GIPS Compliance FAQs
Matt Deatherage, CFA and Cameron Payseno
December 16, 2020
Our team has assisted hundreds of firms and asset owners with their GIPS compliance. Over the years, there are some questions that we see quite frequently. This article lists each of these GIPS FAQs and provides some clarification to help navigate the GIPS standards.
Question 1: What are the requirements for distributing GIPS Reports?
The GIPS standards require that all qualified prospective clients and prospective investors (as defined in your GIPS Policies and Procedures) receive relevant GIPS Composite Reports or GIPS Pooled Fund Reports (“GIPS Reports”) once they initially meet this definition. If the prospect still meets this definition 12 months after they initially received the GIPS Report, they are required to receive an updated version of that Report at that time.
Prospective clients include individuals and institutions that are considering opening a segregated account that will be managed in line with any composite strategies. Prospective investors include individuals and institutions that are interested in investing in pooled funds. Additionally, if composite strategies or pooled funds are offered through intermediaries, these intermediaries also must be treated as prospects and must receive the GIPS Reports each year. This includes third party advisors, wrap sponsors, and institutional databases that are used to present strategy information. Responses to Requests for Proposal (“RFPs”) must also include a GIPS Report for any strategies or pooled funds discussed in the RFP.
To clarify, regarding pooled funds, providing the GIPS Report is only required if the fund is a “Limited Distribution Pooled Fund”; “Broad Distribution Pooled Funds” (most mutual funds in the US) are exempt from this requirement. For more information on distinguishing between broad and limited distribution pooled funds, please see question 9 below or check out How to Update Your GIPS Reports for the 2020 GIPS Standards.
Please keep in mind that the requirement to distribute GIPS Reports is relevant to any composite or limited distribution pooled fund a prospect may be interested in, even if they are considered “non-marketed” strategies. In other words, you must always distribute a GIPS Report to a prospect for the strategies they are interested in, even if the composite is not marketed, and even if the prospect doesn’t ask about GIPS or request the report.
Also, the 2020 GIPS standards now require proof that this distribution requirement was met. To do so, distribution now needs to be tracked. There is no required format, but most often this is either done in a CRM system or in Excel. The format must be such that it can be provided upon request to verifiers and/or regulators who wish to see evidence of compliance with this requirement. These internal logs should document who received the GIPS Report, when they received the GIPS Report, which GIPS Report they received, and the form of delivery.
Question 2: To comply with the GIPS standards, are we required to market all composite results and how can performance be presented outside of GIPS Reports?
GIPS Reports are the only required marketing document that must be created and maintained for composites and limited distribution pooled funds to comply with the GIPS standards. Outside of the distribution requirements to prospects (see Question 1), you are not required to present the performance of any composite. Most firms just have a few composites they actively market while the other composites exist primarily to meet the requirement of having every discretionary, fee-paying portfolio in at least one composite. What you choose to present outside of your GIPS Reports is outside the scope of GIPS and can include anything meaningful to your organization and strategies as long as it does not violate any local regulatory requirements, does not conflict with the information presented in the GIPS Report, and is not considered false or misleading.
When advertising, mentioning GIPS is optional. If mentioning GIPS, then either a GIPS Report must be included or the GIPS Advertising Guidelines can be followed instead. The GIPS Advertising Guidelines offer an abbreviated way to mention GIPS compliance without including a full GIPS Report. A checklist of the required advertising disclosures can be downloaded here: 2020 GIPS Advertising Disclosure Checklist.
Since the advertising provisions are optional, mentioning GIPS or the claim of compliance is not required in any documents outside of the GIPS Reports if not desired. Anyone claiming compliance with GIPS may maintain their current procedures for internal client reporting and other marketing documents, as long as there is consistency with GIPS in their strategies and how they hold themselves out to the public.
Question 3: What is the scope of a GIPS verification and are we required to be verified?
GIPS verification provides assurance on whether GIPS policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Compliance with all applicable requirements of the GIPS standards, even those beyond what is specified in the verification procedures, is required to claim compliance. Therefore, verification does not guarantee the accuracy of any specific performance presentation or set of statistics, but rather opines on the existence of a framework put in place to consistently apply the requirements of the GIPS standards.
During a verification, the selected verifier will use the GIPS policies and procedures to test various aspects of the established framework for GIPS compliance. Undergoing a verification is not a requirement to be able to claim compliance with GIPS, but it is a recommendation set forth by CFA Institute.
Question 4: When should composites utilize minimum asset levels and significant cash flow policies?
The GIPS Standards allow for the creation of composite-specific rules, such as minimum asset levels and significant cash flow policies. The purpose of both policies is to help ensure the composite results are a meaningful representation of the portfolio manager’s discretionary management.
Minimum asset levels ensure that small portfolios that may not be diversified the same as larger portfolios are excluded from composites; significant cash flow policies temporarily remove portfolios from composites for periods where the client is making contributions or withdrawals that are large enough to disrupt the management of the portfolio. Both policies require pre-determined thresholds to be documented in the GIPS policies and procedures document.
For example, if $100,000 is the minimum size needed to fully implement the composite’s strategy, a minimum asset level could be set at $100,000, which would then trigger the exclusion of all portfolios with assets less than $100,000. If a significant cash flow policy has a threshold of 20%, this means that any period where a portfolio experiences a contribution or withdrawal of 20% or more of the portfolio’s fair value, the portfolio is temporarily excluded from the composite for that performance period. Detailed rules must be documented to specify exactly how long the portfolio remains excluded and should be based on the typical amount of time needed to bring the portfolio back in line with the composite’s strategy.
Since these policies are composite-specific, each composite can have different thresholds. You may also elect to set up these policies for some, but not all composites. The most important factor in determining if these policies should be implemented for a composite is whether asset amounts are important to implementation of the strategy and if big external cash flows materially disrupt the investment process. If the strategy is very liquid then these policies may not be necessary. Also, if the composite is large in terms of number of portfolios, a little dispersion caused by small portfolios or portfolios experiencing significant cash flows may have only a very minor impact on the composite results. If the impact is small, the burden of administering the policy may not be worth the effort.
Another important consideration is whether adding these policies to a composite could create performance breaks in the future. If a composite is very small in terms of number of portfolios, these policies should not be utilized unless they are essential to create meaningful composite results. If utilizing these policies creates a scenario where all the composite’s portfolios are excluded for the same period, there will be a break in the performance track record that cannot be linked.
Question 5: When are we required to file the GIPS Compliance Notification form?
GIPS compliant firms and asset owners are required to notify CFA Institute of their claim of compliance once they initially become compliant and once a year thereafter (before June 30th of each calendar year). We recommend setting reminders on your internal compliance calendar to make sure this requirement is not missed. Firms and asset owners are allowed to complete this form each year between January 1st and June 30th with information based on December 31st of the prior year. Once the annual form is filed, save the email confirmation from CFA Institute. Firms and asset owners that are verified are required to provide this confirmation to their verifier to support that this requirement was met.
Question 6: How do we determine the discretionary status of a portfolio for GIPS purposes?
Not all portfolios with discretionary contracts are considered discretionary for GIPS purposes. Portfolios with material, client-mandated restrictions may be deemed non-discretionary if they are not a meaningful representation of the portfolio manager’s discretionary management. Documentation of the definition of discretion must be maintained in your GIPS policies and procedures to ensure clear criteria can be consistently applied when determining the discretionary status of each portfolio.
The most common criteria documented that trigger portfolios to be deemed non-discretionary for GIPS include:
- Investment restrictions that affect over X% of portfolio assets
- Portfolio manager must obtain client approval prior to trade execution
- Tax sensitivity that restricts trading or requires the harvesting of gains/losses
- Client directed use of margin
- Liquidity needs and/or recurring contributions or distributions
- Restrictions on credit ratings or duration
Please note that this is not an all-inclusive list, nor is it a list of required criteria. We recommend documenting examples that are meaningful to your organization and the types of strategies managed.
Utilizing percentage thresholds can help ensure the criteria is applied consistently. For example, if you manage clients with legacy positions (and these positions cannot be segregated from the strategy for performance purposes) you can set a percentage threshold to indicate when the size of the position is large enough to require exclusion from the composite. Specifically, this means that if the threshold is set at 10%, portfolios with restricted positions totaling less than 10% will be included in the composite while portfolios with restricted positions totaling 10% or more will be excluded from the composite. Using a threshold rather than excluding all portfolios with restrictions in any amount helps reduce the number of non-discretionary portfolios and allows as many portfolios to be included in composites as possible. Again, applying a clear threshold helps ensure there is consistency in the determination of discretionary status.
Question 7: Before we change our portfolio accounting system, what GIPS questions should we consider?
Because the cost of portfolio accounting systems can be significant, it is common to re-evaluate options and occasionally switch systems when feasible to do so. When considering a new system, it is critical that you confirm that the new system’s calculation methodology meets the minimum requirements set forth in the GIPS standards. If considering a newer system that is not well known, it is best practice to confirm that the system has current users that are GIPS compliant and that these users have had their GIPS compliance verified by a reputable GIPS verification firm. Confirming this can provide added comfort that the calculation methodology has been tested.
Once you know that the system meets the requirements of the GIPS standards as well as other general accounting and reporting needs, it is important to plan the logistics of the conversion. Part of this includes ensuring that the historical performance track record is maintained and can be adequately supported to meet the books and records requirements of the GIPS standards.
Standards related to books and records require the ability to support everything reported in your GIPS Reports. Portfolio-level holdings, transactions, prices, etc. should be maintained to be able to reproduce or prove out any statistics requested by a verifier or regulator. If historical results are hardcoded in the new system without portfolio-level details, it is important to ensure that transactions, holdings, prices, etc. are still retrievable in the prior system or from the custodian.
If historical transaction details will be added to the new system, it is important to consider if the historical portfolio and composite results will be hardcoded from the old system or recalculated in the new system. This is because the new system may have a different calculation methodology than the old system (e.g., daily valuation instead of only revaluing for large cash flows) and the historical results may change when recalculated in the new system. The GIPS standards do not allow for a retroactive change to calculation methodology so this new method should only be applied prospectively.
Additionally, we strongly recommend having an overlapping period where both systems run concurrently. Especially when historical periods are recalculated in the new system, it often takes time to get this historical data reconciled to match the old system.
The final consideration includes updating GIPS policies and procedures documents to reflect changes. Documentation of the portfolio accounting change should be made with details describing any changes to methodology. The date of the conversion must be clearly documented with a clear description of what the methodology was before that date and what it will be going forward.
Question 8: What is required when a making a benchmark change?
The GIPS Standards allow changes to the benchmarks used in the GIPS Reports if a different benchmark is considered a more meaningful comparison to the strategy. When a benchmark change is made, benchmark(s) can either be changed prospectively or retroactively.
Prospective benchmark changes are typically made when the composite or pooled fund strategy has shifted and a different benchmark will be a more meaningful comparison for the strategy going forward, while the old benchmark is still the best benchmark for the older periods. Retroactive benchmark changes are typically made when a new benchmark is determined to be a more meaningful comparison for the entire history of the strategy.
Both prospective and retroactive benchmark changes require disclosure in the GIPS Report that had the change. Prospective changes must be disclosed for as long as the original benchmark remains part of the presented information, while the disclosure of a retroactive change may be removed after a one-year period. For example disclosure language see: 2020 GIPS Report Disclosure Checklist.
Question 9: How do we determine if our pooled funds are considered limited or broad distribution and what is different about applying the GIPS standards in each case?
New to the 2020 edition of the GIPS Standards is requirements specifically addressing the presentation of performance to prospective investors in pooled funds. Pooled funds now must be classified as either broad or limited distribution. The best approach to determine this classification is to look at the way these funds are discussed with prospective investors.
If the sales communications are done exclusively in a private, one-on-one setting, the fund is likely a limited distribution pooled fund (e.g., a pooled vehicle set up as a limited partnership). If the fund is offered to prospective investors publicly (e.g., a mutual fund), the fund is likely a broad distribution pooled fund. The determination on whether your pooled fund is a broad or limited distribution fund must be done at the total fund, not share class, level.
Anyone claiming GIPS compliance is required to maintain a list of both types of funds and must include descriptions for the limited distribution funds (descriptions are not required for broad distribution pooled funds). GIPS Reports must be provided to all prospective investors of limited distribution pooled funds, but this is not required for prospective investors in broad distribution pooled funds.
The GIPS Report can be specific to the limited distribution pooled fund itself or it can be for the composite in which the pooled fund is included. Whether providing a GIPS Pooled Fund Report or a GIPS Composite Report, the detailed fees of the fund including the fund’s total expense ratio must be included. For more information on this requirement check out How to Update Your GIPS Reports for the 2020 GIPS Standards.
Regardless of the type of pooled fund, if it meets the definition of an existing composite (i.e., a composite created for segregated accounts), the fund must be included in the composite. If no composite exists matching the strategy of the fund, there is no longer a requirement to include the fund in a composite (i.e., beginning in 2020 creating composites for pooled funds is no longer required if the strategy is only offered to prospective pooled fund investors).
Question 10: When do the GIPS standards allow the calculation of money-weighted returns instead of time-weighted returns?
The use of money-weighted returns (“MWR”) in GIPS Reports instead of time-weighted returns (“TWR”) has broadened under the 2020 edition of the GIPS standards. MWRs may be shown in addition to TWRs if desired; however, if replacing TWR with MWR, certain criteria must be met. Specifically, the manager must control the timing and amount of the external cash flows for the strategy and must also meet at least one of the following criteria:
- The investment vehicle must be closed-end
- The investment vehicle must have a fixed-life
- The investment vehicle must have fixed commitments, or
- A significant portion of the assets in the strategy must be illiquid investments
If a strategy meets these requirements, then the option to present only MWR in the GIPS Report is available, but not required (TWR can still be used if preferred). When switching the returns from TWR to MWR (or vice versa) in the GIPS Report, the change must be disclosed. Switching methodologies should be avoided unless absolutely necessary as one method should be selected as the most meaningful representation of the strategy’s performance. Examples of disclosure language are available here: 2020 GIPS Report Disclosure Checklist.
If you have questions contact us or email Matt Deatherage at firstname.lastname@example.org.