A summary of the CFA Institute's 19th Annual GIPS Standards Conference
CFA Institute hosted the 19th Annual Global Investment Performance Standards (GIPS®) Conference in beautiful Coronado Bay, California (just outside of San Diego) on September 17-18, 2015. As usual, the conference was a great opportunity to meet up with colleagues, network, and see what is going on in the performance measurement industry. Just under 400 people attended the conference, making it an excellent opportunity to reacquaint with old friends, as well as make new connections.
So what was new with respect to the GIPS Standards? The quick answer is, not much, if you are asking what has changed since this time last year. That said, there were some indications of changes and proposed changes coming down the pike. Here’s a summary:
Firm Notification RequirementReally, the only new change to the GIPS Standards is the Firm Notification Requirement. Effective January 1, 2015, firms that claim compliance with the GIPS standards must notify CFA Institute of their claim of compliance. This must be done by June 30th each year, with respect to the firm’s status as of the end of the prior calendar year.
In talking with people at the conference, even though many firms have registered, there still seems to be considerable consideration regarding this new requirement. The requirement is now part of the GIPS standards, so it is now one of the requirements for firms that claim compliance, just like any required provision or requirement from the GIPS guidance.
During the GIPS Update at the conference, it was reiterated which information on the submission form is required. That information includes: name of firm, firm address, contact information and verification status. All other information in the form is optional.
Firms may opt to have their name listed on the CFA Institute Website. If a firm chooses to be listed, the only information that appears on the site is the name of the firm, with a link to the firm’s website if the provided a website to link to.
CFA Institute shared some statistics regarding firms that have registered thus far (actually, as of June 30, 2015), including:
- 1572 firms have registered
- 85% of the firms indicated they have been verified
- 82% chose to be listed on the CFA Institute website
It will be interesting to see how these numbers change over time. I imagine we will see the numbers have somewhat of a bump next year, as firms’ verifiers notify their clients that they must follow this requirement, if they have not done so already. Verifiers are now required to be satisfied that firms have met this new requirement.
- If you have more information on this requirement, please reach out to Patrick Fowler at The Spaulding Group, who can help you obtain a copy of our recorded webcast covering the new requirement. For those that wish to register, please visit www.gipsstandards.org/compliance/Pages/compliance.aspx. To see the list of firms that have registered and chose to be listed, please see www.gipsstandards.org/compliance/Pages/firms_claiming_compliance.aspx.
Expanded Use of Internal Rate of Return!
In my opinion, the most exciting news was the indication that the GIPS Technical Committee “wholeheartedly supports the notion of expanding the use of (internal rates of return)” in the GIPS standards. Apparently, the United States Investment Performance Committee (USIPC) has done some research on the use of internal rate of return (IRR) within the GIPS standards, and the Technical Committee is looking to expand usage of this return measure beyond fixed life, fixed commitment private equity composites and closed-end real estate composites (the latter of which must also present time-weighted returns).
The use of IRR for private equity has been required since private equity provisions were introduced into the GIPS standards (effective January 1, 2006), and IRR for closed end real estate funds went into effect January 1, 2011. That said, there are several other scenarios where we at The Spaulding Group feel that internal rate of return should be used, so we welcome this particular development, and look forward to seeing what the changes in this area will be. I would even say that I hope this particular subject could be “fast tracked” if at all possible, as we have some verification clients where we strongly feel internal rate of return would be more appropriate than time-weighted returns, and those firms know their prospects expect to see IRRs as well, yet they can only include IRR as supplemental information under current GIPS guidance.
Pooled Funds Guidance Statement
For the last few years, a working group has been developing a guidance statement related to pooled funds, and the compliant firm’s responsibility to meet GIPS provision 0.A.9 (i.e., to provide a compliant presentation to prospective clients at least every 12 months. After a few iterations of “floating” proposed new guidance, the Pooled Fund Working Group took a new approach to the GIPS Technical Committee, which was approved. Some key points of the new approach:
- A new term, “prospective pooled fund investor,” was created to differentiate these investors from “prospective clients.”
- The new guidance will not be a “guidance statement;” rather, it will be called the Pooled Funds Advertising Guidelines. Compliance with these guidelines will be required.
- The emphasis of the Pooled Funds Advertising Guidelines will be on the presentation and reporting aspects of the GIPS standards.
The goal is to introduce the Pooled Funds Advertising Guidelines for public comment in Q4 2015, so this is likely to be the first new changes to GIPS we will see, other than perhaps some Q&As.
Supplemental Information Guidance Statement
During the GIPS Update, it was mentioned that the GIPS Executive Committee has had a “long-standing” goal to take a fresh look at the existing Guidance Statement on the Use of Supplemental Information. It was mentioned that some aspects of this guidance may not be consistent throughout the GIPS standards. One issue that was addressed specifically was the question of whether labeling of supplemental information is required just on the page(s) of the compliant presentation, as opposed to information outside the page(s) of the compliant presentation. It was mentioned that the Technical Committee believes “that Supplemental Information should be limited to information that is included within a compliant presentation only.”
Mention of that did seem to create a bit of a buzz among attendees, but I would caution firms to not take these comments to be official guidance or an indication of a change to the GIPS standards just yet. It was also mentioned that reworking the Guidance Statement on the Use of Supplemental Information will be a longer term project. It may be possible that changes will occur in the form of Q&As, but in the meantime, the GIPS standards have not officially changed in this area. If there is an official change, we will let our clients know.
Portability Guidance Statement
It is very likely we’ll see new guidance in the area of portability soon; indication was given that the Interpretations Subcommittee has finished a redraft of the portability guidance, and that the draft is being “finalized.” The goal that was expressed is to have the finalized draft reviewed by the GIPS Technical Committee during Q4 2015.
The portability guidance addresses the ability and/or requirement for a firm to port a track record from one firm to another. GIPS provision 5.A.8.b indicates that an acquiring firm has one year to bring the assets of a firm that has been acquired into compliance, but clarification and guidance is needed on some of the specifics, including when the “one year clock” starts, and also what firms are required to do during that one year period.
Overlay Guidance Statement
Among the “longer term” projects that is being worked on is the development of guidance for handling overlay assets and composites. Current GIPS guidance indicates that overlay assets generally must not be included in firm assets or in composite assets. That said, it is recognized that overlay managers are put in a difficult situation, as this requirement means their firm assets and composite assets will end up being significantly smaller than the total assets they oversee. Clearly there is a need for additional guidance in this area, as we have received several questions from our clients as to how to deal with overlay assets.
Benchmark Guidance Statement
Another long term project is the development of guidance around the benchmark related provisions of the GIPS standards. It was stated that the GIPS Technical Committee recently approved a list of topics for potential inclusion in this guidance statement. Potential topics for the guidance include: appropriate benchmarks for “less traditional strategies;” what is meant by a “widely recognized benchmark?,” the question of whether one benchmark must be labeled as the primary benchmark if multiple benchmarks are presented; and the use of net of tax vs. gross of tax benchmarks.
A presentation by Karol Pollock from the Los Angeles Regional Office of the SEC touched on a few points that investment firms should be aware of. Also, Thomas D. Giachetti of Stark and Stark spoke on preparing for an SEC exam. Key points from their talks include:
- Firms need to take ownership of their policies and procedures, and make sure they describe what the firm is actually doing. Policies should not describe things that the firm is actually not doing, in practice. Often this results from the use of policies templates from consultants where the firm has not taken ownership of the policies.
- Care should be taken with respect to presentation of model or back-tested performance. Performance shown must have adequate disclosure, and results shown must be fair and accurate.
- The SEC is proposing to amend Rule 204-2 regarding the required books and records that investment advisers must maintain. The proposed changes could expand record retention to cover supporting performance information distributed to any person, rather than the current requirement to require retention of such records for investment performance information distributed to 10 or more people.
- It was great to see the President and CEO of CFA Institute (Paul Smith, CFA) address the conference with opening comments on the first day, and he also offered CFA Institute’s invitation to conference attendees to attend the 10th anniversary celebration of the CIPM Program (Certificate in Investment Performance). Mr. Smith indicated that CFA Institute will be working to give greater exposure to the CIPM Program, and he acknowledged the high level of volunteerism around the program, and also around the GIPS standards.
- Wylie Tollette of CalPERS indicated that, while they have not asked managers if they are GIPS compliant in the past, they are now starting to. Notably, most of their external managers are in alternative assets (real estate, private equity, etc.), so it will be interesting to see how this change will impact adoption of GIPS in those asset classes.
Empower your performance team to deliver accurate and timely performance results with the number one solution for performance, attribution, risk and GIPS reporting.