Are Preliminary GIPS Disclosures a Good Idea?

The Global Investment Performance Standards (GIPS) provide a voluntary framework for investment managers to use in presenting their investment performance. GIPS compliance has become increasingly important, particularly when dealing with institutional investors who often insist upon it.

GIPS verifications test whether a firm has complied with the GIPS composite construction and policy/procedure requirements. It provides an opinion of compliance at a firm level, and does not ensure the accuracy of any specific composite. A deeper composite examination can be performed to provide an opinion on a specific composite.

We live in a fast-paced society in which people want access to information quickly. This puts pressure on operations and performance professionals to provide investment returns shortly after a period end. There are multiple challenges in the process of compiling investment returns, including:

  • Reconciling client accounts
  • Making sure the securities are properly valued
  • Reviewing the accounting records to check that transactions are recorded properly
  • Updating investment performance presentations
  • Reviewing the presentations for compliance with GIPS and regulatory standards

Performing these steps takes time. Suppose the process takes two weeks, but an investment manager wants to issue updated presentations within two days of the period end. Some investment managers, in their efforts to publish performance numbers, skip a few steps and modify their claim of compliance to indicate their returns are preliminary until the underlying data are reconciled. Such disclosures often look like the following:

  • “Preliminary data was used in calculating the current period’s performance”
  • “Returns are preliminary as underlying data are not yet reconciled”
  • “Preliminary data, if so noted, reflects unreconciled data”

This raises the question of whether the practice of preliminary GIPS disclosures is permitted. A firm’s policies and procedures must be designed to calculate and present performance in compliance with the GIPS Standards. The GIPS Standards do not contain provisions allowing firms to conditionally claim compliance. Firms are permitted to use estimates; however, a firm would have to evaluate the final reconciled figures to the estimates.

The GIPS Standards contain error correction provisions which would apply if the final figures are different than the estimates. For material errors, the firm would need to correct the returns, add disclosures about the correction to the presentation, and provide corrected copies to everyone who received a presentation with an error.

As an extension of the concept of preliminary disclosures, some investment managers have modified their GIPS claim of compliance to indicate that their returns are preliminary until their firm’s verification (and potentially composite examination) is completed. Such disclosures often look like the following:

  • “Returns are preliminary until our firm-wide verification is completed by (add name of verifier here)”
  • “Performance returns are considered preliminary until examined according to GIPS for the reporting period”

Although GIPS verification brings additional credibility to the claim of compliance, it is not part of the claim of compliance. Verifiers can act as resources (being mindful not to violate independence concerns), but investment firms have sole responsibility for their GIPS compliance. A firm’s policies and procedures must be designed to calculate and present performance in compliance with the GIPS Standards. The standards do not contain provisions allowing firms to conditionally claim compliance. The investment manager’s error correction policies apply here as well.

Given that error correction can be a painful and tedious process, it may be prudent to wait until the period end closing process is completed before publishing updated performance presentations.

We will be happy to provide further information relating to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting at tpeters@kmco.com or 215.441.4600.

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