Key Takeaways from the 2020 GIPS® Standards Virtual Conference
Sean P. Gilligan, CFA, CPA, CIPM and Sara Celapino
November 11, 2020
The week of October 26th, CFA Institute hosted the 24th annual GIPS Conference. It was the first of its kind, with speakers presenting virtually from the comfort of their own homes and offices.
Most of this year’s conference was focused on compliance with the 2020 GIPS standards, as well as important discussions around US-specific (SEC) regulatory compliance and ESG performance. Below are some key takeaways from this three-day event.
Specific Takeaways Relating to GIPS Compliance
The 2020 GIPS standards were released at the end of June 2019, so the industry has had some time to absorb the updates that were made. All changes firms are required to make must be completed before presenting performance for periods including 31 December 2020 in the firm’s GIPS Reports.
With the end of 2020 fast approaching, the conversion to the 2020 standards was the focus of this year’s conference. We have previously published information relating to converting your GIPS Reports and Policies and Procedures for GIPS 2020 so we will not repeat that all here, but below are some of the key points that were emphasized during the conference:
Broad vs. Limited Distribution Pooled Funds
The treatment of pooled funds is one of the most significant changes made to the GIPS standards for 2020. Since the requirements for how pooled funds are treated differ depending on whether they are classified as Broad Distribution Pooled Funds (“BDPF”) or Limited Distribution Pooled Funds (“LDPF”), the speakers emphasized how to distinguish between the two.
Pooled funds are different than segregated accounts in that their ownership interests may be held by more than one investor. A BDPF is regulated in a way that permits the general public to purchase or hold the fund’s shares, and this type of pooled fund is not exclusively offered in one-on-one presentations. On the other hand, a LDPF is any pooled fund that does not fit into the category of a BDPF.
The classification between the two types of pooled funds is made at the fund level rather than the share class level. Some common examples of BDPFs include pooled funds with at least one retail share class and pooled funds with shares traded on an exchange. The most common BDPFs in the U.S. are mutual funds. LDPFs include any pooled fund that a firm offers exclusively in one-on-one presentations.
The distinction between the types of pooled funds is important because there are different requirements that need to be met depending on whether the fund is a BDPF or LDPF. Specifically, firms are not required to provide a GIPS Report to BDPF prospective investors, but they must make every reasonable effort to provide a GIPS Report to all LDPF prospective investors when they initially become a prospect and every twelve months thereafter for as long as they remain a prospective investor.
The GIPS Report provided to LDPF prospective investors can be either a GIPS Pooled Fund Report or a GIPS Composite Report for the composite in which the LDPF is included. Regardless of which is provided, the report must disclose the fees specific to the fund including the fund’s total expense ratio. Firms choosing not to create a separate GIPS Pooled Fund Report may wish to maintain multiple versions of their GIPS Composite Report so a version with pooled fund fees can be provided to prospective pooled fund investors and a version with just management fees can be provided to prospective segregated account clients.
Firms Must Gain an Understanding of their Verifier’s Policies for Maintaining Independence
Independence is an important topic relating to GIPS verification. Ensuring that verifiers do not step into a management role, set policies, calculate returns, etc. is essential for the verification to be meaningful. Only when the verifier remains independent will the verification letter truly represent the opinion of an unbiased third-party.
Firms are not required to be verified but investing in verification brings additional credibility to a firm’s claim of compliance. At the GIPS Conference, the speakers emphasized that under the 2020 GIPS standards, if a firm chooses to be verified it must:
- Gain an understanding of the verifier’s policies for maintaining independence.
- Consider the verifier’s assessment of independence.
This is an ongoing process, and these steps must be performed with each verification engagement. To properly adhere to these requirements, firms should obtain a summary of the verifier’s policies for ensuring independence and have sufficient discussions with the verifier to understand the policies and identify any conflicts of interest.
When issues come up that require the help of GIPS expert, utilizing the help of an independent GIPS consultant, such as Longs Peak, rather than the firm’s verifier helps ensure the verifier’s independence is not jeopardized.
Requirement to Maintain a GIPS Report Distribution Log
Firms have always been required to make every reasonable effort to distribute GIPS Reports to prospects; however, under the 2020 GIPS standards, firms are now also required to demonstrate their effort to do so.
The speakers at the conference emphasized that not only is it now required to demonstrate this effort, but verifiers will be testing this. This means that firms should track the distribution in a manner that can be easily converted into a report to provide to their verifier. There is no specific requirement as to how this is tracked, but the most common is to log the relevant information into a CRM database or in a spreadsheet if a CRM is not used.
Next Steps for CFA Institute
CFA Institute is constantly updating their resources related to the GIPS standards and will continue to do so. During the conference, a list of “next steps” was discussed.
- The Q&A Database will be updated to ensure the current Q&As are relevant to the 2020 standards. Q&As that are no longer relevant will be archived.
- Existing Guidance Statements will be updated to ensure they adhere to the 2020 standards.
- CFA Institute is in the process of finalizing exposure draft Guidance Statements related to benchmarks, overlay strategies, risk, and supplemental information.
- The creation of tools and resources to assist with implementation of the 2020 edition of the GIPS standards will continue. Updates on new tools/resources will be posted on the CFA Institute website as well as announced in monthly emails. To subscribe to the GIPS standards newsletter please follow instructions here.
Regulatory (SEC) Compliance Takeaways
The SEC’s Proposed New Advertising Rule
The main focus of the SEC compliance portion of the conference was to discuss the proposed new Advertising Rule. The new Advertising Rule should be finalized in the next couple months, and firms will have one year to comply once it is finalized.
Historically, firms have relied on “No-Action Letters” and other interpretive guidance to ensure advertisements do not violate SEC requirements. The new Advertising Rule is expected to consolidate this miscellaneous guidance into a set of principles-based provisions with an overarching emphasis on ensuring advertisements are fair and balanced.
Some of the key elements of the proposed new Advertising Rule are below.
- As proposed, the definition of “advertisement” will be broadened to include “any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser’s investment advisory services or that seeks to obtain or retain one or more investment advisory clients or investors in any pooled fund vehicle advised by the investment adviser.” While there will be certain exclusions, this essentially broadens the definition to include all promotional emails, text messages, and any pre-recorded podcasts. It also makes the firm responsible for ensuring that any third-party content promoting advisory services on behalf of the firm also adheres to the Advertising Rule.
- The proposed rule prohibits advertisements from including performance results from fewer than all portfolios with substantially similar investment policies, procedures, objectives, and strategies, with limited exceptions. This better aligns the SEC rules with the GIPS standards, as it moves firms towards composite construction rather than using representative accounts. There do appear to be exceptions to the rule where representative accounts could be used as long as the return of the representative account is no higher than the average return of all portfolios managed with the same strategy; however, this could be difficult to support without calculating the composite returns. We expect that composite returns will become the norm, even for firms not complying with the GIPS standards.
- The new rule also emphasizes the requirement of pre-use review and approval of all advertisements prior to dissemination. This review and approval can be designated to one or more employees with the competence and knowledge regarding the requirements, and the designated employee(s) should generally include legal or compliance personnel. Exclusions from this rule would include live oral communications that are not widely broadcast and communications disseminated only to a single person or household or to a single investor in a pooled fund vehicle.
Once this new Advertising Rule is finalized, advisers can use the one-year transition period to develop and adopt appropriate policies and procedures to comply with the new rule. Since the new rule is not yet finalized, no immediate action is required at this time other than starting to consider what changes will likely be necessary for your firm.
As ESG-based investing has become increasingly popular, the GIPS Conference included a session discussing ESG performance attribution. Environmental, Social, and Governance (“ESG”) refers to three of the main factors in measuring the sustainability and societal impact of an investment. Measuring ESG essentially refers to measuring how much of an investment’s performance can be attributed to ESG considerations in the investment process.
Sources of ESG Data
ESG data has evolved over time, and there are multiple categories of sources. The main sources used historically are Corporate Governance Disclosures as well as news and media sources. A very systematic quality control process of evaluating ESG data needs to be in place to properly interpret the data.
Some of the sources that are becoming increasingly available are alternative data sources, such as government regulatory agency databases and models for ESG metrics. Data from alternative sources requires expertise to extract and properly shape in order for the data to be useful.
Materiality of ESG Data
ESG data is generally not very uniform or standardized, and there are biases that exist across the various sources. Discussions during the ESG portion of the conference compared the current state of ESG data to financial data of the past. There was a period of time when financial data was in this “messy” state before reporting standards were put in place and the process of unifying global financial data was undertaken. ESG data is expected to follow a similar path.
Zeroing in on what is material and what factors matter while evaluating a company is an important part of the investment process. There are many factors to consider while assessing ESG inputs, but determining the key factors relevant to any given business model is essential.
Overall, the GIPS Conference was a success despite not being able to meet in person. The networking is always a fun and important aspect of the conference, but the virtual conference still was able to provide useful practical tips for implementing the 2020 GIPS standards as well as other related performance topics.
If you have any questions about the GIPS Conference or GIPS and performance in general, please feel free to contact us.