Craig B. Evans, Director, Audit & Accounting

Earlier today, President Trump signed the $484 billion bill passed by the House Thursday afternoon and intended to provide additional relief to businesses impacted by the COVID-19 pandemic. The bill includes approximately $310 billion in additional funding for the Paycheck Protection Program (PPP). Of the $310 billion, $60 billion is reserved for smaller lenders, including community financial institutions, small insured depository institutions, and credit unions with assets less than $10 billion.

Unfortunately, hedge funds and private equity firms will be unable to take advantage of PPP loans. In its interim final rule, the Treasury Department clarified that hedge funds and private equity firms are primarily engaged in investment or speculation, and that Congress did not intend for these types of business to obtain PPP financing.

As more details of business relief efforts are made available, specifically those related to the investment industry, Kreischer Miller’s Investment Industry Group will provide additional updates. We also regularly update our COVID-19 Resource Center, which you can access here. If you have any questions about these or any other matters, please contact your Kreischer Miller relationship professional or any member of our team.

Craig B. Evans can be reached at cevans@kmco.com or 215.441.4600.

You may also like:

• GIPS 2020 changes carve-out standards
• OCIE 2020 cybersecurity and resiliency observations
• OCIE 2020 examination priorities

Verifier independence is not a new topic within the GIPS Standards. In 2005, the GIPS Executive Committee released the Guidance Statement on Verifier Independence, which laid the foundation for verifier independence as well as outlined the minimum guidelines for verification firms and clients. The newly-proposed Guidance Statement on Verifier Independence is being issued with the purpose of clarifying and strengthening the existing guidance surrounding verifier independence.

Verifier Independence Clarified

The proposed Guidance Statement stresses that independence is the responsibility of the verification firm as well as the verification client. The assessment of independence is initially performed at the commencement of an engagement acknowledged by both parties through an engagement letter. However, it should be an ongoing process throughout the engagement, affirmed by both the verification firm and verification client upon completion of the engagement via the verification report and representation letter, respectively. Any new information potentially impacting the initial assessment of independence should be reviewed and documented by both the verification firm and verification client, along with the conclusions reached.

With respect to the guiding principal that verification firms should not step into a management role on behalf of a verification client or assume any responsibility in any management function, the proposed Guidance Statement defines “management functions” as tasks and responsibilities that are relate to the GIPS-compliance process. Some examples given within the proposed Guidance Statement include:

• Assigning portfolios to composites;
• Determining firm definition;
• Determining discretion definition and/or status;
• Creating composite criteria;
• Establishing or modifying policies and procedures;
• Calculating portfolio- and composite-level returns; and
• Preparing compliant presentations

What the Proposed Guidance Requires

In an attempt to strengthen the independence assessment made by the verification firm, the proposed Guidance Statement will require verifiers to create and document policies and procedures surrounding the independence assessment at both the firm and the employee level. This is a change from prior guidance. Although verifiers were always responsible to assess independence, this proposed Guidance Statement now requires all verifiers to formally document their policies and procedures for addressing independence. The proposed Guidance Statement also encourages verification clients to follow suit and document policies and procedures that address verifier independence.

Your Opinion Matters

The proposed Guidance Statement on Verifier Independence will be open for public comment until October 26, 2017. We encourage all firms, including both verification firms and verification clients, to weigh in on the guidance statement as all will be subject to the provisions on verifier independence. The draft of the guidance statement can be found at: https://www.gipsstandards.org/standards/Documents/Guidance/exposure_draft_public_comment_verifier_independence.pdf.

We would be pleased to provide further information related to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting at tpeters@kmco.com or Joshua E. Kramer, Senior Accountant, Audit & Accounting at jkramer@kmco.com. 

You may also like:

• Newly-Proposed Guidance Statement on Risk
• The trouble with using hypothetical, back-tested returns
• Are preliminary GIPS disclosures a good idea?

The GIPS Technical Committee is seeking comments on a newly-proposed Guidance Statement on Risk and how it relates to the presentation of risk, both quantitatively and qualitatively within the compliant presentation. The Guidance Statement will address when and where risk-related information is appropriate, recommended, and required to be included in compliant presentations.

Presentation of the Three-Year Annualized Ex-Post Standard Deviation

GIPS standard 5.A.2 requires firms to present the three-year annualized ex-post standard deviation, using monthly returns, for the composite and the benchmark. If the firm determines that the three-year ex-post is irrelevant or inappropriate for a given strategy, reasoning supporting this conclusion must be disclosed (GIPS Standard 4.A.34). Firms electing not to present the three-year annualized ex-post are required to present an additional three-year ex-post risk measure that is available and appropriate.

Firms already presenting the three-year annualized ex-post are not required to change anything to their compliant presentations. The proposed Guidance Statement will eliminate a firm’s ability to elect to not present the three-year annualized standard deviation. Under the new guidance, all firms will be required to present the three-year annualized ex-post standard deviation as well as disclose whether the risk measure was calculated using gross or net returns. GIPS standard 5.A.2 does not currently address disclosure of using gross versus net returns in the calculations. Firms will still be encouraged to present additional ex-post risk measures, and will be required to describe the risk measure and its relevance to the strategy.

Adequacy of Risk Description within Composite Definitions 

While GIPS Standard 4.A.3 related to defining composites does not explicitly require firms to disclose qualitative information about risk, firms must include any significant features about an investment strategy to help prospective investors make informed decisions.

Prior to the proposed Guidance Statement on Risk, there was little guidance within the standards on how firms should address risk within composite descriptions. The newly-proposed Guidance Statement will require firms to assess the impact and significance of risk as it relates to a composite’s investment mandate, objective, and strategy. Firms will need to assess strategy features including, but not limited to, investment concentration, correlation of returns, changes in liquidity, exposure to counterparty creditworthiness risk, and the ability to employ significant leverage in portfolio. The nature and significance of risk features within a composite will drive the complexity of the risk description disclosure within the composite definition.

Your Opinion Matters

Like all new GIPS pronouncements, the proposed Guidance Statement on Risk will be open for public comment until September 26, 2017. We encourage all firms to weigh in on the guidance statement as all will be subject to the provisions on risk and the adequacy of risk disclosures. The draft of the guidance statement can be found here: https://www.gipsstandards.org/standards/Documents/Guidance/exposure_draft_public_comment_risk.pdf.

We would be pleased to provide further information related to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting at tpeters@kmco.com or Joshua E. Kramer, Senior Accountant, Audit & Accounting at jkramer@kmco.com. 

You may also like:

• Newly-Proposed Guidance Statement on Verifier Independence 
• GIPS Guidance Statement on Broadly Distributed Pooled Funds
• The Trouble With Using Hypothetical, Back-Tested Returns

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

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

What Led to the Proposed Guidance Statement

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

Complicating Factors

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

Other potentially confusing factors:

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

What the Guidance Statement is Proposing

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

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

What the Proposed Guidance Statement Does Not Require

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

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

Your Opinion Matters

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

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

Related Content:

• Proposed Update to Fair Value Disclosure Requirements
• Update on 2015 PCAOB Inspection of Broker-Dealers and Areas of Focus for Upcoming Audits
• Proposed Amendments to Books and Records Rule 204-2