Author Archives: kmco

SEC Proposes Private Fund Reporting Changes

In what appears to be a response to continued evolvement and growth of the private fund industry, on January 26, 2022 the SEC proposed amendments to Form PF which would require reporting of certain events as well as lower the threshold for large private equity advisers.

Form PF was originally adopted in 2011. Private fund advisers (i.e., SEC-registered managers of hedge, private equity, and other alternative funds) are generally required to file Form PF if they manage at least $150 million in private fund assets. It further requires “large” advisers to provide additional disclosures. Currently, those thresholds are as follows:

  • Large Hedge Fund Advisers – At least $1.5 billion in hedge fund assets under management
  • Large Liquidity Fund Advisers – At least $1 billion in combined money market and liquidity fund assets under management
  • Large Private Equity Advisers – At least $2 billion in private equity fund assets under management

Further background on Form PF as it currently stands, including the form and the instructions, can be found at Form PF ( Additionally, the SEC has posted staff responses to frequently asked questions here.

The SEC’s new proposal would require certain hedge funds and private equity funds to file reports within one business day of stress events, which the SEC believes would be relevant to financial stability and improve investor protection. The proposal would also lower the threshold for large private equity advisers from $2 billion in private equity assets under management to $1.5 billion.

The proposal is expected to be published to the Federal Register and will include a 30-day comment period. Kreischer Miller’s Investment Industry Group will continue to monitor the status of the proposal and provide updates as they become available.

We would be pleased to provide further information related to this subject. For more information, contact Craig B. Evans, Director, Audit & Accounting at


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H.R.4620: What Family Offices Should Know about The Family Office Regulation Act of 2021

Background – The Family Office Rule

Family offices are generally excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.  This was a result of the Dodd-Frank Act which gave the SEC the authority to exempt family offices.  Since June 2011, a family office is excluded from the definition of an investment adviser if it:

  • has no clients other than family clients;
  • is wholly owned by family clients and is exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and
  • does not hold itself out to the public as an investment adviser

The size of the family office (i.e., assets under management/AUM or number of family member participants) nor the types of assets managed (e.g., equities, fixed income, derivatives) are qualifying factors.

For further background on SEC Rule 202(a)(11)(G)-1 (the “Family Office Rule”) the original text can be found at Final Rule: Family Offices ( The SEC has also posted several staff responses to questions at | Staff Responses to Questions About the Family Office Rule.

H.R. 4620 – The Family Office Regulation Act of 2021

In what appears to be a response to testimony by Archegos Capital Management before the House Financial Services Committee, New York Congresswoman Alexandria Ocasio-Cortez has introduced H.R. 4620.

Under H.R. 4620, the exclusion described above would now be limited to “covered family offices” with a threshold of $750 million or less in AUM. Those family offices with more than $750 million in AUM would still be exempt from registering with the SEC but would have to file reports with the SEC as an “exempt reporting adviser.” Additionally, all family offices that are subject to an SEC order, as described in Section 15(b)(4)(H) of the Securities Exchange Act of 1934, for conduct constituting fraud, manipulation, or deceit, would not be considered a covered family office. Furthermore, certain family offices that utilized a grandfathering clause within the Dodd-Frank Act to qualify for the family office exclusion despite having clients who are not members of the family would also not be considered a covered family office since such grandfathering clause would be repealed.

H.R. 4620 also directs the SEC to exclude family offices that are below $750 million in AUM from being a covered family office if they are highly leveraged or engage in high-risk activities. H.R. 4620 does not define “highly leveraged” or “high-risk activities.” The full text of H.R. 4620 can be found at Text – H.R.4620.

With the House returning from recess this week, family offices should keep an eye on the progress of H.R. 4620. If The Family Office Regulation Act of 2021 were to pass through Congress as currently written, it would significantly alter the availability of existing exemptions for many family offices and the SEC would have the ability obtain data it currently does not have access to.

We would be pleased to provide further information related to this subject. For more information, contact Craig B. Evans, Director, Audit & Accounting at


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Beware Phony FINRA Phishing Schemes

There has been a recent wave of cybercriminals impersonating the Financial Industry Regulatory Authority (FINRA). Because organizations strive to be compliant with regulations, receiving an email from FINRA can be quite startling and cause recipients to inadvertently fall for the scam.

In this FINRA-themed phishing email, the sender’s email address uses the domain The email claims that your organization has received a compliance request and it directs you to click on a link for more information. To add a sense of urgency, the message also states “Late submission may attract penalties.” The email even includes a case number, request ID, and a footer with legal jargon to make it feel legitimate. However, clicking the link will redirect you to a malicious website.

Use these 3 tips to stay safe from these types of attacks:

  1. Look for threats of urgency, such as the need to pay a penalty if you don’t act quickly enough. These scams rely on impulsive actions, so always think before you click.
  2. Check who sent the email. In this case, while the email address includes the name FINRA, it did not use the official domain.
  3. If you are worried that the email could be legitimate, reach out to FINRA another way. Do not click any links or use the contact information provided in the email.​


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Certain Smaller Broker-Dealers Have Opportunity to Extend Filing Deadline of Annual Reports

On February 12, 2021, the Securities and Exchange Commission (SEC) issued an order that extends the filing deadline for annual audit and related reports an additional 30 days for smaller broker-dealers that meet certain conditions. These filings are normally required to be completed within 60 calendar days after the fiscal year-end. With this new order, qualifying broker-dealers now have 90 calendar days to complete the filings.

The order was issued to provide firms and auditors additional time to prepare and audit the annual reports required within a compressed time period, when professional service providers are at their greatest demand. It was also noted that the 30 day extension could result in better quality of annual reports.

A broker-dealer must meet all of the following conditions in order to be granted the 30 calendar day extension:

  • As of its most recent fiscal year-end, be in compliance with rule 15c3-1 and have total capital and allowable subordinated liabilities of less than $50 million, as reported in box 3530 of Part II or Part IIA of its FOCUS Report
  • Be permitted to file an exemption report as part of its most recent fiscal year-end annual reports
  • Submit a written notification to its designated examining authority of its intent to rely on this order on an ongoing basis for as long as it meets the conditions of the order
  • Files the annual report electronically with the Commission using an appropriate process

This comes as welcome news for some smaller broker-dealers who are challenged to meet a higher standard with limited resources at their disposal. Based on the order’s interpretation, as long as the conditions noted in the order are met and the submitted written notification is accepted, the deadline will be extended on an ongoing basis, allowing for 90 days to file the required audit and related reports with the SEC. To reiterate, broker-dealers that meet the criteria summarized above, must submit a written notification to FINRA of its intent to rely on this order on an ongoing basis for as long as it meets the conditions of the order.

The text of the SEC’s order is available here.

We would be pleased to provide further information related to this subject. For more information, contact Frank L. Varanavage, Manager, Audit & Accounting at


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SEC Modernizes the Accredited Investor Definition

On August 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to its “accredited investor” definition. Its goal was to simplify and improve the framework to allow investors who have been denied eligibility in the past to qualify based on their knowledge, expertise, or certification, in addition to certain tests for specific income and net worth. It also expanded the list of entities that might qualify as an “accredited investor.”

The SEC made these amendments in an effort to expand investment opportunities while maintaining appropriate investor protections and promoting capital formation.

The following are the highlights of the amendments that will revise Rule 501(a) and Rule 144A of the Securities Act.

The amendments to the accredited investor definition in Rule 501(a):

  • Add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations, or credentials, or other credentials issued by an accredited educational institution which the SEC may designate from time to time by order. In conjunction with the adoption of the amendments, the SEC designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the SEC with flexibility to reevaluate or add certifications, designations, or credentials in the future. Members of the public may wish to propose for the SEC’s consideration additional certifications, designations, or credentials that satisfy the attributes set out in the new rule;
  • Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
  • Clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
  • Add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
  • Add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
  • Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

The amendments expand the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition. The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.

The amendments to these rules will give options and opportunities to both investors and investment managers who were limited in the past by who they could invest with and who would be allowed to invest.

The amendments and order become effective 60 days after publication in the Federal Register.

We would be pleased to provide further information related to this subject. For more information, contact Frank L. Varanavage, Manager, Audit & Accounting at


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Are Your GIPS Policies and Procedures Up-To-Date in Advance of GIPS 2020?

As we draw near the December 31, 2020 adoption date for GIPS 2020, it will become increasingly important for firms to review the updated standards to determine whether any changes should be made, or more importantly, must be made to their existing policies and procedures to remain compliant.

While some of the changes and updates made in GIPS 2020 will result in the simplification of existing policies and procedures, others will require firms to assess, create, and adopt new ones altogether. We recommend that firms perform a gap analysis of their current policies and procedures in an effort to determine whether, at a minimum, all new requirements of GIPS 2020 have been met.

This article seeks to cover some of the changes and updates brought about as a result of GIPS 2020 that we anticipate will have an impact on many firms’ policies and procedures. It is important to note that this article is not meant to be all encompassing and, as a result, firms should review the updated standards in their entirety to understand the full impact of GIPS 2020.

Creating and Updating GIPS Reports

An area of the standards that has seen notable change, and is likely to impact a large number of firms, involves the creation and updating of GIPS reports. Before digging into these updates, it should be pointed out that GIPS 2020 replaced some keywords from the prior edition as well as introduced some new terminology that firms should take into consideration when updating their policies and procedures.

First and foremost, GIPS 2020 eliminates the use of GIPS compliant presentations and replaces it with GIPS reports. There are two distinct types of GIPS reports, each with their own set of requirements and recommendations. GIPS composite reports are more or less the same report one might associate with a GIPS compliant presentation. The GIPS pooled fund report is a new concept introduced by GIPS 2020 and is a presentation for a specific pooled fund.

In addition, GIPS 2020 introduces a model centered around portfolio types, which are then used as the basis for creating, updating, and distributing GIPS reports. As a result, firms will need to examine and segregate managed portfolios into one of three categories, each of which has been defined below:

  • Segregated Account – a portfolio owned by a single client
  • Broad Distribution Pooled Fund (BDPF) – a pooled fund that is regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares and is not exclusively offered in one-on-one presentations (i.e. mutual fund)
  • Limited Distribution Pooled Fund (LDPF) – any pooled fund that is not a BDPF (i.e., hedge fund)

When creating composites, firms were previously required to include all actual fee-paying, discretionary accounts in at least one composite. However, under GIPS 2020, firms are now only required to include all actual, fee-paying segregated accounts in at least one composite. Pooled funds no longer need to be included in separate composites so long as the strategy is not offered for segregated accounts. As a result, previously kept pooled fund composites, often referred to as single-member composites, may be terminated. If the same strategy is offered for both pooled funds and segregated accounts, GIPS 2020 requires firms to include the pooled fund as part of the composite strategy. Furthermore, firms are prohibited from excluding one from the other based on legal structure alone.

Firms are required to create and maintain a GIPS Composite report for each composite strategy and a GIPS Pooled Fund report for each LDPF. Due to the complexities and regulatory requirements surrounding BDPFs, GIPS 2020 does not require firms to create and maintain GIPS Pooled Fund reports for BDPFs. While not required to do so, firms are not prohibited from creating a GIPS Pooled Fund report for a BDPF or including a BDPF in a GIPS Composite report. As indicated in the aforementioned paragraph, firms are required to include a BDPF in a composite if it meets the definition of a composite maintained for segregated accounts.

When updating GIPS Reports for distribution under the new standards, firms are now required to update reports to include information through the most recent annual period end within 12 months of that annual period end. In other words, when presenting calendar year-end periods, a firm must present the December 31, 2020 year-end returns no later than December 31, 2021. While most firms’ policies and procedures may stipulate that GIPS reports are to be updated at least annually, failure to do so now has the potential to jeopardize a firm’s compliance.

Distribution of GIPS Reports

The introduction of the portfolio type model brought about by GIPS 2020 resulted in changes made to the requirements governing the distribution of GIPS reports to prospects. The term “prospective clients,” for instance, was bifurcated into prospective clients and prospective investors. While a prospective client still represents any person or entity interested in one of a firm’s composite strategies, a prospective investor represents any person or entity interested in one of the firm’s pooled funds.

As it relates to the distribution of GIPS reports to prospective investors, differences exist in the requirements for BDPFs and LDPFs. Similar to composite strategies for prospective clients, prospective investors interested in LDPFs must be provided with an updated GIPS composite or GIPS pooled fund report at least once every 12 months. When providing a GIPS report to a prospective LDPF investor, firms have the option of providing either a GIPS pooled fund report or a GIPS composite report so long as the pooled fund is included within the composite. Firms are not required to distribute GIPS reports to prospective investors interested in BDPFs as a result of the nature of the investment and the availability of information.

One of the more important changes related to the distribution of GIPS reports is the requirement for a firm to demonstrate that it made every reasonable effort to provide GIPS reports to prospective clients and investors. This may require firms to develop more robust policies and procedures surrounding the tracking of such distribution. Sound policies and procedures should provide firms with pertinent information such as when a party initially became a prospective client or investor, which GIPS report was last provided, and when the next report is required to be provided. It should be emphasized that new verification requirements require verifiers to test this area as part of procedures performed. As such, it will be important to have tracking policies and procedures in place going into 2021.

Firm Assets

As part of the presentation requirements under the 2010 GIPS Standards, firms had the choice of presenting either total firm assets or composite assets as a percentage of total firm assets, as of each annual period end. GIPS 2020 removes that election and requires that all firms present total firm assets as of each period end. It is important to note that firms that have historically presented composite assets as a percentage of total firm assets need not retroactively update GIPS reports, as this option is still permissible for periods ending prior to December 31, 2020.

While not specifically addressed within the 2010 edition of the GIPS standards, firms previously relied on the guidance provided within the Guidance Statement on the Use of Supplemental Information when presenting advisory-only assets. GIPS 2020 specifically provides guidance on the use of advisory-only assets within GIPS reports. When presenting advisory-only assets, firms have the option to present amounts separately from total firm assets or combined with total firm assets, but presented as a separate value. Regardless of the decision, firms are still required to present total firm assets as a separate and identifiable value. It is worth mentioning that the presentation of advisory-only assets pertains to both firm-level assets as well as composite-level assets.

Non-Fee-Paying Portfolios

When opting to include non-fee-paying portfolios in a composite, firms were previously required to present the amount of composite assets represented by the non-fee-paying assets. However, under GIPS 2020, firms are no longer required to present this measure when presenting gross-of-fee returns or net-of-fee returns with a model net down. Only when presenting net-of-fee returns where returns are reduced by actual management fees charged (which would exclude non-fee-paying portfolios) are firms required to present this figure.


Historically, policies and procedures on the topic of portability have been relatively straightforward – if the new or acquiring firm met the prescribed criteria, performance of the past firm was required to be linked. However, under GIPS 2020, firms may choose whether to link past performance. The criteria for portability remained consistent between editions, with the exception of an additional criterion clarifying that the track record between the past firm and the new or acquiring firm be continuous in nature, if the firm wishes to link performance. If a break in performance does exist, firms are still permitted to port historical performance of the past firm, but are restricted from linking this to current performance.

GIPS 2020 also offers some clarity surrounding the timing and transition associated with the acquisition of another firm or merger of two firms. When a firm acquires another firm or affiliation, the firm has one year to bring any non-compliant assets into compliance. Furthermore, assets of the acquired non-compliant firm must meet all requirements of the GIPS standards within one year of the acquisition date, on a going forward basis. It’s worth reiterating that the one-year grace period applies to non-compliant assets becoming compliant on a prospective basis. New or acquiring firms are not required to bring past performance into compliance unless they want to port the prior track record, in which case there is no time limit or constraint.

Wrap Composites and Estimated Transaction Costs

In the past, wrap-specific composites or composites containing wrap portfolios posed a problem for firms in that transaction costs were indeterminable. This made it difficult to calculate and present gross-of-fee returns. Oftentimes, firms resorted to presenting a combination of net-of-fee returns in addition to other supplemental information, such as pure gross-of-fee returns.

As part of GIPS 2020, firms are provided the ability to estimate transaction costs when, and only when, actual transaction costs are unknown. Included within the Explanations of the Provisions in Section 2 put out by the CFA Institute, reasonable approaches to estimating transaction costs include using actual transaction costs for portfolios that the firm manages in the same or similar strategy, or actual transaction costs for similar securities that trade in a similar market. Estimated transaction costs may take the form of a percentage or as a monetary value. Regardless of the methodology selected, it will be imperative for firms to have clear policies surrounding the calculation of the estimated transaction costs as well as procedures for maintaining proper supporting documentation.

GIPS 2020 has introduced numerous changes to improve the standards. The CFA Institute has issued an Explanation of the Provisions for each of the sections within the standards, which provides firms with additional practical guidance to help implement the GIPS Standards. While we have offered this as a summary of changes potentially impacting your GIPS policies and procedures, it will be important to understand how to implement these policies in your organization. For more guidance about changes to the standards potentially impacting your policies and procedures, or any other part of GIPS 2020, please contact us.

We would be pleased to provide further information related to this subject. For more information, contact Joshua E. Kramer, Manager, Audit & Accounting at


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Error Correction and Materiality Under GIPS 2020

Overview of the Rules Under GIPS 2020

The error correction rules for firms are in provision 1.A.20 of GIPS 2020, which notes that firms must correct material errors in GIPS composite reports and must:

  1. Provide the corrected GIPS composite report to the current verifier
  2. Provide the corrected GIPS composite report to current clients and any former verifiers that received the GIPS composite report that had the material error
  3. Make every reasonable effort to provide the corrected GIPS composite report to all current prospective clients and prospective investors that received the GIPS composite report that had the material error. The firm is not required to provide a corrected GIPS composite report to former clients, former investors, former prospective clients, or former prospective investors.

The rules for pooled fund reports mirror those for composite reports and can be found in Provision 1.A.21.

This provision seems pretty straightforward, except for one item. How does a firm determine if an error is material or not?


What’s Material?

In order to help explain the GIPS Standards, in the past the CFA Institute has issued GIPS Handbooks, which provide guidance and examples. Under GIPS 2020 for firms, the Handbook has been renamed Explanations of the Provisions. Many people still refer to this as the Handbook, and we will too in this article.

In the GIPS 2020 Handbook (or just Handbook for short), error correction and materiality guidance is presented for provisions 1.A.20 and 21. The Handbook also notes that an error, which can be qualitative or quantitative, is any component of a GIPS report that is missing or inaccurate.

In order to determine whether an error is material, the Handbook goes on to note that firms should start with the following:

Materiality Definition

An error (or item) is material if the magnitude of the omission or misstatement of performance information, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed by the omission or misstatement.

This is a good definition as it gets to the crux of the matter whether or not the judgment of a reasonable person relying on the information would have been changed. This definition is consistent with the framework used in the accounting profession as well as frameworks used when weighing legal and SEC matters. Although quantitative measures are important, note that this is not a purely quantitative model and that judgment (qualitative analysis) is required in order to make a final determination.

We suggest that firms expand upon this materiality definition to create a framework. This can be done by adding the following:


Materiality is influenced by the perception of the needs of GIPS report users who rely on those reports to make judgments about an investment manager’s performance. Users are viewed as a group, not as specific individuals.

Judgment Influence

In determining if an error could influence the judgment of a user (as defined above), users are assumed to:

  • Have an appropriate knowledge of business and economic activities and performance reporting and a willingness to study the information in the GIPS reports with an appropriate degree of diligence;
  • Understand that GIPS reports are prepared to levels of materiality;
  • Recognize the differences in different methods for calculating and reporting performance;
  • Make appropriate decisions on the basis of information in the GIPS reports.

Perspective of Materiality

Materiality considerations should include the entire GIPS report, rather than one line, number, or disclosure viewed in isolation. In addition, errors need to be evaluated along with other known errors (including uncorrected errors from prior periods). This article discusses this further below.

Quantitative and Qualitative Considerations

Although materiality is commonly expressed in quantitative terms, determination of materiality is a matter of professional judgment that includes both quantitative and qualitative considerations.


Why Can’t Materiality Just Be Quantitative?

We see a wide variety of approaches to materiality in practice, including some firms which adhere to simple numerical thresholds without taking into consideration context, multiple errors in one statement, non-numerical errors, and other concerns which require judgment.

When defining materiality, firms should consider many factors. Setting a single basis point limit (such as 20 basis points) as the sole determinant of materiality can be dangerous.

Materiality is a relative concept. For example, 20 basis points may be material on a return of 25 basis points; however, on a returns of 700 basis points, 20 basis points does not seem as significant. Also, such absolute factors are impossible to apply to all non-return figures and disclosures in a presentation.

Below we have listed several different types of errors. Many of the errors are the same quantitatively, but the reasons for the errors and impact on a presentation are different for each example. Is each error material or immaterial? These potential error scenarios illustrate that there are many types of issues that can trigger errors, and that a fixed, absolute definition of materiality is not flexible enough to effectively evaluate all potential errors and the impact to the users of a performance presentation. A relative framework, which involves judgment, is needed.

  1. The composite return is off by 19 basis points.
  2. The composite return is overstated by 19 basis points and correcting the difference would cause the manager to go from outperforming the benchmark to underperforming the benchmark.
  3. The composite return is overstated by 19 basis points while the index return is understated by 19 basis points.
  4. Every number on the presentation is 100 percent correct, but the notes are misleading.
  5. The current year composite return is overstated by 19 basis points. Suppose every prior year composite return in the presentation has the same misstatement.
  6. The composite return was overstated by 19 basis points to manipulate company bonus allocations to portfolio managers.
  7. The composite return is off 19 basis points as a result of mispricing of the underlying securities; this caused the account to trigger a performance fee. Without the mispricings the account would not trigger the performance fee.
  8. A U.S. manager’s composite presentation containing mutual funds only shows gross returns and the investment manager is registered with the SEC. All returns presented are correct, the presentation contains the required disclosures, but the SEC requirement to show net returns for composites containing mutual funds has been violated.


Bringing It All Together

We suggest that firms consider the following approach in evaluating whether errors are material.

  1. Set quantitative thresholds and qualitative factors that trigger an error review. Trigger criteria don’t necessarily mean that an error is material. Rather, trigger criteria causes a review of the error by the firm. Trigger criteria might include:
    1. Returns off by more than X%
    2. Benchmark returns off by more than X%
    3. Dispersion off by more than X%
    4. When composite or fund AUM is off by more than X%
    5. When firm AUM is off by more than X%
    6. Number of accounts is off by more than X%
    7. Incorrect or missing disclosures
    8. Any other error or combination or errors that the performance team believes should be evaluated for materiality
  2. Create a committee responsible for evaluating error materiality. Consider including the following team members on the committee:
    1. Performance professionals who are familiar with the GIPS Standards.
    2. Compliance professionals who are familiar with regulatory requirements and rules, such as those promulgated by the SEC.
    3. Investment professionals who understand the investment products being represented by the GIPS reports.
  3. Use the materiality framework noted above to evaluate the errors. This might include the following:
    1. Recalculate the returns and quantify the error in the GIPS report. Any additional errors (including those from prior years that are still uncorrected) should be included in the analysis. The result is that the committee should be able to look at the current GIPS report with all errors identified. Maybe this is just one return. Maybe it’s the past 5 years’ returns and benchmark data. The point is to view the GIPS report as a whole when determining whether it’s misleading. Just analyzing one number, viewed in isolation, is generally not an effective method for determining whether the GIPS report is materially misstated. It is generally helpful to analyze errors both individually and in the aggregate.
    2. Determine if the error(s) are material based on the materiality definition and framework presented earlier in this article.
      1. For numeric errors, consider evaluating the error on both an absolute and relative basis. For example, 20 basis points may be material on a return of 25 basis points; however, on a returns of 700 basis points, 20 basis points does not seem as significant.
      2. For disclosure items (such as missing or incomplete disclosures), consider the impact of the error on a user of the GIPS report. Perhaps omitting a disclosure that indicates that the returns are calculated in USD is deemed to be immaterial, while omitting the required composite description is material.
  4. Document the committee’s decisions and reasoning.
  5. Follow the firm’s error correction policies:
    1. For material errors – the firm’s policies must follow the correction and distribution requirements of Provisions 1.A.20 and 21, including the redistribution of corrected reports to verifiers, clients, and prospective clients and investors who received the GIPS report that contained the material error. Also, the GIPS Standards require firms to disclose errors deemed material for a minimum of one year in the related GIPS report.
    2. For immaterial errors – the firm has more flexibility on whether to correct or leave the error uncorrected. Some firms do not make any changes under the rationale that it’s simply not material. Other firms correct the presentations. The key is to follow the firm’s policies and procedures consistently.
  6. Maintain a log, which should include:
    1. A description of each error.
    2. Whether or not it was material.
    3. For material errors, to whom the corrected GIPS reports were sent.
    4. Any new policies and procedures implemented in order to minimize the risk of similar errors occurring in the future.

GIPS 2020 has introduced numerous changes to improve the standards. The Handbook provides additional practical guidance to help firms implement the GIPS Standards. While we have offered this overview of error correction and materiality determination, it is important to understand how to implement these policies in your organization. For more guidance about error correction, materiality, or any other part of GIPS 2020, please ccontact us.

We would be pleased to provide further information related to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting at


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Operational Due Diligence During a Pandemic

It was the best of times; it was the worst of times. This well-known phrase keeps coming to mind as we evaluate how to move forward when it feels as though the whole world has collectively stopped moving. While approximately 300 million people, just in the United States, have been asked to stay at home, the world has not stopped moving. The markets are open, and during these turbulent times effective due diligence is more important than ever.

Yet, can there be “effective due diligence” during a pandemic?

As COVID-19 continues to develop and present new challenges, so too must operational due diligence professionals adapt and develop new policies and procedures to ensure non-investment risks are addressed. Due diligence should never be a “check the box” exercise, and while today that has never been more evident, gathering consistent, easily-applied data can help an investor identify higher-risk managers.

Gather Basic Information from your Investment Managers

It may seem obvious, but the idea is to formulate a quick snapshot to help an investor understand its risks, determine its liquidity, and assess transparency issues. Some areas in which to gather this information include:

  • Manager location – As new virus hotspots emerge, do you know which of your managers could be affected?
  • Manager size– Smaller managers will be at greater operational risk due to a smaller headcount and lack of segregation of duties. Should a key employee get sick, are there sufficient resources and back-up functions to keep the investment process moving?
  • Service providers – Which service providers are used for your funds? Has the manager reached out to the service provider to determine whether there will be servicing problems?
  • Counterparty exposure – Ask each investment manager to provide prime broker and counterparty exposure.
  • Front office – Ask each investment manager to provide a summary of the impact to the front office, including any effect to the execution of the investment strategy or the deal timelines.
  • Back office – Ask each investment manager to provide a summary of the impact to the back office, including any changes in controls and procedures due to employees working from home.

Beyond the Basics – Adapting to the Challenges

  1. Documentation Review. Part of what makes due diligence using only remote procedures a less than ideal model is the reluctance of investment managers to release sensitive documentation. With travel restrictions in place for the foreseeable future, investment managers, investors, and due diligence professionals will have to be creative in addressing access to sensitive documentation. This applies to not only the due diligence professional, but also the investment management staff – how is the investment manager obtaining relevant documentation during its investment due diligence?
  2. Virtual “Trust but verify” is still a fundamental component of operational due diligence. An onsite visit provides the opportunity to observe employees, processes, and systems in action. With most, if not all, of an investment manager’s staff working from home and on-site visits suspended, due diligence professionals can obtain a significant amount of information through questionnaires, social media, a review of Form ADV, and even the investment manager’s website. Virtual visits include “a walkthrough of systems” through screen shares and video conferencing.
  3. Interviews. Although in-person interviews are a great way to glean information from a manager, video conferencing is a viable alternative. Interviews are important not just for what is said, but due diligence professionals will pay close attention to non-verbal communication as well as corroborations between front, middle, and back office personnel. As stay at home restrictions continue, due diligence professionals and investment management personnel are becoming comfortable with conducting interviews remotely. Video conferences can still allow the interviewer to read body language, walk through the life of the investment, and assess whether the story “fits.”
  4. Business Continuity and Disaster Recovery. Most investment managers have business continuity and disaster recovery plans in place. Typical plans address isolated events such as a power outage or an inaccessible office building. Most do not address a pandemic with widespread quarantines, travel restrictions, and most, if not all, employees working from home. Annual BC/DR testing is more often than not executed when the office is not at 100 percent capacity (e.g., a long weekend or a week in summer when a higher than normal percentage of employees are on vacation). COVID-19 has tested these plans and highlighted weaknesses. Due diligence professionals should ask about any problems, and more importantly, any changes that have been made in response to COVID-19.
  5. Regulatory Concerns. Investment managers and due diligence professionals should be aware of any regulatory changes due to COVID-19. The SEC and OCIE have both released statements in response to COVID-19. OCIE has indicated it may discuss with registrants the implementation and effectiveness of business continuity plans. The SEC has stated that the June 30, 2020 deadline for complying with Reg BI will not be changed in light of COVID-19. Investment managers should ensure any changes in policies and procedures are carefully documented and consistent with legal requirements. Well-designed compliance programs that are not properly documented or implemented will often lead to regulatory enforcement actions.      

Looking Forward

As COVID-19 continues to evolve and market participants continue to adapt, due diligence professionals will need to evolve and adapt as well. Due diligence professionals are adapting to virtual environments, watching for regulatory guidance, and developing an understanding of policy and procedural changes.

As we move past the pandemic, due diligence professionals and investors should ask for copies of policies and procedures as well as disaster recovery and business continuity plans. Any documentation that has not been revised or updated as a result of COVID-19 should be a red flag.

While we are in what can only be described as “the worst of times,” we can still develop best practices that will carry forward with us as we look forward to the “best of times.”

For more information about this topic contact us at or 215.441.4600.


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OCIE 2020 Cybersecurity and Resiliency Observations

Cybersecurity is the practice of protecting networks, devices, and data from unauthorized access or criminal use. Today, everything relies on computers, no industry is immune, and the volume of data and availability of information puts firms and capital markets at risk each day.

Importance of Information Security

For the eighth year in a row, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) announced it would continue to prioritize information security in its 2020 examinations.

Observations and Best Practices

On January 27, 2020, OCIE released a 13-page report detailing observations relating to cybersecurity and best practices. The observations are based on thousands of examinations of broker-dealers, investment advisers, clearing agencies, national securities exchanges, and other SEC registrants, according to the report published on its website.

The observations highlight practices in the following areas:

  1. Governance and Risk Management
  2. Access Rights and Controls
  3. Data Loss prevention
  4. Mobile Security
  5. Incident Response and Resiliency
  6. Vendor Management
  7. Training and Awareness

Looking Forward

OCIE recognized that “there is no such thing as a ‘one size fits all’ approach, and that all of the practices may not be appropriate for all organizations. It was providing these observations to assist market participants in their consideration of how to enhance cybersecurity preparedness and operational resiliency.”

As part of its operational due diligence program, Kreischer Miller reviews an investment manager’s cybersecurity program. We look at written policies and procedures, meet with technology teams, and obtain an understanding of how a manager identifies risks, addresses those risks, and enforces its policies and procedures, including the training of its employees.

Please contact us to learn more about Kreischer Miller’s operational due diligence services or to discuss your firm’s needs.

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OCIE 2020 Examination Priorities

On January 7, 2020, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) announced its 2020 Examination Priorities. For the past 8 years, OCIE has released its examination priorities on an annual basis. Examination priorities highlight where OCIE will focus its resources as it continues to improve compliance and protect investors.

Importance of Compliance

In its 2020 release, OCIE continues to highlight the importance of compliance. Specifically, it emphasized the importance of compliance programs, chief compliance officers, and other compliance staff that play critical roles at a firm. OCIE indicated that a culture of compliance and the tone from the top were key, and effective compliance programs had positive impacts in its examination results. OCIE highlighted the hallmarks of an effective compliance program, which included compliance’s active engagement in most facets of firm operations, a knowledgeable and empowered chief compliance officer, and perhaps most importantly, a commitment to compliance from C-level and similar executives to set a tone from the top that compliance is integral to the organization’s success.

OCIE FY 2019 Results

OCIE prefaced its examination priorities by summarizing its FY 2019 results. OCIE indicated it completed 3,089 examinations in FY 2019. Examinations covered registered investment advisers (RIAs), investment companies, broker-dealers, national securities exchanges, municipal advisors, transfer agents, the Financial Industry Regulatory Authority (FINRA), and clearing agencies.

OCIE issued more than 2,000 deficiency letters, with many firms taking direct corrective action in response to those letters, including amending compliance policies and procedures, enhancing disclosures, and returning fees to investors.

OCIE 2020 Examination Priorities – 8 Themes

  1. Retail investors, including seniors and individuals saving for retirement. OCIE will once again focus on the protection of retail investors, particularly seniors and those saving for retirement. OCIE will prioritize examinations of intermediaries that serve retail investors, namely RIAs, broker-dealers, and dually registered firms, and the investments marketed to, or designed for retail investors, such as mutual funds and exchange-traded funds (ETF), municipal securities, and other fixed income securities, and microcap securities.

Examinations will focus on:

    • Recommendations and advice given to retail investors, with a particular focus on seniors, teachers, and military personnel.
    • Higher risk products, including private placements and securities of issuers in new and emerging risk areas, such as those that: (1) are complex, (2) have high fees and expenses, or (3) where an issuer is affiliated with or related to the registered firm making the recommendation.

OCIE will continue to examine RIAs to assess whether, as fiduciaries, they have fulfilled their duties of care and loyalty. OCIE will continue to focus on risks associated with fees and expenses, and undisclosed or inadequately disclosed compensation arrangements.

  1. Information security. OCIE will continue to prioritize information security. Examinations will focus on proper configuration of network storage devices, information security governance, and retail trading information security. Specific to RIAs, OCIE will continue to focus its examinations on assessing RIAs’ protection of clients’ personal financial information. Particular focus areas will include: (1) governance and risk management, (2) access controls, (3) data loss prevention, (4) vendor management, (5) training, and (6) incident response and resiliency.

In the area of third-party and vendor risk management, OCIE will focus on oversight practices related to certain service providers and network solutions, including those leveraging cloud-based storage.

  1. Financial technology and innovation, including digital assets and electronic investment advice. Examinations will focus on firms’ use of new sources of data and assess the effectiveness of related compliance and control functions.
    • Digital assets. Examinations will assess the following: (1) investment suitability, (2) portfolio management and trading practices, (3) safety of client funds and assets, (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of employee outside business activities.
    • Electronic investment advice. OCIE will focus on RIAs that provide services to their clients through automated investment tools, often referred to as “robo-advisers.” Areas of focus include: (1) SEC registration eligibility, (2) cybersecurity policies and procedures, (3) marketing practices, (4) adherence to fiduciary duty, including adequacy of disclosures, and (5) effectiveness of compliance programs.
  1. Additional focus areas involving RIAs and investment companies. OCIE typically assesses compliance programs of RIAs in one or more core areas, including the appropriateness of account selection, portfolio management practices, custody and safekeeping of client assets, best execution, fees and expenses, and valuation of client assets for consistency and appropriateness of methodology. In addition, OCIE will often assess the adequacy of disclosures and governance practices in the core areas reviewed.

OCIE will prioritize examinations of:

    1. RIAs that are dually registered as, or affiliated with, broker-dealers, or have supervised persons who are registered representatives of unaffiliated broker-dealers. Areas of focus will include whether the firms maintain effective compliance programs to address the risks associated with best execution, prohibited transactions, fiduciary advice, or disclosure of conflicts regarding such arrangements.
    2. Firms that utilize the services of third-party asset managers to advise clients’ investments to assess the extent of these RIAs’ due diligence practices, policies, and procedures.
    3. RIAs offering clients new types or emerging investment strategies, such as strategies focused on sustainable and responsible investing, which incorporate environmental, social, and governance (ESG) criteria. Areas of focus will be on the accuracy and adequacy of disclosures.
    4. Never-before and not recently examined RIAs.
    5. Mutual funds, ETFs, the activities of their RIAs, and oversight practices of their boards of directors.
    6. RIAs to private funds that have a greater impact on retail investors, such as firms that provide management to separately managed accounts side-by-side with private funds. Examinations will assess compliance risks, including controls to prevent the misuse of material, non-public information, and conflicts of interest, such as undisclosed or inadequately disclosed fees and expenses, and the use of RIA affiliates to provide services to clients.
  1. Additional focus areas involving broker-dealers and municipal advisors. OCIE examinations of broker-dealers will focus on the safety of customer cash and securities, risk management, certain types of trading activity, the effects of evolving commissions and other cost structures, best execution, and payment for order flow arrangements
    • Broker-dealer financial responsibility. Examinations will focus on compliance with the Customer Protection Rule and the Net Capital Rule, including the adequacy of internal processes, procedures, and controls.
    • Trading and broker-dealer risk management. Examinations will focus on (1) firms’ trading and other activities in “odd lots,” (2) controls around the use of automated trading algorithms, and (3) use of internal procedures, practices, and controls to manage trading risk.
    • Municipal advisors. Examinations will focus on: (1) whether advisors have satisfied their registration, professional qualification, and continuing education requirements, (2) fiduciary duty obligations to municipal entity clients, fair dealing with market participant requirements, and the disclosure of conflicts of interest, and (3) the conduct of municipal advisors when faced with conflicts while representing their clients, and compliance with recently-effective Municipal Securities Rulemaking Board (MSRB) Rule G-40 concerning advertisements.
  1. AML programs. OCIE will continue to prioritize examining broker-dealers and investment companies for compliance with their AML obligations. The goal of these examinations is to ensure that broker-dealers and investment companies have adequate policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money-laundering activities.
  2. Market infrastructure. OCIE will examine entities that provide services critical to the proper functioning of capital markets. These entities include Clearing Agencies, National Securities Exchanges, Alternative Trading Systems, and Transfer Agents.
    • Clearing Agencies. The Dodd-Frank Act requires the SEC to examine, at least once annually, registered clearing agencies that the Financial Stability Oversight Council has designated as systemically important and for which the SEC serves as the supervisory agency.
    • National Securities Exchanges. OCIE will examine operations, especially how they react to market disruptions, how the exchanges monitor member activity for compliance with the federal securities laws and rules, and will focus on exchange efforts concerning abusive, manipulative, and illegal trading practices to protect the integrity of the marketplace.
    • Regulation Systems Compliance and Integrity (SCI). SCI was adopted by the Commission to strengthen the technology infrastructure of the U.S. Securities markets. SCI entities must establish, maintain, and enforce written policies and procedures designed to ensure that their systems’ capacity, integrity, resiliency, availability, and security is adequate to maintain their operational capability and promote the maintenance of fair and orderly markets. OCIE will continue to evaluate whether SCI entities have met these requirements. Areas of focus will include IT inventory management, IT governance, incident response, and third party vendor management, including the utilization of cloud services.
    • Transfer Agents. OCIE will continue to examine transfer agents’ core functions including the timely turnaround of items and transfers, recordkeeping and record retention, and safeguarding of funds and securities. Examinations will also focus on the requirement for transfer agents to annually file a report by an independent accountant concerning the transfer agent’s system of internal accounting controls, as well as compliance with obligations to search for lost security holders and provide notice to unresponsive payees.
  1. Focus on FINRA and MSRB.
    • FINRA. OCIE conducts risk-based oversight examinations of FINRA. It selects areas within FINRA to examine through a risk assessment process designed to identify those aspects of FINRA’s operations important to the protection of investors and market integrity. Based on the outcome of this risk-assessment process, OCIE conducts inspections of FINRA’s major regulatory programs.
    • MSRB. MSRB regulates the activities of broker-dealers that buy, sell, and underwrite municipal securities, and municipal advisors. OCIE, along with FINRA, conducts examinations of registered firms to ensure compliance with MSRB rules. Examinations of MSRB evaluate the effectiveness of MSRB’s policies, procedures, and controls.

Looking Forward

While the examination priorities of 2020 do not look much different than 2019, it is important to note several key points:

  • Examination coverage. OCIE’s completion of over 3,000 examinations in FY 2019 represents only 15 percent of RIAs. While OCIE has made great strides in increasing its coverage of RIAs, it will continue to face challenges as it tries to keep pace with a growing and evolving industry.
  • New regulation. The Securities and Exchange Commission (SEC) finalized many new rules and interpretations in 2019 that will affect firms and OCIE. The most significant is the package of rules and interpretations designed to enhance the quality and transparency of retail investors’ relationships with RIAs and broker-dealers. OCIE has noted that its FY 2020 examinations will include a focus on:
    • Regulation best interest
    • Form CRS relationship summary
    • Interpretation regarding the standard of conduct for investment advisers

These new rules will require various market participants to make changes to their operations, including to required disclosures, marketing materials, and compliance programs. While this article offered a high level overview of OCIE’s examination priorities for 2020, it is important to understand how your firm may specifically be impacted. For more guidance or to discuss your individual circumstances, please contact us.

For more information about this topic, contact us at or 215.441.4600.

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