Author Archives: Becky Clark

Newly Proposed GIPS Guidance Statement on Broadly Distributed Pooled Funds


The GIPS Technical Committee is seeking comments on a newly proposed Guidance Statement. The purpose of the Guidance Statement is to address applying the GIPS Standards® to broadly-distributed pooled funds, as the existing standards do not directly address these funds.

Broadly distributed pooled funds (BDPFs) are funds which are unitized and broadly distributed, typically where there is no or minimal contact between the investment advisor of the pooled fund and the prospective pooled fund investors. Mutual funds are a good example of BDPFs, while private equity partnerships typically are not considered BDPFs.

What Led to the Proposed Guidance Statement

GIPS Standard 0.A.9 requires firms to make every reasonable effort to provide a compliant presentation to all prospective clients. This requirement, combined with the lack of direct guidance on how to handle BDPFs and the fact that many countries have different offering rules, led to this proposed guidance statement.

Complicating Factors

While it would seem easy to simply require firms to provide compliant presentations to all prospective BDPF clients, it’s not actually so easy or logical. In many cases, investment managers don’t have contact with BDPF clients (or prospective clients), as they are distributed by other institutions. Sometimes all the investment manager sees is an omnibus account.

Other potentially confusing factors:

  • Many investment managers have a separate firm set up to handle management of BDPFs. The name of this firm is often not the same name as the firm claiming GIPS compliance.
  • Composites can be single fund composites or can contain other accounts. Multi-account composites might not be appropriate to present to BDPF investors.
  • Under GIPS, firms can choose (in many, but not all, circumstances) to present gross or net returns. Many countries require that funds’ returns be shown net. For GIPS purposes, net returns reflect the deduction of trading and investment management fees, but generally not the deduction of administrative expenses (such as custodial, legal, audit, and other similar fees). Many countries’ rules (such as those of the SEC in the U.S.) require fund returns to be net of everything.

What the Guidance Statement is Proposing

The proposed Guidance Statement takes a minimalist approach, in that it requires the following items to be included in the offering document:

  • Description of the investment strategy
  • Indication of risk measures
  • Return calculations that follow local rules, or if not mandated by local rules, that roughly follow the GIPS Advertising Guidelines, with the key difference being that net returns be presented that are net of all expenses.

What the Proposed Guidance Statement Does Not Require

The proposed Guidance Statement does not require including the GIPS claim of compliance nor disclosure of sales charges/loads, but notes that these are recommended.

Interestingly, the proposed Guidance Statement states that offering to provide investors with a GIPS compliant presentation is neither required nor recommended. Instead, Provision 0.A.9 would be deemed satisfied if the firm followed the list of required disclosures and calculation rules noted above.

Your Opinion Matters

Like all new GIPS pronouncements, the public is given an opportunity to weigh in with comments. If you firm manages mutual funds or similar funds that would fall under these new rules, we encourage you to provide feedback. The comment period is open until April 29, 2016. The draft of the guidance statement can be found here.

We will be happy to provide further information relating to this subject. For more information, contact Tom Peters, Director, Audit & Accounting at


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Proposed Update to Fair Value Disclosure Requirements

In December 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The proposal is an element of the FASB’s broader disclosure framework project. This project is expected to promote the use of discretion by entities when assessing disclosure requirements, with the hope of improving the level of effectiveness of the financial statement footnotes.

The proposed update is still in the review period, and therefore open for public comment. Comments are due February 29, 2016.

Topic 820 provides a single purpose framework for measuring fair value, while requiring specific fair value measurements and/or disclosures. The FASB has proposed revising and removing specific fair value measurement disclosures for all entities, and adding new disclosures for public entities, not-for-profit entities, and employee benefit plans.

The goal of this proposal is to increase the efficiency of the disclosure requirements for all entities, and to further eliminate the number of disclosures for private companies. Some of the key changes are as follows:

  1. There will be no need to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 nor will there be a requirement to disclose the policy for timing of transfers between levels of the fair value hierarchy.
  2. For private companies, there will no longer be a requirement to reconcile opening balances to closing balances of recurring Level 3 fair value measurements, but they will have to disclose transfers into and out of Level 3 of the hierarchy, as well as purchases and issues of Level 3 items.
  3. Public entities, not-for-profit entities, and employee benefit plans will be required to disclose the changes in unrealized gains and losses for the period, included in other comprehensive income and earnings (or changes in net assets), for recurring Level 1, Level 2, and Level 3 fair value measurements held at the end of the reporting period.

If the proposed update is accepted, entities would have several modifications and eliminations to their disclosures, either due to inconsistencies or no longer being applicable. We recommend that firms research this topic in order to determine the effects it might have on their financial statements. Firms should consider whether this proposed amendment will result in more direct and useful information about fair value measurements.

We will be happy to provide further information relating to this subject. For more information, contact Meghan DiDonato, Senior, Audit & Accounting at


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Update on 2015 PCAOB Inspection of Broker-Dealers and Areas of Focus for Upcoming Audits

Several years ago, the interim inspection program of auditors of broker-dealers was implemented due to new authority given to the Public Company Accounting Oversight Board (PCAOB) over auditors of SEC-registered broker-dealers by the Dodd Frank Wall Street Reform and Consumer Protection Act.

This summer, the PCAOB released its fourth inspection report. It continues to identify deficiencies in broker-dealer audits, despite publicizing four years of inspection findings covering over 275 audits.

The fourth interim inspection included 66 firms and covered elements of 106 audits. In its report, the PCAOB indicated that is has identified deficiencies in portions of 92 of the 106 audit engagements inspected. The most frequent deficiencies identified were around independence, revenue recognition, reliance on records/reports, fair value accounting estimates, financial presentation and disclosure, and the customer protection rule.

It is important to note that while these deficiencies were identified by the PCAOB, it does not mean that the financial statements and/or supporting schedules of the broker-dealer were materially misstated or that the broker-dealer violated SEC rules 15c3-1 and or 15c3-3. Rather, audit deficiencies described by the PCAOB are failures by firms to perform, or perform sufficiently, certain required audit procedures.

The following includes some of the key points identified in the PCAOB’s report.


Independence remains a primary concern of the PCAOB. One in four of the audits inspected had an independence finding, many of which related to the auditors’ assistance with the preparation of the audit clients’ financial statements.

As a refresher on independence, auditors cannot be in a position to audit their own work. As a result, auditors are prohibited from, among other items, maintaining or preparing the audit clients’ accounting records, preparing or originating source documentation underlying the financial statements, or preparing financial statements that are filed with the SEC or that form the basis of financial statements that are filed with the SEC.

Broker-dealers should be preparing their own financial statements, including disclosures, and maintaining all documentation required to support the financial statements.

Revenue Recognition

At least one deficiency was found in 76 of the 106 audits selected for inspection. Of these, at least half had multiple deficiencies related to testing of revenue recognition. For example, some firms did not test material classes of revenue transactions or did not perform sampling procedures correctly to test revenue transactions. It was also noted that some firms did not perform sufficient procedures to test the relevant assertions for revenue.

Broker-dealers should review their own policies and procedures surrounding revenue recognition, as this will be an area their auditors will focus on during the audit.

Reliance on Records and Reports

More than 55 percent of the audits that were selected for inspection had a deficiency related to establishing a basis for reliance on records and reports. Inspections staff observed that firms did not perform sufficient procedures on information produced by service organizations that were used to perform substantive audit procedures or test of controls.

For example, in some instances the PCAOB indicated that the auditor obtained a clearing broker statement, and the auditors’ procedures were limited to agreeing the clearing broker statement to the cash receipts or general ledger of the audit client. Auditors should be establishing some basis to conclude that they can rely on the clearing broker report. Broker-dealers should expect their auditors to request additional information to collaborate the data in the clearing brokers’ reports.

Broker-dealers can also expect their auditors to request an SSAE-16 report from the clearing broker or other third party service providers. Broker-dealers should also obtain a copy of these reports and ensure they have implemented and documented the user controls noted in the SSAE-16 report.

Fair Value Accounting Estimates

Deficiencies were found in nearly half of the inspections related to valuations. For fair value accounting estimates, broker-dealers should expect their auditors to test how management’s estimates are formulated and the inputs being used, as well as the controls surrounding the inputs for the estimate and any information that could have an impact on the estimate up through the date of the auditor’s report.

Financial Presentation and Disclosures

In nearly 45 percent of the audits that were examined, there was a deficiency related to financial statement presentation and disclosures. Broker-dealers should review their policies and procedures for ensuring all required disclosures are complete and accurate. These procedures should include the completion of a disclosure checklist and a review by someone other than the preparer of the financial statements. This review should focus on the reader’s ability to understand the financial statement disclosures without additional explanation from the broker-dealer’s personnel.

The Customer Protection Rule

When a broker or dealer claims an exemption under the Customer Protection Rule, auditors are required to ascertain whether the conditions of the exemption were complied with as of the examination date and whether anything came to the auditor’s attention to indicate that the broker-dealer was not in compliance during the period since the last examination. Broker-dealers should reconsider how their compliance with their exemption from Rule 15c3-3 is monitored and be prepared to discuss these matters with their auditors. They should also be prepared to demonstrate how their compliance with the exemption is monitored, and to detail any exceptions that occurred during the year.

PCAOB Staff Inspection Brief

In addition to the results of the interim inspection program, the PCAOB staff also released a Staff Inspection Brief during 2015 which identified key areas of PCAOB inspection focus. Many of the items are recurring, including revenue recognition, service organization reports utilized as audit evidence, auditor independence, and auditing supplemental information, including the broker-dealers’ computation of Net Capital under SEC Rule 15c3-1 and the Compliance or Exemption Reports under SEC Rule 15c3-3.

As part of the planning process for your upcoming audit, look at the PCAOB inspection results and the focus of upcoming inspections, and review your policies and procedures in those areas. This review will help you to discuss these matters with your auditor, and to understand your auditor’s increased focus and testing on these areas.

In 2016, the PCAOB plans to increase its inspections to 75 firms covering portions of approximately 115 audits. It continues to work toward developing a rule proposal to be issued during 2016 that would establish a permanent inspection program.

The PCAOB Interim Inspection Report is available here.

The PCAOB Staff Inspection Brief is available here.

We will be happy to provide further information relating to this subject. For more information, contact Todd E. Crouthamel, Director, Audit & Accounting at or Frank L. Varanavage, Manager, Audit & Accounting at

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Annual Investment Industry Update

Thursday, December 3, 2015
12:00pm to 3:30pm
King of Prussia, PA

Staying on top of the myriad of changes that impact an investment advisor’s operations can be a challenging task. This seminar will provide an overview of current topics and key changes impacting performance reporting, SEC compliance, and accounting & tax issues.

Topics will include:

  • Overcoming common GIPS challenges
  • New accounting changes impacting the investment industry
  • Recent tax developments
  • Regulatory compliance hot topics

Presented by Kreischer Miller and Cipperman & Company.


12:00pm – 12:45pm    Lunch and networking
12:45pm – 3:30pm      Seminar


Proposed Amendments to Books and Records Rule 204-2

The SEC recently made available the comments received on IA-4091, Amendments to Form ADV and Investment Advisers Act Rules. First, let’s revisit some specifics of the amendments, originally introduced on May 20, 2015. The first of the amendments is to Form ADV Part 1A, specifically as it relates to the inclusion of an adviser’s separately managed account (SMA) business. Another amendment facilitates a standard process for registration of private fund advisers. There were also two proposed amendments to Rule 204-2 of the Investment Advisors Act of 1940, the books and records rule, for which this article is specifically focused.

As it stands, Rule 204-2(a)(16) requires registered advisers, or those required to be registered, to maintain records supporting performance claims in communications such as notices and advertisements that are distributed to ten or more persons. The proposed amendment simply removes the “ten or more persons” wording from the rule and replaces it with “any person.” This proposed change will likely cause advisers to review and potentially enhance their policies and procedures surrounding performance calculations and how they communicate performance data, regardless of whether it’s personalized for a specific client or used more broadly in an advertisement.

Additionally, proposed amendments to Rule 204-2(a)(7) would add another category of required original documentation: all communications related to the performance or rate of return of any or all managed accounts or securities recommendations. The impetus for this proposed amendment appears to have been an enforcement action, In the Matter of Michael R. Pelosi, where a lack of evidence prohibited the action from moving forward.

The SEC requested comment on whether investment advisers currently maintain these records, whether there might be alternate ways to collect performance information and communicate it to clients, and any potential exceptions that should be considered.

In total, 45 comment letters were received and published, although many addressed amendments not related to the books and records rule. Those that did focus on Rule 204-2 varied widely. Several respondents supported the amendments, mentioning that they already maintain such information and it would not be a significant additional burden. However, numerous respondents felt that the SEC is greatly underestimating the burden that maintaining this information would place on advisers, particularly smaller advisers and private equity firms. If the amendment is adopted, these commenters argued that there should be a lengthy adoption period.

There were also a few respondents who asked for clarification on several items, including the meaning of “original” in this digital age and the scope of “all written communications received and copies of written communications sent.” Commenters worried that adding the additional category of required original documentation for all communications could encompass more than intended.

These amendments won’t come without a cost, as advisers will have to determine how they will gather and maintain the information to comply. Firms should keep an eye on these amendments and the status of this project as it progresses.

We will be happy to provide further information relating to this subject. For more information, contact Craig B. Evans, Manager, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at or 215.441.4600.

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