The Fundamentals of Compliance section for Firms is the first section of the GIPS 2020.

Just like the soon to be old version of the GIPS, that is the 2010 edition, it still covers the foundational elements and principles for a compliant or prospective compliant firm.

What it seeks to do is to provide the do’s and don’ts for initial and ongoing compliance before diving into the technical details of what data you will need, what methodologies to use and how to present performance information.

What are the Differences between Old and Proposed New

  1. What is however different here under the new structure is the fact that these principles apply to firms managing all types of asset classes and strategies unlike the 2010 edition which focused on traditional asset classes managers using portfolios, hence the use of composites as the only format for performance presentations. Now it has been expanded to specifically include provisions for alternative asset classes and strategies as well as pooled fund structures.
  2. Applicable sections of the existing Standards from other provisions as well as from Guidance Statements and Q&A’s that expanded the use of the 2010 edition to alternative asset classes and strategies and in other situations, such as correcting errors, have now been consolidated as specific provisions in this section, and indeed, across the entirety of the new Standards.
  3. The number of Standards under this section have increased from that in the 2010 edition. We now have 35 requirements and 7 recommendations, up from 16 and 4 respectively from the 2010 edition.

But the underlying principle of applicability still applies, that is, you only comply with the applicable requirements specific to the situation of your firm, based on the asset classes and strategies you manage, be it traditional asset classes, alternative asset classes and strategies or both.

Guidance Statements Consolidated

This section has converted certain best practices contained in Guidance Statements into specific provisions. The areas drawn from are:

  1. Recordkeeping
  2. Error Correction
  3. Supplemental Information
  4. Verification

Other provisions have also been drawn from Q&A’s, such as the GIPS Q&A on Firm Notification that is now a requirement (1.A.34).

The consolidation of some sections of Guidance Statements and Q&A’s into specific Standards does not, however, mean that it is no longer important to refer to these Guidance Statements as they do provide more detailed guidance and best practice commentary beyond the sections now included as specific provisions in requirements and recommendations.

New Standards and Other Changes

Apart from the consolidations, new Standards have also been added to this section to ensure universal application to all firms, asset classes and strategies. Some of these changes include:

1. The use of the new term ‘GIPS REPORT’ to represent the three different presentation formats (GIPS Composite Report, GIPS Pooled Fund Report and GIPS Asset Owner Report) that a compliant firm can produce based on whether the presentation is for a Composite, a pooled fund or by an asset owner (1.A.10).

2. The requirement to update the GIPS Composite and Pooled Fund Reports within six months of the current period end (1.A.12).

3. The introduction and use of the terms, ‘Limited Distribution and Broad Distribution Pooled Funds’ (1.A.10).

4. The requirement for ‘Limited Distribution Pooled Funds’ to use the most appropriate performance track record to represent new strategies that they market to prospective clients or in this case, Prospective Pooled Fund Investors(1.A.14).

Such track record can be that of a Composite or other pooled fund strategy managed according to similar or same strategy as the new one.

5. The requirement for pooled fund managers to also maintain a complete list of pooled funds and their descriptions and to make them available to prospective Pooled Fund Investors upon request (1.A.19(b)and (c)).

6. The introduction of the term ‘Minimum Effective Compliance Date’ representing the “date after which only compliant performance may be presented by a firm” (1.A.26).

7. Relaxation to allow firms to present money-weighted returns in addition to time-weighted returns when certain conditions are met. The conditions include the requirement of the firm to have control over external cash flows into portfolios or pooled funds, in addition to the portfolio or pooled fund meeting all of the following conditions (1.A.31)

a. be closed-ended

b. have a Fixed life

c. be a Fixed commitment vehicle

d. Have illiquid investments as a significant part of the investment strategy

8. The requirement to now notify the GIPS Organization of initial compliance with the GIPS and annually thereafter, by completing and submitting a GIPS Compliance Notification Form by 30th June each year (1.A.34).

Comments Requiring Feedback by GIPS Organization

The GIPS Organization requires your feedback on the following specific areas:

1. Whether the terms ‘Limited’ and ‘Broad’ used to describe the two classes of pooled funds are easily understood or suggestion more representative and better-understood terms if not so (Comment #1).

2. Whether the requirement to update GIPS Reports and the six months minimum update frequency are appropriate (Comment #2).

3. Whether the requirement to include terminated pooled funds on the list of firm’s pooled funds for at least five years after termination should still apply when the particular terminated pooled fund is not available for the prospective investor (Comment #3).

4. Whether firms should only provide a list of pooled funds appropriate to a specific prospective investor or rather show the entire list of pooled funds whether available to the Prospective Pooled Fund Investor or not. And whether the firm should adopt a two-step approach of providing a list of pooled funds without descriptions first and then the description of the pooled fund upon request, unlike composite lists that include their description in the list.

This is to cater for the situation where certain firms may have a tall list of pooled funds and for which adding and maintaining the description for a huge number may be unwieldy (Comment #4).

5. Whether firms should be allowed to choose whether to port returns when they meet the Portability tests instead of the current requirement to do so and whether the fourth test of portability should be explicitly listed as part of the tests in the provision (Comment #5).

6. Whether the criteria to determine whether a firm can present money-weighted returns in addition to time-weighted returns are correct, whether the criteria have been correctly named and whether to allow this when firm controls the cash flows in addition to meeting one of the other criteria instead of all four specified (Comment #6).

How to Send in Your Comments

We have made it easy for you to go through the comments in bite-sizes and to submit your responses quickly by completing comment survey forms covering the feedback areas requested and more. At the end of the commenting period (December 31, 2018), we will compile all the comments received and forward to the GIPS Organization for review.

Sign-up for free on our Composite Insider platform to do so.

Alternatively, you can send your written responses to the GIPS Organization.

In the next post, we review the changes to Input Data and Calculation Methodology for Firms.