance. When investing in foreign ETFs, investors are exposed to currency risk, as fluctuations in exchange rates between the ETF's base currency and the currencies of the underlying index's constituents can impact returns. Currency movements can either enhance or detract from the ETF's performance, depending on whether the base currency strengthens or weakens relative to the underlying currencies.

Consequently, currency risk should be considered when using international ETFs as benchmarks.

Dividend Handling:

The handling of dividends by ETFs, whether they are paid out to investors or reinvested back into the fund, can have a notable impact on their total return compared to the index they track. Indices typically assume continuous reinvestment of dividends without considering real-world frictions such as transaction costs or timing delays associated with reinvestment. In contrast, ETFs may adopt different dividend distribution policies based on investor preferences and fund objectives.

ETFs that reinvest dividends back into the fund can potentially enhance their total return over time by capitalizing on the power of compounding. However, this approach may result in tracking errors if the reinvestment process incurs costs or timing discrepancies that deviate from the index's assumed reinvestment.

ETFs that distribute dividends to investors as cash payments may offer more immediate income but could lag behind the index's total return if investors do not reinvest these dividends efficiently. Therefore, the dividend handling policy adopted by an ETF can significantly influence its performance relative to the index and should be carefully considered.

Lack of Historical Data:

Some ETFs, especially newer ones, may not have a long track record. This can make historical performance comparisons less reliable or comprehensive. Without an extensive performance history, sufficient data may be lacking to assess an ETF's performance across various market conditions and economic cycles, making it challenging to gauge its potential risks and returns accurately.

Strategies that existed long before an ETF was created to track the comparable index, may end up with timing differences. Many firms often need to use multiple benchmarks to cover the entire period. But, for some strategies that go way back, an ETF may not exist back to inception. Be sure to include rationale in your documentation for benchmark selection so that it is clear when and why a benchmark was selected for the given time periods.

Conclusion:

In conclusion, using ETFs as benchmarks offers practical benefits, potentially making them a more accurate and accessible measure of investment performance compared to traditional indices since they are an actual investable alternative to hiring an active manager. However, these benefits do not come without shortcomings. By carefully evaluating these factors and considering the specifics of the ETFs selected for each strategy, managers can effectively use ETFs as benchmarks to assess and monitor investment strategies. In understanding these factors, an ETF may actually be a better comparison tool for your strategy than the underlying index.

We at Longs Peak Advisory Services were thrilled to sponsor and participate in the 22nd Annual Performance Measurement, Attribution & Risk Conference (PMAR™) held on May 22-23, 2024. The event was a fantastic opportunity for us to engage with industry experts and share our insights. We always appreciate how TSG encourages participants to engage with sponsors and if you were there, hope we had a chance to meet you!

If you couldn’t make it this year, here are some of the key takeaways from the event that we found most impactful:

Artificial Intelligence in Performance and Reporting

This year’s event included two powerful sessions on the use of AI in the performance industry. Harald Collet from Alkymi presented a compelling session on the transformative impact of artificial intelligence (AI) in performance measurement and reporting. AI's capability to process vast amounts of data and generate actionable insights is indeed revolutionizing our field. Collet's discussion highlighted both the opportunities AI presents, such as enhanced efficiency and accuracy in reporting, and the challenges it brings, including concerns about data integrity and ethics. This session resonated with us as we continually seek to integrate advanced technologies to better serve our clients while carefully managing associated risks.

The application of AI, even on a small scale, can have a profound impact, helping optimize processes, and enhancing customer/employee experience and overall satisfaction. It has the power to enhance productivity and decision-making, making even modest use of this technology extremely valuable. One example provided was how to integrate AI with Excel. It is now possible to augment Excel’s capabilities to automate data entry, cleaning, and formatting, which saves time and reduces human error.

The “human in the loop” (HITL) concept was also discussed which emphasizes the role of human oversight and intervention in AI systems, where AI technologies are guided and corrected by human judgment, particularly in complex or critical tasks where machine errors could have significant consequences. While experts in many fields are often concerned that AI technologies will replace individuals in the workforce, Collet encouraged the crowd with a simple reminder that “You’re not going to lose your job to AI. You’re going to lose your job to someone who is using AI.”

Implementing SEC Guidelines

Our very own partner, Matt Deatherage, CFA, CIPM, had the privilege of moderating a session on the practical implementation of the new SEC guidelines alongside Lance Dial and Thayne Gould. They aimed to provide attendees with a comprehensive overview of these guidelines and share strategies for effective compliance. Now that the guidelines have been in place for over a year, the discussion underscored the importance of understanding regulatory expectations and adapting internal processes accordingly. Some of the key reminders from this session were:

• Most of the time the SEC will likely view Yield as a performance statistic and should therefore be shown net of fees. If the investment firm believes yield is not performance and wants to show it gross, they must be comfortable in defending that stance.
• Attribution analysis is often seen as performance-related information and therefore needs to be net of fees.
• Do not put hypothetical performance on your website! In most scenarios, it is generally not appropriate to present hypothetical performance. This is also a relevant topic in current events, where organizations have been fined for adding hypothetical performance to their website.
• Any sort of statement made in marketing needs to be supported. For example, if a firm claims to be “the best” they need to be able to support that claim – according to what/whom are you the best?
• A MWR (“also known as “IRR”) stream must also be presented with the prescribed time periods, net of fees. As of this publish date, the SEC has not put out any prescribed calculation methodology on how the MWR is to be calculated.

This panel offered actionable insights to help firms navigate the regulatory landscape efficiently and ensure adherence to the latest SEC standards. Reach out if you would like us to connect you with an SEC compliance consultant.

GIPS® Standards OCIO Guidance Statement

One of the standout sessions was the panel discussion on the Global Investment Performance Standards (GIPS®) OCIO Guidance Statement, featuring Joshua O’Brien, Todd Juillerat, Amy Harlacher, and G.R. Findlay. This session was invaluable as it delved into the implications of the guidance for firms managing outsourced chief investment officer (OCIO) services. While there is still some gray area around the OCIO guidelines, the panel emphasized the necessity of aligning with global best practices and provided insight into the important considerations to keep in mind for compliance. It reinforced the importance of transparency and consistency in performance measurement, which are core values we uphold at Longs Peak.

GIPS® Compliance Q&A

In another interactive session, Matt Deatherage joined John D. Simpson, John Norwood, and Susan Agbenoto for a Q&A on GIPS® compliance. They addressed a variety of common questions and concerns, providing practical advice for firms striving to adhere to the GIPS® standards. Some of the questions they answered were:

Q: What are some best practices to prepare for a verification?

A: Outlier reviews are extremely important to make sure composite construction is accurate and in line with expectations and your policies and procedures. Performing this type of review can help catch composite construction mistakes that may otherwise delay a verification if found in the testing process. This review is important no matter the approach you take as outliers can be reviewed in a variety of ways.

Never done an outlier review? Fill out this form and put PMAR2024 in the message box -- we will test a sample of your composite data and provide you a list of outliers for review.

Q: What should be reviewed annually by a GIPS compliant firm?

A: GIPS standards policies and procedures. Your policies and procedures are the backbone to your claim of compliance and should be reviewed periodically to ensure they are still up to date. Reviewing this at least annually and documenting any changes will go a long way.

Q: What tips do you have for firms looking to become GIPS compliant or adjust their current compliance program?

A: We have lots of suggestions, but here are two big ones:

• Leverage software as much as possible, whether that be for composite construction or GIPS report creation. Software can help build efficiencies and remove risk of human error.
• Don’t over-complicate your compliance program or policies and procedures. Make sure your policies and procedures are meaningful, but not so complex that they become difficult to consistently follow and implement.

What resources are available for organizations going through verification (whether it’s their first or 10^th)?

A: While it can be helpful to appoint someone internally as the head of your GIPS compliance program to oversee all relevant requirements are being met, depending on the size of your organization, you might need to seek out additional help if you have no one in-house with this knowledge. We have helped over 150 firms become GIPS compliant by serving as their outsourced GIPS standards experts and would love to support your firm too.

There are also third parties, such as your verifier, that can help answer questions about GIPS standards verification. The CFA Institute also has a lot of great resources available such as the GIPS standards help desk (email them at: gips@cfainsitute.org), GIPS handbook and/or the GIPS standards Q&A Database.

We hope this session was rewarding for participants and left them with clear takeaways for enhancing their GIPS compliance practices.

WiPM Event

For the second year in a row, the Women in Performance Measurement (WiPM) group hosted a meaningful and enlightening day-long event in conjunction with PMAR. With sessions addressing communication in the workplace, ethical considerations in performance, and work-life balance, the conversations and knowledge-sharing did not disappoint.

It was inspiring and encouraging to hear from so many female thought leaders engaged in discussion about how we can further equip the next generation of female leaders in performance measurement. Two key highlights from the women-focused content shared included:

• The importance of creating a “brag book.” Oftentimes as women, it can feel arrogant or uncomfortable to share successes, but it’s important to remember that we can be our biggest advocates when we keep a record of our own accolades and triumphs. While the title of “brag book” could be off-putting, it is intended to simply be a “fact book” of all the accomplishments you’ve had in the workplace.
• Especially for women, work-life balance can feel impossible to achieve, so we explored the idea of “work-life harmony” instead. We discussed how the idea of “work-life balance” always feels like a give and take where one area has to give for the other area to grow – causing women to feel more guilt around the area that is now lacking. When we reframe this topic to be “work-life harmony,” it allows us to think about work and life in tandem – ebbing and flowing with a level of musicality that doesn’t require one to be “less” for the other to be “more”, but rather gives women the ability to recognize how they can be successful in both areas of life as the demands of each shift in different seasons.

While WiPM is still a relatively new organization, the group is excited to continue to offer group and individual programs to aid in the advancement of women in the performance measurement industry. During the event, the group highlighted the existing Mentoring program that matches mentors/mentees together to support one another in their performance-related careers.

Learn more about Women in Performance Measurement here, or join the LinkedIn group.

Conclusion

PMAR™ 2024 was a resounding success, offering a wealth of knowledge and practical insights on the latest advancements and regulatory updates in performance measurement and risk management. Our sponsorship and active participation underscored our commitment to supporting the industry's growth and evolution. We at Longs Peak are dedicated to advancing best practices and helping our clients navigate the complexities of performance measurement and GIPS compliance. If you have any questions about the 2024 PMAR Conference topics or GIPS and performance in general, please contact us.

We hope to see you at PMAR & WiPM in 2025!

The SEC's Marketing Rule, Rule 206-4(1), outlines specific criteria for the disclosure of "performance." However, determining whether metrics like yield constitute "performance" under this rule seems ambiguous. Based on our experience, yield information falls into one of three categories:

1. Performance - prompting the Marketing Rule's requirements;
2. A portfolio characteristic – exempt from the performance presentation rules; or
3. Both

While SEC staff have discussed this ambiguity publicly and privately, a definitive stance on the treatment of yield in advertisements remains elusive. In practice, presenting the actual yield of an account or composite often qualifies as performance, as it aims to demonstrate the income generated and expected.

Conversely, the yield of an individual investment, such as a specific bond, could be considered a characteristic, especially when presented alongside other metrics like duration and maturity.

Determining if yield should be considered performance or characteristic may also depend on its intended use and the overall context. For instance, displaying the average yield of investments as part of a risk assessment suggests it may be a characteristic, while presenting the portfolio's yield likely implies performance under the Marketing Rule. Similarly, the yield of an individual investment may be deemed a characteristic or "extracted performance" based on context.

You may also want to consider the significance of yield to the performance presented as this could also determine how the SEC may interpret the information. During the 2023 GIPS Standards Conference, extensive discussion was had about the significance of yield to strategy performance. For example, the yield of a bond portfolio may be more likely considered performance while dividend yield, presented for a large cap equity portfolio, could be regarded as a characteristic.

What to do

To navigate this ambiguity, we recommend that firms pre-determine whether a metric is intended as performance or a characteristic and document this decision and reasoning internally. If yield is deemed a characteristic, marketing materials should reflect this classification and include appropriate disclosures. All presentations should include comprehensive performance disclosures, including gross and net figures over relevant time frames.

Although SEC staff interpretation may differ, internal documentation and disclosure can mitigate regulatory risks unless expressly contradicted by SEC guidance.

As the year draws to a close, we can’t help but marvel at the whirlwind of activities and achievements that have marked 2023 for Longs Peak. Not only have we continued to provide outstanding professional services to our clients, but our team has also celebrated significant personal milestones and accomplished impressive feats. Join us in recapping the memorable moments that shaped our year in this edition of “Around the Peak”.

Celebrations and New Beginnings

Love was in the air at Longs Peak this year with not one, but three major life events. James Blazer and his fiancé Melanie became engaged, Cameron Payseno and Kelsey celebrated their union in a beautiful wedding here in Denver, and anticipation fills the air as Matt Deatherage prepares to welcome his first child likely before the end of the year.  These joyous occasions have not only strengthened our bonds, but have also added an extra layer of happiness to our close-knit Longs Peak family as we #LiveOurBestLife.

In addition, our founder, Sean Gilligan celebrated the 10^th and 20th anniversaries of his two open heart surgeries, inspiring us to remember that the human spirit, much like the heart, is resilient, enduring, and capable of soaring to new heights even in the face of adversity.

Educational Triumphs

Longs Peak takes pride in the continuous growth and development of its team members. In 2023, Mila Gao and Sara Celapino achieved a significant milestone by passing their CFA Level 1 exam. These accomplishments reflect our commitment to excellence and the continuous pursuit of knowledge within our organization.

Internally, our team – under Matt Deatherage’s tutelage –  developed a robust training program for all employees. One of our favorite training sessions this year was spearheaded by our in-house Excel wizard, Henry Jones, who writes formulas while he sleeps and makes everything he touches more efficient.

Global Engagements and Industry Recognition

Our team members Matt, Sean and Cameron showcased their expertise on the international stage, presenting and #SimplfyingTheComplex to five CFA societies across the globe, including Greece, Brazil, and the UK. Domestically, our presence was felt at four conferences, including PMAR North America, the inaugural Women in Performance Measurement (WiPM) Conference, the 27^th Annual GIPS Standards Conference, and the ComplyConnect Conference and Expo. Jocelyn also moderated a virtual WiPM panel discussion on performance measurement outside the US while Matt shared his insights at the PMAR Conference, participating in a panel on Performance Reporting; Beyond the GIPS standards #UsePrudentJudgement.

Jocelyn was honored with the Outstanding Women in Performance & Risk Measurement award by the Journal of Performance Measurement. Additionally, Jocelyn’s inclusion in ColoradoBiz magazine’s list of Top 25 Young Professionals in Colorado underscored our team’s dedication, impact, and ability to #ActWithIntegrity.

In addition, Jocelyn is using her financial expertise to serve on the Board of Directors of a Longmont community bank and giving back to our community by serving on the Board of Education and Treasurer for the St. Vrain Valley School District.

Team Growth

Longs Peak expanded its team this year, welcoming Dhwani Desai as an Associate and McKinley Rich as the Director of Operations. These new additions have brought fresh perspectives and expertise to our dynamic team.

For the first time, we have a fully functional internal operations team with Cally Chenault and McKinley Rich at the helm – supercharging the infrastructure and planning for growth in the years to come.

Kelley Cooney earned a well-deserved promotion to the role of Senior Associate, a testament to her outstanding work. We feel fortunate to have her on our team.

Sara Celapino was made a Manager at the end of 2023, in recognition of her remarkable achievements and contributions to Longs Peak. We consider ourselves lucky to have found Sara and remain confident that she will continue to drive our success in the years to come.

As we celebrate the accomplishments of the past year, we also take a moment to acknowledge Cameron Payseno, who marked an impressive five years of #OperatingWithExcellence at Longs Peak. His dedication and contributions have been integral to our success, and we look forward to many more years of collaboration.

Unity in the Mountains

A top highlight of the year was our office retreat in Granby, CO, where the team came together for three days of team-building activities, including a challenging ropes course, bowling, and baking in the breathtaking scenery of the mountains. This retreat reinforced our sense of #BeOneTeam, laying the foundation for continued success in the years to come.

Industry Accolades and Milestones

Longs Peak’s commitment to excellence was acknowledged by ColoradoBiz Magazine, which names us one of the Top 200 Privately Owned Companies in Colorado.

As we bid farewell to 2023, we carry with us a sense of pride for the accomplishments, growth, and moments of joy that have defined this year. Looking ahead, we remain committed to delivering exceptional service, fostering professional development, and building on the strong foundation that has made Longs Peak a leader in the industry.

Cheers to a 2024 that is filled with even more excitement and triumphs!

CFA Institute hosted the 27th annual GIPS Standards Conference on October 17^th - 18^th 2023 in Chicago, Illinois. As expected, it was filled with a lot of familiar faces, but also had quite a few first timers, which was nice to see.

Being almost a year into the SEC Marketing Rule and with implementation of the Private Fund Adviser Quarterly Statement Rule on the horizon, the hottest topics of this year’s conference were the sessions relating to regulatory compliance. These sessions included discussions with representatives from the U.S. Securities and Exchange Commission (“SEC”) answering practical questions related to adherence to these rules as well as sessions with senior performance professionals discussing the detailed performance methodology required to comply.

Other topics included a review of the proposed guidance statement for applying the GIPS standards to OCIOs, helpful advice for updating consultant databases, a proposed method to risk-adjust performance attribution, and some lessons on soft skills for leaders managing relationships.

SEC Marketing Rule

Michael McGrath, CFA, Partner with Dechert LLP and Robert Shapiro, Assistant Director, Division of Investment Management with the SEC together with Karyn Vincent, CFA, CIPM and Krista Harvey, CFA, CIPM of CFA Institute did an excellent job emphasizing the key lessons learned as we near the 1-year mark of the adoption of the Marketing Rule. Below are some key takeaways worth noting:

Defining “Performance”

Since the Marketing Rule requires investment managers to present performance net-of-fees, it is important for firms to define what they consider “performance.” The SEC takes a straightforward approach, generally considering any statistic that demonstrates how much an investor earned from an investment to be performance. But, even with this simple and easy to understand approach, there can be some grey areas.

Based on the discussions in this session, it seems to now be widely accepted that in addition to basic returns being considered performance that contribution is also considered performance, while attribution and most performance appraisal measures are not considered performance. Performance appraisal measures should be individually considered to confirm if they are demonstrating the amount earned (which would be performance) or if it is used as a measure of the manager’s skill(which would not be considered performance).

Some portfolio characteristics could also be a grey area that firms should be careful to consider before presenting solely as gross-of-fees. For example, yield was discussed at length. It was said that total portfolio yield for something like an enhanced cash portfolio likely would be performance because the yield in that case is essentially the return the investor earned. On the other hand, dividend yield for a growth strategy where this does not directly indicate the amount the investor earned *might* be performance. This really would come down to how it is presented and how material the yield is to the strategy. If material to the strategy’s return, this may be considered performance and, in this case, would need to be reduced by a model fee.

After determining that a statistic is not performance and will be presented based on gross-of-fee input data, it is important to clearly label these figures as gross. A disclosure under the table or chart that simply states something like, “Risk statistics are presented gross-of-fees,” should suffice.

There was also a lot of discussion relating to applying fees to extracted performance such as sector and holdings-level performance. It was made very clear that each segment must be reduced and presented net-of-fees so fees cannot just hit the cash segment or something like that. To achieve this, most firms are using a model fee. For example, if the highest fee for the strategy is 1% per year and quarterly sector returns are presented, each sector’s quarterly return is reduced by 0.25%.

Hypothetical Performance

Hypothetical performance has been a focus of the initial SEC enforcement actions taken against firms under the Marketing Rule. The main issue has been firms broadly distributing hypothetical performance without any policies and procedures in place to ensure the distribution of this type of performance is limited only to those that can be reasonably expected to understand it.

The key is that firms must document policies that clearly define the intended audience for a particular presentation of hypothetical performance and then ensure that the presentation only goes to this audience. In addition, documentation should include the tools necessary to understand the information provided. For example, the type of hypothetical performance should be clearly described as well as any assumptions made to create this performance.

Hypothetical performance is very broadly defined. It could be anything from a back-tested model to a paper portfolio or even just an aggregation of extracted returns (e.g., a composite of carveouts). It should be clear what the performance represents and consideration should be given to the complexity of the information, especially when determining it’s appropriate audience.

Private Fund Adviser Quarterly Statement Rule

Anne Anquillare, CFA, Head of US Fund Services with CSC Global Financial Markets and Pamela Grossetti, Partner with K&L Gates together with Krista Harvey, CFA, CIPM of CFA Institute walked us through the key elements to prepare for with the new Private Fund Adviser Quarterly Statement Rule. Below are some key takeaways worth noting:

The Compliance Date for the Quarterly Statement Rule is March 14, 2025. This may sound like a long time away, but it is important to keep in mind that the requirement to include cross-references to the underlying governing documents in the Quarterly Statement may require amendments to such documents before the first Quarterly Statement is issued, and this could be time consuming.

Under this new rule, private fund managers must distribute a quarterly statement to the investors in the fund within 45 days after each quarter ends and 90 days after year-end. This is required for any private fund that has at least two full quarters of operating results.

There are many items that must be included in the quarterly statements relating to general fund details like fees and expenses as well as disclosures that are cross-referenced to the private fund’s offering documents; however, being the GIPS conference, this presentation was primarily focused on the performance requirements.

The performance requirements for liquid funds are very different for illiquid funds. An illiquid fund is one that is not required to redeem interests when requested by an investor and has limited opportunities for an investor to withdraw funds prior to the fund’s termination. If a fund manager determines that their fund is liquid, the performance requirement for the quarterly statement is limited to showing the following three items, each in equal prominence:

1. Annual net-of-fee returns for each of the past 10 fiscal years (or back to inception if shorter)
2. Annualized net-of-fee returns for the past 1, 5, and 10 years through the end of the latest fiscal year (or since inception if shorter)
3. Year-to-date net-of-fee return for the current fiscal year

Illiquid funds have a much more significant requirement with 12 figures they are required to present:

Portfolio-Level

Investment-Level

Unlike the GIPS standards, under this rule, there is no exemption for funds that only use a subscription line of credit for a short period of time. Funds that utilize a subscription line of credit for any period are required to show the metrics listed above both with and without the subscription line.

Another notable difference from the GIPS standards is that this rule requires interest expense charged from the subscription line of credit to be added back when calculating the “without subscription line of credit” version of the required metrics. The GIPS standards do not require this adjustment.

It was also discussed that if these quarterly statements were provided to prospective investors instead of only current investors then they would also need to be reviewed to confirm that they meet the Marketing Rule on top pf the Quarterly Statement Rule.

Current State of SEC Exams

Mark Dowdell, Assistant Regional Director with the SEC together with Ken Robinson, CFA, CIPM from CFA Institute discussed current trends in SEC examinations. Below are some key takeaways worth noting:

There was a strong emphasis on the need for clear policies and procedures that have been customized for the firm. Specifically, it was emphasized that policies and procedures relating to hypothetical performance are not the only thing firms should make sure they add for the Marketing Rule. For example, if firms are presenting predecessor performance or extracted performance there should be documented policies for this as well.

It was mentioned that in addition to standard examinations, the SEC is also conducting some risk-based exams that may be limited in scope, but go very deep on a narrow area. This may even include the recalculation of performance in their own systems to get comfortable with the accuracy of presented figures.

Outside of the recent enforcement actions relating to hypothetical performance, the SEC continues to see firms make exaggerated or untrue statements relating to the number of staff they employ, the qualifications of staff, awards received, the use of AI in the investment process, and their adherence to ESG standards in the investment process. While it is okay to state opinions in marketing materials, statements of fact absolutely must be substantiated.

Developing a Database Strategy

Jill Banaszak, Global Head of Omni Success at eVestment lead a great session on getting the most out of 3^rd party and consultant databases.

The most important takeaway was the importance of using databases to tell the story of your firm in a complete and accurate way. Often firms leave a number of fields blank or neglect to revisit (or update) the narrative sections to remain accurate and in sync with their other messaging online or in marketing materials. Asset owners and their representatives use the databases to make short lists of firms meeting their criteria and many firms end up excluded as a result of blank fields or inconsistencies in messaging. At a minimum, firms should target completing at least 80% of the requested information.

It is also important to ensure information is completed timely and accurately. Firms should have monthly figures updated by the 12^th business day of the month at the latest to avoid missing out on searches. To avoid errors or incomplete information, firms should consider who is tasked with updating the information and also ensure this person or team is qualified and has access to all relevant information so it can be fully completed. Implementing a quality control process to double check the information is also important to avoid typos or other mistakes in the information presented.

Applying the GIPS Standards to OCIOs

There is currently an exposure draft of the Guidance Statement for OCIO Strategies out for public comment with comments due by 20 November 2023. This session was led by a group of panelists who were part of the OCIO working group that created this new guidance statement. The purpose of this guidance statement is to improve comparability between OCIO strategies. The primary change in this proposed guidance that deviates from the current requirements of the GIPS standards for firms is the required composite structure that all OCIO managers would need to follow.

The required composite structure would separate liability-focused composites from total return objective composites and would then further break the composites down by their allocation between risk mitigating assets and growth assets ranging from conservative to aggressive allocations. There are specific weightings defined for each that are intended to line up with commonly used OCIO benchmarks.

These new composites are only required to build out five years of history, but like other composites firms manage, must then build up to showing a ten year track record before any performance periods can be removed.

This guidance statement also proposes requiring both gross-of-fee returns and net-of-fee returns instead of only one because of the complexity of OCIO fees.

This guidance statement has not yet been officially adopted, but once approved, it is expected to allow for a 12-month implementation period for firms to update their policies and procedures, construct composites that align with the prescribed composite structure, and create GIPS reports for these new composites.

Conclusion

This year’s speakers did a great job providing clarification on the SEC Marketing Rule and other relevant topics that impact GIPS compliance and investment performance.

We were happy to see many old friends in person this year in Chicago and look forward to seeing everyone again next year in San Diego. It was announced that next year’s conference will be held on the 17^th – 18^th of September in San Diego, California!

If you have any questions about the 2023 GIPS Standards Conference topics or GIPS compliance and performance measurement in general, please contact us.

*A previous version of this article included a mistake for investment-level figures for illiquid funds. This has been corrected.