GIPS Compliance Actions for the New Year 2020

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.

This year, conducting a review of your firm’s GIPS compliance is especially important because of the 2020 Edition of the GIPS Standards that was published in mid-2019. For information specific to the 2020 changes, please check out 2020 GIPS Standards: Prepare for the Changes.

Even without the release of a new edition of the standards, each year you should conduct a review. In the 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 compliance 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 GIPS Reports 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 www.gipstandards.org. 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.

With the new 2020 Edition of the GIPS Standards, a review of the changes to determine how they affect your firm is especially important this year. These changes must be fully adopted before presenting returns in your GIPS reports for periods ending on 31 December 2020 or later.

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 composite descriptions, as you must make changes each time a new composite is added or if a composite closes. However, even without adding new strategies or closing older strategies, the list of composite 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 composite descriptions 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 and description of the 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 GIPS Reports) 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.

With several mergers, acquisitions, and start-ups in the verification community over the last few years, you may need to do some research to ensure you are familiar with what your options are when selecting a verification 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 a higher 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.

Questions?

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

2020 GIPS Standards: Prepare for the Changes

The 2020 edition of the Global Investment Performance Standards (“GIPS®”) was released to the public at the end of June 2019 and with it comes a number of changes that firms will need to address. To maintain compliance with the GIPS standards, firms must make the required changes necessary to follow all requirements of the 2020 GIPS standards prior to presenting information through 31 December 2020 in their firm’s GIPS Reports.

All firms and asset owners complying with the GIPS standards will be required to at least make some changes to disclosures and the terminology used in their GIPS policies and procedures. Some firms will require more work. The following questionnaire is designed to help firms determine if converting to the 2020 GIPS standards will require more than a few minor tweaks for their firm. This list does not include all changes, but includes the top ten material changes that may require a project plan to be put in place to be able to implement the required changes by the effective date of the 2020 GIPS standards.

If your firm answers “Yes” to any of the following questions, a project plan should be established to address how the 2020 changes will be implemented at your firm prior to presenting 2020 performance in your firm’s GIPS Reports:

Key Questions to Consider

  1. Does your firm have limited distribution pooled funds (i.e., private funds that are not regulated under a framework that would permit the general public to purchase shares in the fund without a one-on-one presentation)?
  2. Has your firm created single account composites for pooled funds solely for the purpose of meeting the GIPS requirement of having every discretionary, fee-paying portfolio in at least one composite?
  3. Does your firm have multi-strategy portfolios (e.g., balanced portfolios where the equity and fixed income segments each could be represented as standalone strategies) where you would like to carve-out the individual strategies into their own composites?
  4. Does your firm have portfolios where actual transaction costs are unavailable (e.g., wrap accounts or other bundled fee arrangements)?
  5. Does your firm have portfolios where your firm controls the amount and timing of external cash flows (other than for private equity or real estate)?
  6. Does your firm have real estate or private equity composites?
  7. Does your firm include theoretical performance (e.g., model performance) as part of a GIPS report?
  8. Does your firm follow the Advertising Guidelines to claim compliance with the GIPS standards outside of your GIPS reports?
  9. Does your firm currently update your GIPS compliant presentations more than 12 months after the year ends?
  10. Does your firm have advisory-only assets or uncalled committed capital you wish to present in your GIPS Report?

Need Help Navigating or Implementing the 2020 GIPS Standards?

As a consulting firm specialized in investment performance and the GIPS standards, Longs Peak Advisory Services (“Longs Peak”) is available to help implement the 2020 GIPS standards for your firm. Verification firms are required to remain independent, which means they can provide your firm with advice, but they cannot actually “get their hands dirty” making the changes for you.

Whether you answered “Yes” to any of the questions above or if you just need help with the minor tweaks all firms need to make, Longs Peak is available to help. Please reach out to us and we can create a project plan to help your firm prepare to comply with all requirements of the 2020 GIPS standards.

A Personal Note From Our Founder

Today, September 3, 2018, Longs Peak turns 3 years old! Over the last 3 years we have provided investment performance and GIPS consulting services to over 70 investment firms and we are proud that, for many of these firms, we helped them claim compliance with the GIPS standards for the first time.

To celebrate this occasion, instead of writing a technical blog about performance and GIPS, I’d like to share what this date means to me each year.

September 3rd was not an arbitrary date to launch our firm. This date is significant to me because on September 3rd 2003 I had my first open heart surgery to repair an aortic aneurysm and to replace my aortic valve with a valve from a pig. Exactly ten years later, on September 3rd 2013, I had a second open heart surgery to replace my pig valve with a valve from a cow because my pig valve had torn.

Going through these surgeries and the recovery periods that followed was not easy, but I made a conscious decision to embrace being part farm animal and focus on the positive. These experiences motivated me to live my life to its fullest potential. This means something different to everyone, but for me, this meant taking chances to ensure I didn’t look back on my life wishing I’d had the courage to do something I was too scared to try. One of the biggest chances I took was leaving a great job to start Longs Peak. This was one of the scariest decisions I’ve ever made, but it has been one of the most rewarding adventures of my life, thanks to our wonderful clients and amazing team.

Over the years, this mentality has pushed to make decisions that help me truly experience life outside of work as well. Specifically, on or around September 3rd each year, I celebrate my life and health by doing something I would not have been able to do if it weren’t for the success of these surgeries. In previous years I have run a marathon, completed long hikes, and climbed 14ers (mountains in Colorado above 14,000 feet), but this year I am taking it to a new level!

With this year being both the 5th and 15th anniversaries of my two surgeries, I was looking for a big physical challenge as well as a way to encourage the people around me to live long, healthy, and satisfying lives. This year, I have decided to climb Mount Kilimanjaro as a fundraiser for the American Heart Association, which I will do during the second half of this month.

GillyDoesKiliPicture

The American Heart Association’s mission is to be a relentless force for a world of longer, healthier lives. Without the hard work of organizations like this, the idea of putting parts of farm animals into people would sound ridiculous. Actually, it still does sound ridiculous, but it works, and it gives people like me the opportunity to live full and complete lives.

I would love to have your support in this adventure. If you are interested in contributing to the fundraiser, donations of any amount are greatly appreciated and can be made through the link below. Please note that as my contribution to this cause I will personally match all donations up to $2,500.

Link to fundraiser page: Gilly Does Kili