Will the GIPS Guidance Statement on Broadly Distributed Pooled Funds affect your firm?

Sean P. Gilligan, CFA, CPA, CIPM

February 23, 2016

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An Exposure Draft of the Global Investment Performance Standards’ (GIPS®) new Guidance Statement on Broadly Distributed Pooled Funds was recently published. The intention of this exposure draft is to seek comments from the public regarding this proposed new guidance before it is officially adopted in January of 2017.

Anyone with opinions regarding the guidance, especially with regard to questions the GIPS Technical Committee has included within the exposure draft, is encouraged to provide written feedback by 29 April 2016. Witten feedback can be submitted by emailing your comments to: standards@cfainstitute.org.

Who does the pooled fund guidance apply to?

Any GIPS compliant firm that manages and markets a “broadly distributed pooled vehicle” (which includes mutual funds or other similar vehicles) fits within the scope of this guidance.

If a firm is only responsible for managing the fund (e.g., as a sub-advisor), but has no responsibility for filing the fund’s official documents (e.g., the prospectus or KIID) or for creating fund-specific marketing materials, then this proposed guidance statement is not applicable.

The requirements set forth in the proposed guidance statement are specific to marketing pooled funds. Marketing pooled funds should not be confused with marketing a strategy or composite that contains a pooled fund. The guidance is specific to situations where the fund itself is being marketed to attract new investors within that fund.

What is the purpose of the proposed guidance?

GIPS requires firms to make every reasonable effort to provide compliant presentations to all prospective clients; however, most firms have historically interpreted this to only include new separate account prospective investors, not pooled fund investors that simply invest in a fund that is already included in a composite.

The purpose of this guidance statement is to ensure GIPS compliant firms are consistent in the way they present their pooled fund information to prospective investors. This consistency is intended to help prospective pooled fund investors make meaningful comparisons between funds. To achieve this, the exposure draft proposes requiring official fund documents, as well as all fund-specific marketing materials (i.e., materials that are specifically marketing the fund itself, not the strategy or composite), to include specific statistics and disclosures.

What does the proposed guidance require?

If adopted in its current form, the new guidance would require GIPS compliant firms to include the following in each of their funds’ official documents as well as any fund-specific marketing materials:

  1. A description of the fund’s objective or strategy.
  2. An indication of the risk involved in investing in the fund, which can be either qualitative or quantitative.
  3. Pooled fund returns calculated according to the methodology and time periods required by local laws or regulations. If local laws or regulations do not specify a methodology or time period then firms must present the fund’s returns net of all fees and expenses for periods that are acceptable based on the current GIPS Advertising Guidelines.
  4. Benchmark returns for the same periods that the fund’s performance is presented, as well as a description of the benchmark. If no appropriate benchmark exists, this can be disclosed in lieu of including benchmark performance.
  5. The currency used to express performance.

There is no requirement to mention GIPS or provide (or even offer) a compliant presentation. The guidance statement does recommend, however, that firms include the following claim of compliance in their fund’s official documents and fund-specific marketing materials: “XYZ Firm, the firm managing this pooled fund, claims compliance with the Global Investment Performance Standards (GIPS®). For more information about the GIPS standards, please visit www.gipsstandards.org.”

It is important to note that this claim of compliance is new and differs from the wording used in compliant presentations or materials adhering to the GIPS Advertising Guidelines. When claiming compliance, firms must ensure that the correct claim is used and is stated verbatim from the standards.

What can firms do now to prepare for this new guidance?

Firms managing pooled funds should first determine whether they fit within the scope of the proposed guidance. If so, then your firm should review its current official fund documents and fund-specific marketing materials to determine if changes are needed in order to meet the new requirements, if adopted.

If there are material changes that are not reasonably feasible for your firm, use this opportunity to provide comments to the GIPS Technical and Executive Committees before the guidance is formally adopted.

In addition to sharing your general feedback on the guidance, responding to the specific questions the GIPS Technical Committee has included within the exposure draft will greatly help shape the final version of the guidance statement before it is officially adopted. The entire exposure draft, which includes these questions, can be reviewed here.

To learn more about the Exposure Draft of the Guidance Statement on Broadly Distributed Pooled Funds or other GIPS and performance measurement topics, please contact us.