Is your firm considering GIPS Compliance?

Cascade Compliance can help asset managers achieve and maintain independently verified GIPS compliance. Compliance with the GIPS standards is a firm-wide process, often required by consultants and institutional investors. Third-party verification brings additional credibility to that process and supports the overall guiding principles of full disclosure and fair representation.

Here are 10 helpful tips for becoming GIPS compliant:

Step 1 – Gain Management Support: Management must commit time and resources to bring the firm into compliance. Create a GIPS compliance committee that includes leadership from different stakeholders at the firm.

Step 2 – Know the Standards: GIPS compliance is achieved firmwide, but it’s not realistic to expect everyone at the firm to read the 400+ page GIPS Handbook or sit through a day-long workshop. Select a point person to read the standards in manageable sections and train the GIPS committee as you go. Start with the requirements; attend a workshop; work with someone who’s been down the path before; get familiar with resources on the GIPS website.

Step 3 – Define the Firm: The definition should accurately reflect how your firm is held out to the public and will determine the firm-wide assets under management reported in GIPS Reports. Read the Guidance Statement on Definition of the Firm – only 5 pages and full of critical fundamental information that has been incorporated throughout the GIPS Handbook, most directly on pages 1-3, Provision 1.A.2.

Step 4 – Define Investment Discretion: The standards use the term “discretion” differently than the term is used by regulators. Regulatory discretion refers to the ability to trade client accounts without having to contact the client and get permission for each buy or sell transaction.  Regulatory discretion is spelled out in contracts with clients, and it is necessary to put in writing for custodians to permit trading on behalf of clients in the client’s account. Firms that want to comply with the GIPS Standards must have discretion to trade or effect trades (effective discretion).  The use of the term in the GIPS Standards goes further, however: can the compliant firm effect its strategy in the client account, or does the account have too many restrictions also spelled out in the contract or investment policy statement, prohibiting certain investments, requiring more liquidity, or simply holding securities with low cost basis that can’t be sold without creating an unfavorable tax constraint.  Defining investment discretion is an important step in determining whether accounts must be included in a composite.  Read more about it in Composite Definition guidance (link in Step 7 below) or within the GIPS Handbook, Provisions 2.A.1-2.A.5, 2.A.49, pages 69-80, 137 and 3.A.2-3.A.3, pages 146-151.

Step 5 – List all Accounts Under Management: Identify all accounts under management within the defined firm as of the most recent period-end and at a date at least five years prior (ten to comply with the SEC marketing rule), or since firm inception if less than five years. This should include all discretionary and non-discretionary managed accounts, including terminated ones.  Advisory-only accounts with no accompanying trading component are not included in the firm’s managed assets.

Step 6 – Assess Books and Records: Determine if your firm has the appropriate books and records to support historical discretionary account performance. To claim compliance, a firm needs a minimum of five years of compliant performance. Are terminated accounts still accessible in your portfolio accounting system?

Step 7 – Draft Composites: Separate the firm’s accounts into groups based on discretionary status, investment strategy or mandate, or other criteria.  Read the Guidance Statement on Composite Definition – 7-1/2 pages of pure gold . This will be the basis for creating your composites. Pooled funds don’t have to be included in a composite unless they are managed in the same strategy as segregated accounts.  Then, list and define the composites that will be constructed and establish processes for composite management. Also, list and define any limited distribution pooled funds the firm manages.

Step 8 – Calculate Performance: Calculate composite performance and required annual statistics in accordance with required/recommended calculation methodologies for each of your firm’s composites and pooled funds.  Your portfolio accounting system can do the heavy lifting, but you will need to ensure that you’re selecting compliant options: i.e. be sure to calculate performance that accrues for interest income. These decisions should be  detailed in and agreed to your policy and procedure document.

Step 9 – Compile Performance Presentations: Develop compliant presentations for each of the firm’s composites and limited distribution pooled funds. How your firm maintains these presentations going forward, how you ensure they are provided to prospective clients, and how you check and correct for errors in these presentations will also be added to your policy and procedure document.

Step 10 – Document Policies and Procedures: Document decisions made in Steps 3, 4 and 7 in your firm’s policies and procedures for establishing and maintaining compliance with the GIPS standards.  Read the Guide for Creating a GIPS Standard Policy Manual for Firms.  It’s the longest of the three must-read documents referenced in this article, but it’s worth it once a firm is far enough along in the process to better understand the context, if not first-hand experience, with the guidance offered in this document for firms to establish meaningful policies and procedures.

Questions about GIPS?

Contact us at connect@cascadecompliance.com

Cascade Compliance was established with 100% dedication to consultation and verification services for the investment industry.  With that focus comes thought leadership and a commitment to keeping clients informed about operational and compliance developments and upcoming changes from the CFA Institute.