With year end quickly approaching, firms claiming compliance with the Global Investment Performance Standards (GIPS®) need to ensure that they are preparing to make the switch from a ‘compliant presentation’ to the appropriate ‘GIPS Report.’ This change must take place once the firm is ready to present December 31, 2020 performance information and is required to be completed by December 31, 2021. Per provision 1.A.16, firms must update their GIPS Reports within 12 months of each annual period end. One of the biggest changes with the 2020 GIPS standards is the shift from being based on composites and time-weighted returns, to allowing for more flexibility around the calculation and presentation of money-weighted returns. There are also allowances for the creation of multiple types of GIPS Reports. The following will highlight some of the key changes in the provisions in Section 4, which are specific to a composite time-weighted return report.
“GIPS” is a registered trademark of CFA Institute and firms must include the following disclosure on every GIPS Report, either in the body or in a footnote:
“GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.”
Composite inception date
Another change is the requirement to disclose the composite inception date in addition to the composite creation date. Requiring both allows the recipient to recognize if the composite was created with the benefit of hindsight, as the creation date is when the firm first groups one or more portfolios together to create the composite versus the inception date which is when composite performance begins.
Returns used for risk statistics
Firms must disclose if gross or net returns were used to calculate risk statistics such as internal dispersion and thee-year annualized ex post standard deviation. This requirement is satisfied by either adding it to the body of disclosures or updating the table header.
GIPS compliance statement
A handful of required disclosures that changed must use very specific language. One of these is the wording of a firm’s claim of compliance statement.
Compliance Statement - For a firm that is verified:
“[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. [Insert name of firm] has been independently verified for the periods [insert dates]. The verification report(s) is/are available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm‐wide basis. Verification does not provide assurance on the accuracy of any specific performance report.”
The reference to pooled fund maintenance may be removed if there are no pooled vehicles within the GIPS defined firm. The changes for a composite that has had a performance examination are similar but must also use specific verbiage.
Policies available upon request
The following language represents a slight change from the previous required language:
“The firm must disclose that policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request.”
List of composite and pooled fund descriptions
Because of the new distinction between composites and pooled funds, firms may need to update their disclosure to include a list and description of limited distribution pooled funds and/or a list of broad distribution pooled funds in addition to the standard list of composite descriptions available upon request. If the GIPS-defined firm includes pooled vehicles, the additional language needs to be included in all GIPS Composite Reports. Note that the pooled funds lists are required even if all pooled funds are included in composites.
Firms are required to present total firm assets as of each annual period end. Previously, firms could choose to show either total firm assets or composite assets as a percentage of total firm assets. Beginning December 31, 2020, firms must no longer present composite as a percentage of firm assets in place of total firm assets, but may show it in addition to total firm assets.
A fee schedule has always been a required disclosure, and this carries over into the 2020 GIPS standards. However, 4.C.11 requires firms to disclose the fee schedule that is appropriate to prospective clients or prospective investors. When a composite includes multiple portfolio types, this could result in the firm having to disclose multiple fee schedules and expense ratios, if applicable, or create multiple versions of the GIPS Composite Report that include only the fee schedule that is applicable to the prospective client or investor. It is also permissible to include the fee schedules and expense ratios that are appropriate to the prospective client or investor as an attached exhibit to the GIPS Report.
Percentage of non-fee paying assets
The requirement to present the percentage of the composite comprised of non-fee paying assets now only applies if the composite uses actual fees to calculate net composite returns. If a composite used model fees, the percentage of non-fee-paying assets can be removed for all periods presented.
With the adoption of the 2020 GIPS standards, firms are now allowed to sunset more disclosures than was historically permissible. Several provisions state that a particular disclosure must be included for a minimum of one year and for as long as it is relevant to interpreting the track record. The following disclosures may be removed after one year if they are not relevant to interpreting the track record:
- Composite name change
- Retroactive benchmark change
- Significant events
- Changes to a GIPS Report resulting from correction of a material error
- Change to the type of returns presented (MWR to TWR)
It should be noted that while not specifically called out in the GIPS standards, other disclosures may be removed if they are no longer relevant to interpreting the track record presented in the GIPS Report. For example, if a firm prospectively changed a benchmark 12 years ago and is presenting the minimum 10 years of required performance in the GIPS Report, the benchmark change disclosure may be removed as it is no longer relevant to interpreting the track record because that time period is no longer presented.
While this is a small sampling of changes to the Section 4 provisions, there are a multitude of considerations to ensure your firm’s GIPS Composite Reports are incorporating all the proper disclosure requirements. Now is a great time to take a fresh look at your current presentation materials to ensure the GIPS Reports will be presented in compliance with the 2020 GIPS standards.
ACA assists many firms in their efforts to claim compliance with the GIPS standards and ultimately become verified. If your firm is looking for more information into this effort, please contact us below.
- The 2020 GIPS Standards: Explanation of the Provisions for Firms – Sections 1 and 3
- The 2020 GIPS Standards: Explanation of the Provisions for Firms – Section 2
- The 2020 GIPS Standards: The Top Changes You Need to Know
About the Author
Gretchen Salisbury joined ACA Compliance Group in 2014. As a Principal Consultant with the ACA Performance Services division of ACA, Gretchen provides GIPS compliance consulting and verification services, as well as conducts performance certifications for investment advisers.
Prior to ACA, Gretchen worked at Guggenheim Partners Investment Management. During her tenure at Guggenheim, she held positions in multiple departments, including Marketing and Operations, that culminated in her role as vice president and manager of the New York data integrity team.
Gretchen earned her Bachelor of Science degree from Metropolitan State University of Denver.