Author Archives: kmco

Fifth Circuit Court Vacates SEC’s Private Fund Advisers Rule

On Wednesday, June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit sided with a group of trade associations and vacated the SEC’s Private Fund Advisers Rule, which was adopted in August 2023.

This rule aimed to provide more protections and transparency to investors and enhance oversight in the private fund industry. The rule imposed new reporting requirements including detailed information on fees, performance, and conflicts of interest. It also required an annual audit and restricted certain practices by private fund advisers that the SEC argued could disadvantage some investors.

The Court’s decision was based on arguments that the SEC exceeded its statutory authority, and the rule would impose undue regulatory burdens and costs.

The decision significantly curtails the SEC’s regulatory reach over private fund advisers. The SEC is now reviewing the decision and will decide on its next steps. This development is significant for markets, fund managers, and investors, including pensions, foundations, and endowments. 

If you have any questions about this information or would like to discuss your firm’s valuation needs, please contact us.


Newsletter subscription

SEC Issues Trifecta of Rules and Alerts Impacting the Investment Industry

On August 23, 2023 the U.S. Securities and Exchange Commission (SEC) issued a trifecta of rules and alerts that impact the investment industry, including private funds and broker-dealers.

Regulation of Private Fund Advisors

The long-awaited adoption of new rules and rule amendments to enhance the regulation of private fund advisers was released. At a high level, the rule has the following main requirements:

  • Registered private fund advisers must provide quarterly statements to investors detailing certain information about fees, expenses, and performance.
  • Registered private fund advisers must obtain an annual audit of each private fund and distribute that audit to its investors.

We are in the process of evaluating and summarizing the 660 page rule, but if you’d like to get a head start, you can view the SEC’s press release or the final rule (IA-6383).

Extension of Safeguarding Rule Comment Period

The SEC reopened the comment period of its proposed Safeguarding Rule. The initial comment period ended on May 8, 2023; however, it will now remain open for the next 60 days. For our summary of the proposed rule, you can read our article here.

Amendments to Exemption from National Securities Association Membership

The SEC adopted amendments that narrow the exemption from Section 15(b)(8) of the Securities Exchange Act of 1934, which generally requires a broker or dealer registered with the SEC to become a member of a national securities association. FINRA, or the Financial Industry Regulatory Authority, is the only registered national securities association. For further detail, you can view the SECs press release or the final rule (release number 34-98202).

If you have any questions about this information or would like to discuss your firm’s needs, please contact Kreischer Miller’s Investment Industry Group.


Newsletter subscription

SEC Announces Proposed Safeguarding Rule

On February 15, 2023, the SEC announced the release of a proposed rule, the Safeguarding Rule, which would constitute a redesignation and enhancement of the current Custody Rule as we know it.

We are in the process of evaluating and summarizing the 434 page proposal, but if you’d like to get a head start, you can view the SEC’s press release or the full proposed rule.

The SEC is requesting public comment within 60 days from publication in the federal registrar. Be on the lookout for further details from Kreischer Miller’s Investment Industry Group.

We would be pleased to provide further information related to this subject matter. For more information, contact Craig Evans, Director, Investment Industry Group at


Newsletter subscription

You may also like:

Just When We Thought Carveouts Were Back


The treatment of carveouts within the GIPS standards (formerly, the AIMR Performance Standards) has been a long and winding road since the inception of the standards back in the early 1990s. Initially, the standards permitted the carving out of a portion of portfolio assets into individual segments for the creation of separate and distinct strategies so long as there was an allocation of cash to the strategy. However, in 2010, the GIPS Executive Committee determined that allocating cash to carveouts could potentially be misleading since it did not portray a fair representation of the performance that would have been achieved with a stand-alone portfolio dedicated to that strategy. This led to carveouts with allocated cash being disallowed under the standards.

It was not until the release of the 2020 edition of the GIPS standards that firms would be permitted to once again allocate cash to carveouts for inclusion within GIPS Composite Reports. The most recent change, which came with a set of new requirements, was made primarily to encourage more firms to comply with the standards that would otherwise struggle with compositing accounts. In particular, the change was made to appeal to certain advisors, such as private wealth managers, whose investors generally are comprised of highly customized retail accounts that use a blend of the firm’s building block investment strategies.

Just when we thought that carveouts were back, the Securities and Exchange Commission (SEC) released the Marketing Rule, which replaces the current advertising rule that was created to protect investors from potentially misleading advertisements. The new Marketing Rule, and the related Adopting Release, were issued in December 2020 with an effective date of May 4, 2021. Investment advisors were given an 18-month window, ending in November 2022, to bring their firm into compliance with the new rule. The rule itself is comprehensive and includes provisions on testimonials and endorsements, including solicitations, third-party ratings, and performance advertising. Under the new rule, GIPS Reports are considered advertisements. While most of the provisions regarding performance advertising are consistent with the GIPS standards, there are areas which could be described as conflicting. One of these areas in particular may compel advisors to revisit their decision on including carveouts with allocated cash within their composites.

Carveouts vs. Extracted Performance

In an effort to understand the differences between the GIPS standards and the marketing rule, it might be helpful to revisit the definition of a carveout. The GIPS standards define a carveout as, “a portion of a portfolio that is by itself representative of a distinct investment strategy.” GIPS requires that carveouts are representative of a standalone portfolio and that cash is allocated on a consistent and timely basis in instances where no separate cash account is maintained. Furthermore, firms are required to create carveouts with allocated cash from all portfolios and portfolio segments within the firm that are managed to that strategy for inclusion within a composite.

Within the SEC’s Marketing Rule, carveouts are addressed as part of the performance advertising section on extracted performance. The marketing rule defines extracted performance as the performance results of a subset of investments that has been extracted from a portfolio (final rule 206(4)-1(e)(6)). Unlike the GIPS standards, there is no requirement under the final rule to include an allocation of cash with extracted performance. Instead, the rule is flexible and requires that advisors determine whether an allocation of cash is warranted based on the facts and circumstances of the situation. Furthermore, the Marketing Rule requires that advisors presenting extracted performance in an advertisement provide, or offers to provide promptly, the performance results of the total portfolio from which the performance was extracted (final rule 206(4)-1(d)(5)).  This requirement mitigates the risk of advisors potentially cherry-picking the best performing securities and allows investors to analyze the extracted performance as well as the overall portfolio from which it was generated.

Carveouts within the GIPS standards and extracted performance within the SEC Marketing Rule are not an apples-to-apples comparison. While both carveouts and extracted performance relate to a portion or subset of a portfolio, the way in which they are advertised or presented is different. As explained earlier, GIPS requires that firms create carveouts for each portfolio and portfolio segment at the firm managed to the same strategy, and group them into a composite for performance reporting purposes. Under the Marketing Rule, extracted performance explicitly pertains to a single portfolio from which performance is extracted and advertised. When extracted performance from multiple portfolios is grouped together, effectively creating a composite of extracts, the Marketing Rule considers this performance to be hypothetical since the performance itself was not actually achieved by a portfolio of the investment advisor. The SEC believes that this performance carries a greater risk of being misleading and therefore requires that it be subjected to additional protections when being advertised.

Hypothetical Performance

The Marketing Rule defines hypothetical performance as performance results that were not actually achieved by any portfolio of the investment advisor (final rule 206(4)-1(e)(8)). Examples of hypothetical performance provided within the rule include, but are not limited to, performance derived from model portfolios, back-tested performance, and targeted or projected performance. Based solely on the definition, most instances of carveout performance presented in accordance with the GIPS standards would be considered hypothetical since the performance is not derived from an actual portfolio of the advisor. Instead, the performance is typically aggregated from all the advisor’s portfolios that are managed to the same strategy. Given that the performance is derived from an aggregation of multiple portfolios, the SEC believes there is a risk that advisors can cherry-pick investments across multiple portfolios and call it a strategy.

The Marketing Rule prohibits advertisements from including hypothetical performance unless additional steps are taken to protect investors and mitigate the risk of the advertisement from being potentially misleading. The requirements were put in place to make sure investors receiving hypothetical performance are of the appropriate level of sophistication and are provided with the resources needed to independently analyze the information. The rule includes three broad requirements that must be met when presenting any kind of hypothetical performance.

Policies and Procedures

First, advisors must establish and adopt policies and procedures to ensure that the hypothetical performance is relevant to both the financial situation and investment objectives of the investor to which it is being provided.  It is important to note that this does not need to be assessed at the individual investor level, but rather based on the intended audience of the performance. Advisor policies and procedures should also address how the distribution of the performance would be limited to only those investors that the advisor has deemed to have the resources and financial expertise.

Currently, under the GIPS standards, firms must establish policies and procedures for identifying prospective clients, which includes determining if, and when, an interested party qualifies to invest in a strategy. However, these policies and procedures generally would not be adequate in determining the financial situation and investment objective of prospects. Furthermore, while the GIPS standards require policies and procedures surrounding the distribution of GIPS reports, it is unlikely that these policies and procedures cover the limitation of such distribution.

Criteria and Assumptions

Advisors are also required to provide sufficient information for the intended audience receiving the performance to analyze the criteria and assumptions that went into deriving the hypothetical performance.  Among other things, this generally will include a detailed description of the calculation methodology as well as any assumptions that went into deriving the performance. Where applicable, firms are also required to include the probability associated with any outcome that was assumed in calculating the hypothetical performance.

Again, it would appear as though the presentation and disclosure requirements of the GIPS standards would fall short of meeting the requirements for hypothetical performance under the Marketing Rule. For starters, the GIPS standards do not require the disclosure of calculation methodologies, but rather indicate that these policies are available upon request. Included within these calculation methodologies for carveouts would be the synthetic allocation of cash, which would be instrumental to understanding how the performance was calculated. Additionally, the GIPS standards do not require firms to disclose the criteria that went into the construction of carveout composites. This would likely be required for a user of the advertisement to understand how the performance was calculated.

Risks and Limitations

Lastly, advisors are required to provide sufficient information so that the intended audience can understand the risks and limitations associated with the hypothetical performance. This information will typically need to include the inherent risks associated with hypothetical performance in general as well as any risks associated with the specific performance being provided.

Under the GIPS standards, information pertaining to risks and limitations specific to a composite strategy are normally included as part of the composite definition, which is required to be disclosed within the GIPS Report. Currently, the standards require the inclusion of material risks that could have had a significant influence on the historical returns or that are useful in understanding the strategy and its future expected returns. It is possible that these disclosures will need to be expanded to include more general information pertaining to the inherent risks of hypothetical performance in order to comply with the Marketing Rule. Additionally, it will be important to include any known reason why the performance of the carveout composites might differ from the performance of an actual portfolio, such as the impact of allocating cash synthetically.


As you might imagine, many industry professionals recognized the potential difference in treatment as it relates to carveouts and brought it to the attention of the SEC during the comment period. Despite the pushback, the SEC made it clear in the Adopting Release that, “…the final rule does not prohibit an advisor from presenting a composite of extracts in an advertisement, including composite performance that complies with the GIPS standards, but this performance information is subject to the additional protections that apply to advertisements containing hypothetical performance…”

There is no question that these additional requirements surrounding carveouts and hypothetical performance will be burdensome for advisors to comply with. It will be difficult for advisors to distribute GIPS Reports containing carveouts to mass audiences, such as providing on a firm website, since advisors will first be required to understand the financial situation and objectives of the recipients of these reports. Advisors utilizing carveouts will need to assess the impact that these new requirements will have on their current policies and procedures and make the necessary adjustments before the fast approaching November 2022 adoption deadline.

For more guidance about the SEC Marketing Rule and its impact on GIPS-compliant firms, please contact us to schedule a conversation.

We would be pleased to provide further information related to this subject matter. For more information, contact Joshua E. Kramer, Manager, Investment Industry Group at


Newsletter subscription

Webinar: Is Your Firm Ready for the SEC’s New Marketing Rule?

Thursday, July 21, 2022
11:00 AM – 12:00 PM

The SEC’s Marketing Rule was approved on December 22, 2020 and went into effect on May 4, 2021. Investment advisors have until November 4, 2022 to comply with the Marketing Rule. Is your company prepared?

Kreischer Miller’s Investment Industry Group hosted an informative panel discussion where we covered the key things you need to know to be ready for the SEC’s Marketing Rule and how advisors are preparing a plan of action.

Our panel discussed:

  • The impact that changes in the rule will have on performance advertising and how that might differ from what your firm is currently doing
  • Other changes within the rule and certain areas of ambiguity
  • What firms are doing now to better prepare themselves for the November 2022 adoption date


  • Thomas A. Peters, Director, Investment Industry Group, Kreischer Miller


  • Joshua E. Kramer, Manager, Investment Industry Group, Kreischer Miller
  • Michael Beck, Vice President of Performance Measurement, Glenmede
  • John Canning, Director, Chenery Compliance Group

Click here to download the slides from the presentation.

Annual GIPS Compliance Notification Due Date is Approaching

The purpose of this industry alert is to serve as a reminder for firms claiming GIPS compliance to submit your GIPS Compliance Notification Form by June 30, 2022.

The GIPS Compliance Notification Form is a required filing with the CFA Institute to notify it of the firm claiming compliance. Firms are required to submit this form when they initially claim compliance, and on an annual basis thereafter. You have until June 30 of each year to submit the form based on information as of the preceding December 31.

The requirements of the submission are detailed below and come from Section 1.A.38 of the 2020 GIPS Standards:

The firm must notify the CFA Institute of its claim of compliance by submitting the GIPS Compliance Notification Form. This form:

  • Must be filed when the firm initially claims compliance with the GIPS standards.
  • Must be updated annually with information as of the most recent 31 December, with the exception of firm contact information, which must be current as of the form submission date.
  • Must be filed annually thereafter by 30 June.

We would be pleased to provide further information related to this subject matter. For more information, contact Eric Levandowski, Manager, Investment Industry Group at


Newsletter subscription

SEC’s New Transparency Rules Target Private Fund Advisors

On Feb. 9, 2022 the U.S. Securities and Exchange Commission (SEC) proposed new rules and amendments to the Investment Advisors Act of 1940 directed at private fund advisors. The proposals would provide a statutory mandate for audits of private funds, enhance transparency to investors about the costs of investing in a private fund and the performance of such fund, limit and/or ban certain transactions or activities that represent a conflict of interest for the private fund adviser, as well as prohibit certain sales practices that are contrary to the public interest and protection of investors.

The proposal anchors around five central areas, two of which would comprise all private fund advisors (i.e., registered and unregistered private fund advisors).

Proposal Affecting Registered Advisors



The Private Fund Audit Rule would require:

  • Registered Advisors to have all of their managed private funds’ financial statements undergo an audit at least annually and upon liquidation
  • Such audits to be conducted in accordance with U.S. generally accepted audit standards (GAAS)
  • Such audits to be performed by an accounting firm that:
    • is registered with, and subject to inspection by, the Public Company Accounting Oversight Board (PCAOB)
    • maintains auditor independence in accordance with SEC independence rules
  • Notification by the accounting firm to the SEC:
    • any changes in the audit firm (e.g., through resignation or dismissal)
    • any modified opinion that the accounting firm issues at the completion of the audit


For the most part, registered private fund advisors currently have the funds they manage undergo an annual audit as an option to satisfy the Custody Rule under the Act. However, not all registered private fund advisers are subject to the Custody Rule, and even those that are subject to the Custody Rule are not required to obtain an audit in order to comply with the Custody Rule. Therefore, in addition to providing protection for the fund and its investors against the misappropriation of fund assets under the Custody Rule, the Private Fund Audit Rule will not replace, modify, or substitute the Custody Rule. The SEC notes that the audit mandate would provide an important check on all registered advisors’ valuations of private fund assets, which often serve as the basis for the calculation of the advisers’ fees.



(Fees and Expenses, and Fund Performance)

Through the quarterly statement rule, the Act proposes to increase transparency of information to investors about the cost of investing in a private fund and the private fund’s performance.

Fees and Expenses: This rule would require registered private fund advisors to distribute to private fund investors a quarterly statement that details, in table format, the following:

  • All compensation, fees, and other expenses allocated or paid by the fund to the advisor or to any of its affiliates during the reporting period
  • Other expenses paid by the fund
  • Any offsets, rebates, or waivers carried forward during the current reporting period to subsequent quarterly periods to reduce future payments or allocations to the advisor or its affiliates.

The proposed quarterly statement rule would also require advisors to disclose the following information with respect to any covered portfolio investment in a single table, as applicable to all such covered portfolio investments:

  • A detailed account of all portfolio investment compensation allocated or paid by each covered portfolio investment during the reporting period
  • The private fund’s ownership percentage of each such covered portfolio investment as of the end of the reporting period. If the fund does not have an ownership interest in the covered portfolio investment, the adviser would be required to list 0 percent as the fund’s ownership percentage, along with a brief description of the history of the fund’s investment in such covered portfolio investment.

Fund Performance: This disclosure is divided between private funds that are “illiquid” or “liquid” funds.

For illiquid funds, the quarterly statement would be required to have performance information covering the period from inception through the end of the current calendar quarter covered by the statement, including:

  • Gross and net internal rate of return for the fund
  • Gross and net multiple of invested capital for the funds
  • Gross internal rate of return and gross multiple of invested capital for the realized and unrealized portions of the fund’s portfolio, with the realized and unrealized performance shown separately

The proposed rule also would require advisors to provide investors with a statement of contributions and distributions for the illiquid fund, detailing the capital inflows and outflows since inception by date for each cash in(out)flow and the amount of each in(out)cash flow, as well as the net asset value as of the end of the current quarter covered by the statement.

For liquid funds, the quarterly statement would disclose fund performance information that includes:

  • Annual net total returns for each calendar year since inception
  • Average annual net total returns over the one, five, and ten calendar year periods
  • Cumulative net total returns for the current calendar year as of the end of the most recent calendar quarter covered by the quarterly statement


While private fund advisors may currently provide statements periodically to investors, there is no requirement for advisors to do so under the Act. The Quarterly Statement Rule proposal is designed to improve the quality of information provided to fund investors and allow them to better assess, monitor, and analyze the value of their private fund investments, and to better compare their private fund investments. Additionally, it is worth noting that the proposed performance information for liquid funds is similar to those required for mutual funds.



The proposal would require a registered private fund advisor to obtain a fairness opinion in connection with an advisor-led secondary transaction where the advisor offers fund investors the option to sell their interests in the private fund, or to exchange them for new interests in another of the advisor’s vehicles. An independent opinion provider would opine on the fairness of the price being offered to the private fund for any assets being sold as part of the transaction. The proposal also would require the advisor to prepare and distribute to the private fund investors a summary of any material business relationships the independent opinion provider has or has had within the past two years with the advisor or any of its related persons.


Advisor-led transactions provide liquidity for investors and secure additional time and capital to maximize the value of fund assets. However, these transactions also raise certain conflicts of interest. Ensuring that the private fund and the investors that participate in the secondary transaction are offered a fair price is a critical component of preventing the type of harm that might result from the advisor’s conflict of interest in leading the transaction. This rule requirement would provide a check against an advisor’s conflicts of interest in structuring and leading a transaction from which it may stand to profit at the expense of private fund investors.


Proposals Affecting All Advisors


The preferential treatment rule eliminates the sales practice by all private fund advisors of providing preferential treatment regarding redemptions from the fund or information about portfolio holdings or exposures to investors. This proposal also prohibits these advisors from providing any other preferential treatment to any investor in the private fund, unless such treatment is disclosed to all current and prospective investors in writing.


Private fund advisors often provide preferential treatment to large investors for strategic reasons that benefit the advisor and also benefit the fund — for example, through increased fund assets that may enable the fund to make certain investments, to attract additional investors, and to spread expenses over a broader investor and asset base.

However, there are scenarios where the preferential liquidity terms harm the fund and other investors. For example, if an advisor allows a preferred investor to exit the fund early and sells liquid assets to accommodate the preferred investor’s redemption, the remaining investors may be left with a less liquid pool of assets, which can inhibit the fund’s ability to carry out its investment strategy or promptly satisfy other investors’ redemption requests.



The prohibited activities rule is designed to reduce the likelihood of fraud by removing adviser incentives. The proposal would ban private fund advisors from:

  • Charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services (e.g., accelerated monitoring fees, servicing fees, consulting, or other fees)
  • Charging fees associated with an examination or investigation of the advisor
  • Seeking reimbursement, indemnification, exculpation, or limitation of its liability for breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund
  • Reducing the amount of an advisor clawback by the amount of certain taxes
  • Charging fees or expenses related to a portfolio investment on a non-pro rata basis
  • Borrowing or receiving an extension of credit from a private fund client


The SEC has observed certain conflicts of interest and compensation practices over the past decade that have persisted, despite the regulatory body’s enforcement actions, and for which they believe disclosure alone will not adequately address. Accordingly, the SEC proposal is to outright ban these practices in order to prevent certain activities that could result in fraud and harm to investors.


Summary and Takeaway

This SEC proposal comes at a busy time of the year for private fund advisors — and it also comes on the heels of two other rule proposals: the Cybersecurity Risk Management Rule for Advisors and the proposal to amend, and expand the disclosures in, Form PF. While the additional SEC proposed requirements may not represent a seismic shift for large private equity and hedge fund advisors, they may be more consequential for mid-size and smaller private fund advisors. Across the board, the proposed changes to the Act mean that private fund advisors will face more compliance requirements. As a result, compliance and technology departments may need to either bolster their headcount to support and keep up with the additional documentation requirements and monitoring surveillance for compliance or engage external firms to supplement their own resources.

These proposed changes to the Act also reflect a move to boost transparency of costs and performance that are similar to those provided by mutual funds. The proposed standardized information will allow investors to understand the costs of a dollar invested and to evaluate the value derived from such costs through fund performance.

Advisors should closely monitor evolving developments to ensure operational and compliance readiness. Comments and feedback on the proposal are due the later of 30 days after publication in the Federal Register or April 11 (which is 60 days after issuance).

We would be pleased to provide more information about the SEC’s new rule proposals. Please contact your Kreischer Miller relationship professional or any member of our Investment Industry Group.


Newsletter subscription

What You Need to Know About the New Schedules K-2 and K-3

With the 2021 tax filing season well underway, there has been uncertainty and controversy surrounding the IRS’s new schedules K-2 and K-3.

The IRS created Schedules K-2 and K-3 to provide greater certainty and consistency in reporting international information to partners and shareholders. The schedules are intended to make international tax items less obscure for partners and shareholders needing the information to file their own returns.

These schedules are new for tax year 2021 and are intended to be used by S corporations, partnerships, and filers of Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) to report items of “international tax relevance.” The schedules replace, supplement, and clarify the reporting of certain amounts formerly reported on the Schedule K-1 as foreign transactions.

There has been a great deal of controversy surrounding what technically constitutes “international tax relevance” as well as the filing process for these new schedules. In response, on February 16 the IRS announced transition relief for certain domestic partnerships and S corporations intended to ease the change to the new schedules. This relief, while appreciated, has given rise to more questions than answers. The IRS also posted a series of FAQs to its website in an attempt to provide further clarification on the items that must be reported.

Tax practitioners have been strongly advocating for a delay to the schedules’ 2021 tax year implementation requirement. On February 24, the AICPA authored a letter to the IRS and the Treasury requesting that the implementation be delayed to 2023 (the 2022 tax year filing season), citing implementation difficulties due to software development and the ongoing challenges of the COVID-19 pandemic, as well as the lack of clarity regarding the filing instructions.

There has been no word from the IRS regarding a delay as of the time of this writing. Given that fact, Kreischer Miller’s Tax Strategies team is moving forward with filing Schedules K-2 and K-3, as applicable for our clients.

We recognize that this is a complex topic exacerbated by a lack of clarity and an environment in which IRS resources are significantly limited. If you have any questions or concerns regarding Schedules K-2 and K-3, including whether you have a filing requirement or whether certain international transactions would be applicable, please contact your Kreischer Miller relationship professional or any member of our Investment Industry Group at your earliest convenience.


Newsletter subscription

Kreischer Miller Exhibiting at 20th Annual PMAR North America Conference

The Journal of Performance Measurement’s 20th Annual Performance Measurement, Attribution & Risk (PMAR) North America Conference

May 10-11, 2022
Westin Philadelphia
Philadelphia, PA

Each year, the PMAR conference provides an opportunity for performance measurement professionals to learn about recent developments in performance, attribution, risk, and GIPS, as well as network with peers and gain new insights and solutions.

Kreischer Miller will once again be exhibiting at this year’s PMAR Conference. Stop by and see us!

More details about PMAR North America.


Beware of the SEC When It Comes to GIPS Claims of Compliance

The CFA Institute created and administers the GIPS Standards. However, a ruling in this SEC case demonstrates that while the SEC did not develop the GIPS Standards, it will take action against investment advisors that falsely claim compliance or omit key disclosures.

The case involves an advisor that advertised its performance in several magazines and investment newsletters. The advertisements cited the firm’s GIPS claim of compliance, but did not include all of the disclosures required by the GIPS Advertising Guidelines (including since inception returns, currency used, and how an interested party can obtain a GIPS Report).

The judge in the case ruled that, among other things, the advisor violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 by misrepresenting its compliance with GIPS standards in the advertisements and newsletters. The judge also ruled that the advisor’s owner aided and abetted the firm’s violations. The firm was censured and ordered to pay civil penalties. The firm’s owner received a permanent bar from association with any advisor or broker-dealer, a cease-and-desist order, and an order to pay civil penalties.

The case serves as a reminder that a firm’s claim of compliance is often an advertising claim. Claiming GIPS compliance involves more than having formal policies and procedures for calculating and presenting composite performance presentations. The GIPS standards also include the GIPS Advertising Guidelines. If a firm mentions GIPS in an advertisement, the GIPS Advertising Guidelines require certain presentation and disclosure items to be included.

As a reminder, here is the way the GIPS Advertising Guidelines define “advertisement”:

An advertisement includes any materials that are distributed to or designed for use in newspapers, magazines, firm brochures, pooled fund fact sheets, pooled fund offering documents, letters, media, websites, or any other written or electronic material distributed to more than one  party, and there is no contact between the firm and the reader of the advertisement. One-on-one presentations and individual client reporting are not considered advertisements.

Presentation and disclosure items required by the GIPS Advertising Guidelines vary depending on whether a firm includes performance in its advertisement, versus just basic language that it is GIPS compliant. While the 2020 edition of the GIPS Standards, effective January 1, 2020, did not see large scale changes to the GIPS Advertising Guidelines (now included in Section 8 of the GIPS Standards for Firms), there were updates made to certain criteria for advertisements including performance. As an alternative to meeting the requirements of the GIPS Advertising Guidelines, firms may provide a GIPS Report with the advertisement to satisfy the GIPS Advertising Guidelines.

As firms begin to evaluate their advertising policies in response to the release of the SEC’s Marketing Rule, which is required to be adopted by all firms no later than November 2022, it may be prudent for firms to take a fresh look at their policies and procedures related to their advertisements and compliance with the GIPS Advertising Guidelines. Policies and procedures often incorporated into a firm’s regulatory review of advertisements should include:

  • The process for determining whether the document is considered an advertisement under the GIPS Standards.
  • Utilization of a checklist designed to ensure the completeness of the presentation and disclosure requirements in the advertisement. This checklist may also include any regulatory requirements and should be completed by the preparer of the advertisement.
  • The policy for reviewing the advertisements, with documentation that the review occurred. Ideally, these advertisements should be reviewed by someone other than the preparer (often a representative from legal and compliance) and should include a review of the completed disclosure checklist related to the advertisement.

And as a reminder, while it is important to have documented policies and procedures, it is equally important to have a documented process that demonstrates how the firm has followed them. If any errors or deficiencies are noted, the firm should proactively correct them and then  adopt policies and procedures to reduce reoccurrence. Independent oversight by internal or external compliance counsel is highly recommended.

If you are currently claiming compliance with the GIPS standards or would like to claim compliance in the future, and would like to know more information about this subject, please contact us.

Todd E. Crouthamel, Director, Audit & Accounting can be reached at

Ashley Jiang, Senior Accountant, Audit & Accounting can be reached at


Newsletter subscription

Related content:

Newsletter Signup