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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 kmiller@kmco.com or 215.441.4600.

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GIPS 2020 Changes Carve-Out Standards

With the release of GIPS 2020 came another change to the standards on carve-outs, marking the second time in which the guidance has changed. So, we thought it might be worthwhile to revisit the history of carve-outs guidance within the GIPS Standards.

A Brief History

Initially, the GIPS Standards (formerly, AIMR Performance Presentation Standards) permitted the carving out of a portion of portfolio assets into individual segments for the creation of separate and distinct strategies. In understanding the importance of cash and its potential impact on performance, the standards required that cash be allocated to these carve-outs on a timely and consistent basis, if not already tracked using a separate cash account. With the release of the second edition of the GIPS Standards in 2005, firms were required to start disclosing the percentage of the composite represented by carve-outs as of each period end.

Fast forward to the release of the 2010 edition of the GIPS Standards, in which the GIPS Executive Committee determined that allocation of cash for carve-outs was no longer permitted. Advocates for this change argued that carve-out returns could potentially be misleading, as they did not portray a fair representation of the performance that would have been achieved with a portfolio dedicated to that strategy. Moreover, there existed a chance that prospective investors could be led to believe that that the firm had experience in managing portfolios dedicated to a specific strategy when that may not have been the case. As a result, carve-outs were permitted for inclusion in composites only if they had a separate cash account for the segment being carved out.

Jumping to present day, the GIPS 2020 Standards once again permit firms to allocate cash for carve-outs for inclusion within compliant GIPS composite reports. The change in heart came about primarily as an attempt to increase the number of firms claiming compliance with the GIPS Standards. The thought process was that by allowing firms to allocate cash to carve-outs, more private wealth managers and managers of private market investments, who are more accustomed to multi-asset portfolios, would be encouraged to claim compliance with the standards as they would no longer be tasked with the burden of tracking separate cash accounts.

As you might imagine, GIPS 2020 includes some additional requirements for firms electing to include carve-outs using a cash allocation. These additional requirements have been introduced in order to address the previously raised concerns.

“So we’re allowed to allocate cash, but how?”

Although GIPS 2020 is once again allowing firms to allocate cash to carve-outs, the standards do not prescribe a specific methodology for the allocation of cash. The only requirement related to the allocation of cash is that it is treated consistently and on a timely basis (3.A.15). As such, there is no single methodology required when allocating cash to carve-outs.

As noted in the adopting release for firms, the CFA Institute plans to include guidance within the GIPS 2020 Handbook regarding possible methods for allocating cash. No release date for the Handbook has been announced. Until such guidance is released, acceptable allocation methods have been provided within the previously-issued GIPS Guidance Statement on Treatment of Carve-Outs, which can be found on the GIPS website.

Two of the acceptable allocations methods included within the Guidance Statement are beginning of period allocation and strategic asset allocation. Under the beginning of period allocation method, each month cash is allocated to the carved-out segment based on the carve-out beginning market value as a percentage of the total portfolio beginning market value, excluding cash.

Under the strategic allocation method, cash is allocated to the carve-out based upon target strategic asset allocation. An example might include a manager with a 60/40 equity to fixed income portfolio. If, at the beginning of the period, the portfolio held 56 percent in equites and 38 percent in fixed income securities, then 4 percent of the cash would be allocated to the equities segment and 2 percent to the fixed income segment.

Regardless of the allocation methodology selected, GIPS 2020 requires firms to disclose the policy within the compliant GIPS composite report (4.C.28).

Additional Requirements

As was the case in 2010, skeptics of the new carve-out guidance within GIPS 2020 argued that the use of carve-outs could potentially be misleading to prospective investors as the related performance may not necessarily be representative of a standalone portfolio in a dedicated strategy. In an effort to make the inclusion of carve-outs as transparent as possible, GIPS 2020 includes additional requirements for firms including carve-outs with a cash allocation in composites.

If a firm elects to include carve-outs with allocated cash in a composite, GIPS 2020 requires that it be representative of a standalone portfolio managed or intended to be managed. While this may sound intuitive, it prevents firms from carving out segments that may be misleading to a prospective investor. For instance, a firm is not permitted to carve out the two German equities included in its global balanced composite and create a German equities composite, as this would not be representative of a standalone portfolio.

Furthermore, GIPS 2020 requires firms to create carve-outs with allocated cash from all portfolios and portfolio segments within the firm that are managed to that strategy (3.A.17). As a result, firms will be prevented from cherry-picking which portfolios of a similar strategy will be carved-out with allocated cash and included in a composite.

To further address concerns related to carve-outs with allocated cash not being representative of a standalone portfolio, GIPS 2020 requires that once a firm has – or obtains – a standalone portfolio managed in the same strategy as the carve-outs with allocated cash, the firm must create a separate composite for the standalone portfolio(s) (3.A.18). As a result, it will not be uncommon for firms to have to two separate composites for the same strategy. The only difference between them would be that one includes standalone portfolios and the other includes carve-outs with allocated cash.

When calculating net-of-fee performance for carve-out segments, it will be important to determine the prospective investor and the target portfolio, whether it is a standalone portfolio or a multi-asset portfolio. GIPS 2020 requires the net-of-fee return calculation to be representative of the investment management fee that would be charged to a prospective investor. Furthermore, if actual fees are used, GIPS 2020 requires firms to allocate fees to each segment that are appropriate for each asset class (2.A.47).

How does this impact my presentation and disclosures?

GIPS 2020 further expanded upon the presentation and disclosure items required for composites that include carve-outs with allocated cash. Recalling from earlier, the 2005 edition of the GIPS Standards required firms to disclose the percentage of composites composed of carve-outs. Under GIPS 2020, the standards now specify that the percentage of composites must be presented only for carve-outs that allocate cash (4.A.6). As such, firms need not present the percentage of carve-outs that maintain separate cash accounts. The purpose of this was to provide a prospective investor with an idea of the portion of the composite not represented by a standalone portfolio.

To further drive home this point, GIPS 2020 requires composites including both carve-outs with allocated cash and standalone portfolios to present composite returns and asset market values of the standalone portfolios segment for each annual period end (4.A.13). As you might recall from earlier, composites will have already been created in connection with Provision 3.A.18 and as such, including the related returns and composite assets should be a relatively easy task.

Additional disclosures required by GIPS 2020 include indicating within the composite name that the composite includes carve-outs with allocated cash as well as disclosing that the GIPS composite report for the composite standalone portfolios is available upon request, if it exists (4.C.28).

Can I switch my accounts from cash account to allocation?

In response to the release of the new guidance on carve-outs, firms currently including carve-outs with segregated cash accounts may be enticed to start allocating cash to alleviate the administrative burden of tracking cash separately. For carve-outs already set up with a  segregated cash account, it may be easier to continue tracking cash separately, but what about for new accounts? Is it possible for a composite to include carve-outs with segregated cash accounts, carve-outs with allocated cash, and potentially standalone portfolios?

Under GIPS 2020, both standalone portfolios and carve-outs with segregated cash accounts are treated one in the same, while carve-outs with allocated cash must adhere to all of the new requirements prescribed within the 2020 GIPS standards.

Inclusive of these requirements is the provision to create carve-outs with allocated cash from all portfolios and portfolio segments within the firm managed to the same strategy. As such, firms electing to allocate cash to carve-outs for a strategy that once included carve-outs with dedicated cash accounts will now need to allocate cash for all carve-outs managed to that strategy. This change should be made on a prospective basis and firms should not restate previously reported performance.

Furthermore, this change would qualify as a composite redefinition and firms must disclose the date and description of any composite redefinition. As a result of this requirement, we expect firms will create carve-outs with allocated cash for strategies where they don’t have carve-outs with segregated cash accounts.

Conclusion

Changes to the GIPS Standards involving carve-outs have certainly evolved over time. GIPS 2020 offers a new take on carve-outs to broaden acceptance of the standards, while also addressing the noted concerns. While allowing the allocation of cash to carve-outs will hopefully draw new firms to the GIPS Standards, the additional requirements will safeguard prospective investors from being misled.

Although a majority of the new guidance introduced by GIPS 2020 regarding the allocation of cash to carve-out have been covered throughout this article, it will be important to make sure all requirements are met when making the election to allocate cash to carve-outs. For more guidance about GIPS 2020 and to schedule a conversation, please contact us.

And, if you already claim compliance with GIPS, consider taking advantage of Kreischer Miller’s free GIPS initial assessment, which will:

  • Identify potential issues and areas for improvement, and
  • Provide meaningful feedback about your current process.

Contact us for your free GIPS initial assessment.

 

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The Impact of GIPS 2020 on Pooled Fund Managers

The 2020 edition of the Global Investment Performance Standards (GIPS 2020) was released on June 30, 2019 and is effective beginning January 1, 2020. GIPS 2020 introduced a significant number of additions and changes, the most notable of which can be found in our “Top 5 Things You Need to Know about GIPS 2020” article.

Number two on our “Top 5” list, and perhaps the one with the most extensive changes from prior GIPS versions, is the treatment of pooled investment funds.

Below are four areas with key changes impacting firms that manage pooled vehicles.

Definitions

GIPS 2020 introduces two categories of pooled funds:

  1. Broad Distribution Pooled Funds (BDPFs)
  2. Limited Distribution Pooled Funds (LDPFs)

BDPFs are defined as pooled funds that are regulated under a framework that would permit the general public to purchase or hold the pooled fund’s ownership interests and that are not exclusively offered in one-on-one presentations. In other words, BDPFs are publicly-traded or retail funds, such as a 1940 Act fund or a UCITS fund. As a point of emphasis, the definition of BDPFs has been revised from the GIPS 2020 exposure draft and earlier guidance statement drafts based on feedback received from comment letters.

LDPFs are those pooled funds that cannot be classified as a BDPF. To put it another way, LDPFs are generally private funds, such as a hedge fund, a private equity fund, a limited partnership, or a collective investment trust.

For firms that market pooled funds, the first step under GIPS 2020 is to classify the pooled vehicle offerings as either BDPFs or LDPFs. This is important since certain provisions and reporting requirements within GIPS 2020, some of which are described below, are applicable to one category versus the other.

Categorization of a firm’s pooled vehicle offerings does not come without its challenges, however. Questions arise in situations such as a multi-share class fund. A comment letter response to the GIPS 2020 exposure draft was presented describing a publicly-traded pooled fund with both a retail and an institutional share class and with the institutional share class marketed only in one-on-one presentations. The adopting release that accompanied the issuance of GIPS 2020 laid out that the rules were not intended to have share classes themselves be classified. In this specific situation, the pooled fund would be a BDPF, because the fund is not exclusively offered in one-one-one presentations.

One item to consider related to classifying pooled funds, which may help in these other situations, is to evaluate the firm’s typical marketing practices. A firm should consider whether or not those marketing practices involve contact between the firm and the prospective investor (thus an LDPF) or do not involve contact (thus a BDPF). Further guidance and examples are expected to be provided in the GIPS 2020 Handbook when it is released.

Composite Inclusion

What will likely go down as the most welcome change, at least amongst fund managers, is that the guidance surrounding composite inclusion for pooled funds has been relaxed in GIPS 2020. Prior GIPS versions did not distinguish between separately managed portfolios or pooled portfolios when it came to composite creation and inclusion. To that end, investment firms that only managed pooled funds (e.g. an ETF only shop), were required to create a large number of single account composites to hold each of the pooled fund offerings. For those types of firms, compliance with the new iteration of the standards should be more easily attainable.

Under GIPS 2020, although pooled funds must still be included in a composite if they meet a composite definition, firms are only required to create composites for strategies that are managed for or offered as a segregated account. In other words, a firm is not required to create a composite that only includes pooled funds unless the firm also offers that strategy as a segregated account. Additionally, firms that created composites to house just pooled funds under past rules may terminate those composites under the new set of standards.

Similar to the definitions described above, this change to composite inclusion does not come without its challenges. Firms that manage both separate portfolios and pooled portfolios may actually see some additional complexities. A change to one provision related to how composites must be defined could create some interpretative challenges for these types of firms. A new sentence was added to that provision in the new rules that indicates a firm must not exclude portfolios from composites based solely on legal structure differences.

Under prior GIPS versions, specifically the Guidance Statement on Composite Definition, firms could use the portfolio type (i.e., separate portfolios versus pooled proposals) as a constraint when defining composites. Expressed in a different way, pooled funds could previously be treated as separate composites or combined with other portfolios of the same strategy.

The new sentence appears to contradict the previous guidance statement and, as such, firms that have both types of portfolios and that previously separated them may now need to combine them. As noted above, further guidance and a decision on whether past guidance statements still apply are expected to be provided in the GIPS 2020 Handbook.

Reporting

Reporting under GIPS 2020 has been changed significantly. Compliant presentations, which were previously utilized for all prospective clients regardless of type, are replaced by GIPS composite reports. Additionally, a second type of GIPS report – the GIPS pooled fund report – has been added. This report will be utilized in connection with a newly added and defined type of prospect, the prospective investor. Before comparing and contrasting the new report types, let us first discuss which report is utilized when.

Determining Which Report to Utilize

Reporting to prospective clients (i.e., those that qualify to invest in a composite) is largely unchanged under GIPS 2020. A firm must still make every reasonable effort to provide a GIPS composite report – similar in nature to the past compliant presentations – to prospective clients when they initially become a prospect and at least every 12 months, assuming they remain a prospective client.

From there, GIPS 2020 eliminated the confusion surrounding past versions as to what, if anything, should be provided to prospective investors. This is where the categorization of BDPFs and LDPFs comes into play, as noted above. For BDPF prospective investors, firms are not required to provide a GIPS composite report, which must include the BDPF if provided, or a GIPS pooled fund report. However, firms may elect to do so.

For LDPF prospective investors, firms must make every reasonable effort to provide a GIPS pooled fund report, or a GIPS composite report that contains the LDPF, when the investor initially becomes an LDPF prospect and at least every 12 months, assuming they remain an LDPF prospective investor.

One key point to reiterate is that regardless of whether it is a BDPF or LDPF investor, the GIPS composite report can only be utilized if that composite report contains the respective pooled fund in the composite.

Comparing and Contrasting GIPS Composite Reports and GIPS Pooled Fund Reports

The purpose of creating a GIPS pooled fund report was to afford a more appropriate method for providing GIPS-compliant information to prospective pooled fund investors. In that regard, there a few less requirements in a GIPS pooled fund report as compared to a GIPS composite report, such as the number of portfolios and a measure of internal dispersion.

One specific requirement of a GIPS pooled fund report that is not required of the GIPS composite report is the inclusion of the pooled fund expense ratio. The pooled fund expense ratio is similar to the expense ratio that a mutual fund would report in its annual financial statements. Overall, the two reports are similar, with the GIPS pooled fund report information being limited to that of the particular pooled investment vehicle. Fund managers may be able to leverage existing fund materials by integrating the GIPS reporting requirements into those materials. While this may create a few additional compliance checks internally, the overall result should be an easier path for fund managers to claim GIPS compliance.

Although this article discussed the two high-level GIPS reports (GIPS Composite Report versus GIPS Pooled Fund Report), one key point to mention is that there are actually four types of reports as a result of the expanded ability to use money-weighted returns (MWRs). Those four reports are:

  1. GIPS Composite Report – Time-Weighted
  2. GIPS Composite Report – Money-Weighted
  3. GIPS Pooled Fund Report – Time-Weighted
  4. GIPS Pooled Fund Report – Money-Weighted

In GIPS 2020, firms may present MWR if they have control over the external cash flows of the composite portfolios or pooled fund, and the composite portfolios or pooled fund has at least one of the following characteristics:

  • Closed-end
  • Fixed life
  • Fixed commitment
  • Illiquid investments are a significant part of the investment strategy

Other Reporting Matters

The following other reporting matters related to pooled investment vehicles were also addressed in GIPS 2020:

  • Firms have a choice of presenting gross or net returns in a GIPS pooled fund report. The GIPS 2020 provisions allow for this so that firms can meet the various regulatory requirements in different countries. In the U.S., net is generally required.
  • Firms must maintain a complete list of BDPFs (note that descriptions are not required) and a complete list of LDPFs with descriptions.
  • Firms are not required to include terminated pooled funds on the above mentioned lists.
  • Firms must provide the LDPF list with descriptions if requested, and that list may be tailored if the firm wishes to do so.
  • Firms must provide the BDPF list if requested, and that list may be tailored if the firm wishes to do so. Alternatively, firms can direct a prospective investor to their website if a complete list is maintained there. Descriptions must also be provided upon request.
  • It is recommended (not required) that firms selling participation in a new LDPF provide the prospective LDPF investor with a GIPS report containing the most appropriate (same or similar strategy) track record.

Advertising

Similar to composite inclusion, another welcome change for fund managers should be the broader application of the GIPS Advertising Guidelines, which remain voluntary.

First and foremost, consistent with the changes in the general GIPS 2020 provisions, the GIPS Advertising Standards also no longer have a composite-centric approach and will be broken down in sections related to composites, BDPFs, and LDPFs. In that regard, fund managers that wish to reference their GIPS claim of compliance in fund materials must adhere to the relevant sections of the GIPS Advertising Standards. Those managers that elect not to follow the advertising guidelines must make no reference to GIPS in advertisements.

The second key change in this area is that the definition of an advertisement has been expanded to include pooled fund fact sheets and pooled fund offering documents. This should allow firms to acknowledge their claim of compliance in documents such as a prospectus or in other fund-specific marketing materials.

In Conclusion

GIPS 2020 introduced significant changes for firms that manage pooled investment vehicles. Some additional internal procedures may have to be incorporated by fund managers, but overall, these changes should reduce the compliance burden and provide a more relevant and attainable path to GIPS compliance.

If you are a fund manager that claims compliance or are thinking about becoming compliant once the new standards are effective, you will be impacted by GIPS 2020. While this article offered an overview of the most significant changes in GIPS 2020 for pooled fund managers, it is important to understand how the new guidance will specifically impact your firm. For more guidance about GIPS 2020, please contact us.

And, if you already claim compliance with GIPS, consider taking advantage of Kreischer Miller’s free GIPS initial assessment which will:

  • Identify potential issues and areas for improvement, and
  • Provide meaningful feedback about your current process.

Contact us for your free GIPS initial assessment.

 

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Kreischer Miller Annual Investment Industry Update

Wednesday, November 13, 2019
12:30 PM – 3:30 PM
The Inn at Villanova
Villanova, PA

 

This seminar covered the key changes involved with GIPS 2020, performance reporting, SEC compliance, and accounting and tax issues.

Watch the videos from the seminar:

 

Kreischer Miller’s Thomas Peters Presenting at CFA Society New York’s 4th Annual Performance and Risk Forum

CFA Society New York
4th Annual Performance and Risk Forum

November 18, 2019
CFA Society New York
New York, NY

For many years, GIPS compliance has been seen as an essential ingredient that can make or break a firm’s marketing efforts in terms of winning new mandates and maintaining institutional clients. This conference provides a forum in New York to discuss the most recent developments in the GIPS standards (the 2020 GIPS Standards) and hear from industry experts on how they implement the standards and other performance measurement and risk analyses at their respective firms. The conference will provide attendees to interact with the speakers during breaks and a networking period at the end.

Kreischer Miller’s Thomas Peters, who is a member of the GIPS Executive Committee, was a speaker at this event.

More details about the forum.

Kreischer Miller’s Thomas Peters Presenting at CFA Society Philadelphia’s GIPS 2020 Update Luncheon

CFA Society Philadelphia
Suburban Luncheon: GIPS 2020 Update

September 26, 2019
Marriott Philadelphia West
Gulph Mills, PA

On June 30, CFA Institute released a new version of the GIPS standards to enhance their application to all asset classes (including alternative investment funds/strategies), to better address pooled funds, and to consolidate guidance issued since the 2010 version was released.

The GIPS standards play an important role in the manager selection process. When asset owners and consultants demand a GIPS compliant report, they have assurance that the manager’s track record is accurate and can be easily compared against other managers’ track records. Asset owners also claim compliance with the GIPS standards to enable comparability of internally and externally managed mandates and to ensure that performance reports presented to beneficiaries, sponsors, and oversight bodies are accurate.

Investment Managers benefit from the GIPS standards too. The GIPS standards assure managers they are competing on a level playing field when it comes to reporting their investment performance. Managers claim compliance with the GIPS standards in order to compete for global mandates and to show their commitment to ethics and market integrity.

Join a panel of experts at the Conshohocken Marriott for a lively discussion about GIPS 2020 and its impact on the investment industry.

Kreischer Miller’s Thomas Peters, who is a member of the GIPS Executive Committee, will be a speaker at this event.

More details about the luncheon and register.

Kreischer Miller Exhibiting at 2019 CFA Institute GIPS Standards Conference

23rd Annual CFA Institute GIPS Standards Conference

September 11-12, 2019
Fairmont Scottsdale Princess
Scottsdale, AZ

The 2020 edition of the Global Investment Performance Standards (GIPS) was issued on 30 June 2019. Subject experts will address the key points you need to know to comply with, or continue to comply with, the GIPS standards. Asset allocators, regulatory experts, and compliance consultants will also address critical issues and major developments in their fields. This conference is essential for any performance or compliance professional.

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

More details about the CFA Institute GIPS Standards Conference.

Webinar: The Top 5 Things You Need to Know About GIPS 2020…and More

Thursday, September 5, 2019
11:00 AM – 12:00 PM

 

On June 30, 2019, the CFA Institute released the 2020 version of GIPS. GIPS 2020 has introduced numerous changes to improve the standards, ease the burden of compliance, and make the process more relevant for many firms in the investment industry. These changes are significant. If you currently claim compliance or are thinking about becoming compliant, you will be impacted by the new standards.

Watch the rebroadcast:

Kreischer Miller Exhibiting at PMAR XVII

The Journal of Performance Measurement’s 17th Annual Performance Measurement, Attribution & Risk Conference
PMAR XVII

May 14-15, 2019
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 XVII.

 

Kreischer Miller’s Thomas Peters Presenting at CFA Society Boston’s GIPS Standards Workshop/Roundtable

CFA Society Boston
The 2020 Edition of the GIPS Standards Workshop/Roundtable

October 23, 2018
Wells Fargo Meeting Center
Boston, MA

The 2020 edition of the GIPS standards was recently released for public comment through the end of this year. Attendees will have the opportunity to learn why the GIPS standards are being updated and the significant proposed changes including those that have been proposed to meet the needs of alternative investment managers, managers of pooled funds and asset owners. Attendees will be able to ask questions about the exposure draft and express their views on the proposal.

Kreischer Miller’s Thomas Peters, who is a member of the GIPS Executive Committee, will be a speaker at this event.

More details about the conference.

 

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