GIPS Compliance Actions for the New Year

Your firm works hard to comply with the Global Investment Performance Standards (GIPS®) and likely expects the benefits of GIPS to far outweigh any burden associated with maintaining compliance.

Most of the policies and procedures your firm set when first becoming compliant will never need to change; however, as both the standards and your firm evolves, it is beneficial to conduct a high-level review of your GIPS compliance each year. This high-level review will help ensure that you continually refine your processes and policies to maximize the benefits of claiming compliance with GIPS year after year.

Before getting into the specific aspects to review, you should first make sure you have the right people involved. One person or department may be responsible for managing the day-to-day tasks that maintain your GIPS compliance; however, high-level oversight from a larger group should take place to help ensure that any decisions made or policies set will integrate well with your firm’s other strategic initiatives.

This larger group, often called a GIPS Committee, typically consists of representatives from compliance, marketing, portfolio management, operations/performance, and senior management.

Not everyone on the committee needs to be an expert in the GIPS standards. In fact, many will not be. What they will need is to be available to share their opinions and represent their department’s interests when establishing or changing key policies for your firm.

Your GIPS expert/manager can set the agenda for your meeting and can provide any background on the requirements that will be part of the discussion. If you do not have a GIPS expert internally, or need independent advice about your policies and procedures, a GIPS consultant can be hired to help.

High-Level GIPS Topics to Consider Annually

Once you select the right group to represent each major area of your firm, the following high-level questions can help determine if any action is necessary to improve your GIPS compliance this year:

  • Have there been any changes to the GIPS standards?
  • Have there been any material changes to your firm or strategies?
  • Do your composites meaningfully represent your strategies or should their structure and descriptions be reconsidered?
  • Are the materiality thresholds stated in your error correction policy appropriate for the type of strategies you manage and are they consistent with the thresholds set by similar firms?
  • Are you satisfied with the service received from your GIPS verifier for the fee that is paid?
  • Is there any due diligence you need to conduct on your verification firm?

Changes to the GIPS Standards

It is important to consider whether there have been any changes to the GIPS standards since last year that would require your firm to take action. For example, if a new requirement is adopted, you should consider if any changes to your firm’s policies and procedures or compliant presentations are needed.

Keep in mind that GIPS compliant firms must comply with all requirements of the GIPS standards including any updates that may be published in the form of Guidance Statements, Questions & Answers (Q&As), or other written interpretations.

If your firm is verified or works with a GIPS consultant, these GIPS experts are likely keeping you informed of any changes to the standards. The best way to check for changes yourself is to visit the “Standards & Guidance” section of Specifically, you should check the “GIPS Q&A Database” where you can enter the effective date range of the previous year to see every Q&A published during this period. You should also check the “Guidance Statements” section. The guidance statements are organized by year published, so it is easy to see when new statements are added.

Changes to Your Firm or Strategies

Similar to changes in the standards, it is important to also consider whether any changes to your firm or its strategies would require you to take action. Examples include, material changes in the way a strategy is managed, a new strategy that was launched, an existing strategy that closed, mergers or acquisitions, or anything else that would be considered a material event for your firm.

Even if no changes were made this year, you should still read your entire policies and procedures document at least annually to make sure it adequately and accurately describes the actual practices followed by your firm.

Regulators, such as the Securities and Exchange Commission (SEC), commonly review firms’ policies and procedures to ensure 1) that the document includes actual procedures and is not simply a list of policies and 2) that the stated procedures truly represent the procedures followed by the firm. Many firms have created their policies and procedures document based on template language, so tweaks may be necessary to customize the document for your firm.

Meaningful Composite Structure

The section of your GIPS policies and procedures requiring the most frequent adjustment is your firm’s list of composites, as you must make changes each time a new composite is added or a composite closes. However, even without adding new strategies or closing older strategies, the list of composites and their descriptions should be reviewed at least annually to ensure they are defined in a manner that best represents the strategies as you manage them today.

Since your firm’s prospects will compare your composite results to those of similar firms, it is important that your composites provide a meaningful representation of your strategies and are easily comparable to similar composites managed by your competitors. If a review of your current list of composites leads you to realize that your strategies are defined too broadly, too narrowly, or in a way that no longer accurately describes the strategy, changes can be made (with disclosure).

Keep in mind that changes should not be made frequently and cannot be made for the purpose of making your performance appear better. Changing your composite structure for the purpose of improving your performance results, as opposed to improving the composite’s representation of your strategy, would be considered “cherry picking.”

Two examples of cases that may require a change in your composites include:

  1. A strategy has evolved and certain aspects of the way the strategy was managed and defined in the past are different from today. This can be addressed by redefining the composite. Redefining the composite requires you to disclose the date, reason, and nature of change. This disclosure will help prospects understand how the strategy was managed for each time period presented and when the shift in strategy took place. Changes like this should be made to your composite descriptions at the time of the change, but an annual review can help you address any items that may have been overlooked when the change occurred.
  2. A composite is defined broadly to include all large capitalization accounts. Within this large capitalization composite, there are accounts with a growth focus and others with a value focus. If your closest competitors are separately presenting large capitalization growth and large capitalization value composites, your broadly defined large capitalization composite may be difficult for prospects to meaningfully compare to your competitors. To address this, you can create new, more narrowly defined composites to separate the accounts with the growth and value mandates. In this case, the full history will be separated and the composite creation date disclosed for these new composites will be the date you make the change. Note that this will demonstrate to prospective clients that you had the benefit of hindsight when determining the definition.

Materiality Thresholds Stated in Your Error Correction Policy

Another section of your firm’s GIPS policies and procedures that should be reviewed in detail is your error correction policy. Your error correction policy includes thresholds that pre-determine which errors (of those that may occur in your compliant presentations) are considered material versus those deemed immaterial. These thresholds cannot be changed upon finding an error; however, they can be updated prospectively if you feel a change would improve your policy.

Many firms had a difficult time setting these thresholds when this requirement first went into effect back at the start of 2011. Now that much more information is available to help you determine these thresholds, such as the GIPS Error Correction Survey, you may want to revisit your policy to ensure it is adequate.

Setting and approving materiality thresholds that determine material versus immaterial errors is a task best suited for your firm’s GIPS committee rather than your GIPS department or manager. The reason for this is that opinions of what constitutes a material error will vary from one department to another. Your committee can help find a balance between those with a more conservative approach and those with a more aggressive approach to ensure the thresholds selected are appropriate.

GIPS Verifier Selection and Due Diligence

If your firm is verified, it is important to periodically evaluate whether you are satisfied with the quality of the service received for the fees paid. You may also want to consider whether you need to conduct any periodic due diligence on your verification firm with respect to data security or other concerns important to your firm.

All verifiers have the same general objective: to test and opine on 1) whether your firm has complied with all of the composite construction requirements of the GIPS standards and 2) whether your firm’s GIPS processes and procedures are designed to calculate and present performance in compliance with GIPS. Where they differ is in the fees charged and process followed to complete the verification.

With regard to fees, much of the difference between verifiers is based on their level of brand recognition rather than differences in the quality of their service. For example, smaller firms specialized in GIPS verification may have more experience with the intricacies of GIPS compliance than a global accounting firm; yet, a global accounting firm will likely charge the highest fee. When selecting a higher fee firm, it is important to consider whether the higher fee is offset by the benefit your firm receives when listing their brand name as your verifier in RFPs you complete.

With regard to process, the primary difference between verification firms is whether the verification testing is done onsite or remotely. There are pros and cons to both methods and it is important for your firm to consider which works best for the team that is fielding the verification document requests.

The onsite approach may result in finishing the verification in a shorter period, but may be disruptive to your other responsibilities while the verification team is in your office. The remote approach may be less disruptive to your other responsibilities, but likely will take longer to complete and may be less efficient as documents are exchanged back and forth over an extended period of time. Another difference is how the engagement team is structured, whether you can expect to work with the same team each year, and how much experience your main contact has.

Regardless of whether the verification is conducted onsite or remotely, be sure to ask any verifier how your proprietary information and confidential client data is protected. If the work is done remotely, how are sensitive documents transferred between your firm and the verifier (e.g., is it through email or a secure portal) and once received by the verifier, do they have strong controls in place to ensure your data is not breached.

If the work is done onsite, it is important to ask what documents (or copies of documents), if any, the verifier will be taking with them when they leave, and whether these documents are saved in a secure manner. Documents saved locally on a laptop are at higher risk of being compromised.

For more information on how to maximize the benefits your firm receives from being GIPS compliant or for other investment performance and GIPS information, contact Sean Gilligan at

Did you miss this year’s GIPS® conference? Here are the key takeaways:

Last week, CFA Institute hosted the 19th annual GIPS Conference in San Diego, California.

Paul Smith, CFA, CEO and President of CFA Institute, delivered the opening address for this year’s conference. He referred to GIPS as CFA Institute’s single most successful product and explained his intention to increase the Institute’s marketing efforts with regard to promoting GIPS around the world.

Smith specifically emphasized the importance of GIPS to developing-market regions. Given that he is based in Hong Kong, I would expect that he will specifically work to promote GIPS in Southeast Asia and other developing regions to help make the standards truly global.

Because there have not been many recent changes to the GIPS standards, much of the conference was focused on general performance and risk topics, as well as US-specific (SEC) regulatory compliance. Below are the key takeaways from this two-day event. Please note that the information provided for non-GIPS topics is based on the opinions expressed by the conference speakers and does not necessarily reflect the opinions of CFA Institute or any other organization.

GIPS-Specific Takeaways

Supplemental Information Disclosures are Not Required Outside of Compliant Presentations

It was clarified that supplemental information disclosures are only required when presenting supplemental information directly on a compliant presentation page. For example, if creating a pitch book with several pages of composite information, supplemental information (e.g., statistics derived from a representative account, carved-out performance, specific holdings, etc.) only needs to be labeled as supplemental if presented on the actual compliant presentation page (i.e., the page with all of your required GIPS statistics and disclosures). If you include supplemental information on pages other than the compliant presentation page, it does not need to be labeled as supplemental and no disclosures are required.

This is a significant shift from how this requirement was interpreted in the past. Previously, most firms interpreted the supplemental information guidance to require any supplemental information included in a presentation to be labeled as such, regardless of what page it was presented on. Other than pure gross returns for wrap composites, it is rare for firms to include supplemental information directly on the compliant presentation page. With this new interpretation, most firms will not need to use supplemental information disclosures at all.

The GIPS Interpretations Committee is working on creating new guidance on this topic that will be published soon. It is important to note that this guidance will not be official until the updated guidance statement is published. It is best to wait until the final guidance statement is available before making any changes to presentations in case changes are made to this guidance as it goes through the process of being approved and finalized.

Submission of Firm Notification Form Now Needs to be Verified

It was announced that verifiers will be required to conduct annual testing to ensure that the firms they verify have submitted their notification form, informing CFA Institute of their status as a GIPS compliant firm. The form must be submitted by 30 June each year, answering the questions about their firm as of 31 December of the prior year.

For most firms, verifiers can simply check to ensure the firm they are verifying is on the published list of compliant firms; however, if your firm has elected to be excluded from this list, it is recommended that you maintain a record of the submission to provide to your verifier.

If your firm has not yet submitted the form that was due 30 June 2015, there is no penalty for late submission, and the recommendation is that you log on and complete the notification form as soon as possible. Click here to complete the form now.

New Pooled Fund Advertising Guidelines will be Distributed for Public Comment During 4Q 2015

GIPS compliant firms are very familiar with the requirement to provide all prospective clients with a compliant presentation, but there has been some confusion as to whether the term “prospective client” includes new investors in funds and other pooled vehicles. It would be very difficult to provide all prospective investors in a fund a compliant presentation, so most firms have followed this requirement by only providing compliant presentations to prospective, separate account investors.

New guidance on how to present performance information to prospective pooled fund investors has been drafted and is scheduled to be distributed for public comment during 4Q 2015. This guidance is expected to require GIPS compliant firms that manage broadly distributed pooled funds to include specific performance and disclosure information in each fund’s prospectus or similar offering documents.

This new requirement is designed to ensure there is consistency and completeness in the way GIPS compliant firms market to prospective pooled fund investors. Many of the required statistics and disclosures are expected to be similar to what is already required by most regulators, so material changes to offering documents may not be necessary.

If you are a GIPS compliant firm that manages broadly distributed pooled funds, please provide feedback during the public comment period to ensure your point of view is considered before this guidance is finalized.

Regulatory (SEC) Compliance Takeaways

Are “Canned” Compliance Policies and Procedures Provided by Consultants Sufficient?

Many firms use “canned” policies and procedures that do not sufficiently describe the actual practices of their firm. It is important to consider whether your compliance policies and procedures are tailored to match your firm or if they are generic, template language provided by a consultant and could be applied to any firm. At a minimum, it is important to ensure that your policies do not state that you are doing something that you are not actually doing.

Policies should have a strong emphasis on employee education, both for new hires and for ongoing training, to demonstrate a proactive approach to creating a “culture of compliance.” Most importantly, ensure that you are able to consistently apply any policy created.

What are the Key Elements of a Compliance Program?

Firms often make their compliance program more complicated than it needs to be. Keep it simple and focus on the following three points:

  1. Risk Assessment – Clearly document how you assess your firm’s risk areas.
  2. Annual CCO Review – Compliance programs should evolve over time to ensure they are sufficiently meeting the needs of your firm, but do not make changes simply to give the impression of making improvements when no changes are necessary. Firms often overdo this. If your firm has not experienced significant changes, your program does not need to change much either.
  3. Calendar/Checklist – This is the most important element of your compliance program. Your compliance calendar is your opportunity to demonstrate your firm’s protocol. If your firm has multiple offices, ensure testing covers all locations and not just your headquarters. Not thoroughly monitoring and testing the compliance procedures of outside offices is a common issue.

What Should Firms do to Prepare for an SEC Examination?

Many firms hire an outside consultant to conduct mock audits, but this can actually be counterproductive. Unless conducted by an attorney, with whom you would have attorney-client privilege, the findings from a mock audit are discoverable by the SEC. This means you are essentially handing the SEC a list of your firm’s weaknesses.

Your time may be better spent working with a consultant building the most robust compliance program you can and ensuring your compliance officer is prepared to confidently represent your firm in the event of an examination.

What are the Current Focus Areas of SEC Examiners?

In addition to the common recurring items that SEC examiners focus on, such as custody, assets under management, marketed performance presentations, suitability, and conflict disclosures, the following are areas currently being emphasized in SEC examinations:

  • Cyber Security – Examiners are looking to make sure cyber security has been considered and policies and procedures have been developed and implemented to protect client data. Firms are responsible for conducting due diligence on their vendors as well, to ensure policies are in place to protect any client data that vendors can access.
  • Fees – There are several areas where fees are being tested by examiners, including:
    • Testing to ensure investors are not placed in wrap or asset-based fee structures for strategies that are not heavily traded, resulting in the investor paying higher transaction costs than if they were on a traditional commission structure.
    • Comparing similar accounts that follow the same strategy to ensure fees are consistent. While it is understood that larger accounts may pay smaller fee percentages, accounts that are the same size and are managed the same, but pay different fees, may be questioned.
    • Reviewing fee structures to ensure they are reasonable and justified for the complexity of the strategy employed.
    • Targeting retirement accounts in their testing sample to ensure the account balances are not being “eaten up by fees.” The SEC feels these types of accounts are especially important to protect, given the reliance individual investors have on these accounts for their future financial security.
    • Examining alternative strategies to ensure both suitability and fees are reasonable and appropriate for the investors.
  • Back-tested Performance – Examiners are looking for “fair and balanced” disclosures. Having multiple drafts of back-tested performance, each with small tweaks until the historical performance looks the best it could, can be an issue if the final version is not clearly based on a repeatable process that the back-tested performance is helping market.
  • Dispersion – Examiners are using dispersion to test that composites or other groupings of accounts are meaningful and that accounts are not included in the wrong composite.
  • Calculation and Distribution of Performance –Examiners are recalculating performance to test results. Even if an independent party has verified your performance, the SEC examiner will likely recalculate your performance to ensure they get to the same results. The distribution and presentation of performance is equally as important as the calculation itself. Even accurate performance could be deemed misleading if matched against an inappropriate benchmark or presented for a select time period that excludes poor performance periods.

Client Reporting Takeaways

Is your firm’s client reporting meaningful for individual investors?

Although the GIPS standards focus on performance reporting for marketing purposes, client reporting was also discussed at the conference. Institutional investors likely want to see detailed performance reports including performance attribution and risk measures; however, if you work with individuals, the reporting that would be beneficial for this type of investor may be quite different.

Once an individual becomes your client, your periodic performance reports are probably the most important tangible item you provide. Given the importance of this document, it is essential that time is taken to ensure the information you are providing is meaningful to that specific client. Consider the following:

  • Is the performance information that you report to your clients easy for them to understand?
  • Do they care if you beat the benchmark or would they rather see a status report demonstrating the progress made toward achieving their financial goals?
  • Does your report help build advocacy and trust in your relationship, or is it just confusing for the client?
  • Do you think your clients read and find value in your reports, or are they disregarded?

Take the time to consider how you add value to your clients, why you are worth a higher fee than a “robo-broker” and demonstrate this value in your client reporting.

Other sessions included a discussion of fee transparency, the use of Active Share in assessing managers, the use of money-weighted returns, insights on manager search and selection, and ex-ante risk evaluation. For more information on these topics or to discuss the key takeaways noted above, please contact Sean Gilligan at