The GIPS® Standards Technical Committee recently released three new GIPS Standards Q&A’s that are all effective as of April 18, 2018. The Q&As provide clarification on Supplemental Information as well as guidance on Broadly Distributed Pooled Funds.
For many firms that ACA works with, the use of supplemental information is a valuable tool used to expand upon and provide more information about performance. Per the Guidance Statement on the use of Supplemental Information, “Supplemental information is defined as any performance-related information included as part of a compliant presentation that supplements or enhances the required and/or recommended provisions of the GIPS standards.” Typically firms will use supplemental information in their pitch books as a way to provide potential investors the proper context to better understand the performance results. The pushback from the industry has been the need to label several pages in the pitch book as supplemental information.
The new Q&A provides clarification that supplemental information is any performance-related information included as part of a compliant presentation. Any information presented outside of a compliant presentation is not required to be labeled as supplemental information. This means a firm no longer needs to label information as supplemental unless it is on the compliant presentation.
Broadly Distributed Pooled Funds – Compliant Presentations
One of the most commonly known requirements of the GIPS standards is “firms are required to make every reasonable effort to provide a compliant presentation to all prospective clients.” In addition, the GIPS standards defines a prospective client as “any person or entity that has expressed interest in one of the firm’s composite strategies and qualifies to invest in the composite.” For firms with broadly distributed pooled funds, there has been some confusion in the industry about whether or not a pooled fund investor would be required to receive a compliant presentation (in fact for most firms this would be costly and almost impossible to do). In its current form, the GIPS standards require firms to have the pooled fund in a composite (whether it would be with other accounts of the same strategy or by itself in its own composite).
Firms we work with have frequently asked us whether or not they would be required to provide a compliant presentation to fund investors since technically the fund is in a composite. The new Q&A provides clarification by stating a pooled fund prospective investor is someone who is interested in a pooled fund vehicle and as such is not required to receive a compliant presentation since this is specific to the composite and not to the fund. For prospective fund investors, firms are required to follow local laws and regulations as it pertains to pooled fund marketing.
Broadly Distributed Pooled Funds – Guidance Statement
The Guidance Statement on Broadly Distributed Pooled Funds was released in March 2017 (effective date January 1, 2020) to provide clarity regarding the content and distribution of information to prospective pooled fund investors. Some firms decided to adopt the requirements noted in the Guidance Statement early to get a jump on the changes coming in the future. However, it appears that CFA Institute has come to realize the difficulties of implementing this guidance across markets with different regulatory structures and products. CFA Institute has commented that this Guidance Statement will be replaced with the Broad Distribution Pooled Funds Advertising Guidelines, which will be included in the 2020 edition of the GIPS standards (“2020 GIPS Standards”).
The new Q&A provides clarification that firms that have adopted the requirements within the Guidance Statement on Broadly Distributed Pooled Funds can use these requirements until they transition to complying with the 2020 GIPS Standards, at which point they must transition from the ineffective guidance statement and can choose to comply with the Broad Distribution Pooled Funds Advertising Guidelines.
Status of Pending GIPS Compliance Guidance Statements
In addition to the three new GIPS Standards Q&As, CFA Institute recently released a notice stating that the final versions of the following Guidance Statements will be released after the 2020 GIPS Standards:
- Overlay Strategies
- Supplemental Information
- Verifier Independence
Initially, these Guidance Statements were to be released at various dates within the next year and were sent out for public comments. After making several key decisions regarding Guidance Statements in various stages of development, CFA Institute decided to delay the effective dates of the Guidance Statements when work began on the 2020 GIPS Standards. The delay in the release of these Guidance Statements is due to the large amount of feedback on the recent Exposure Drafts provided by GIPS standards volunteers, committee members, local sponsors, investment firms, and industry members.
About the Author
Joel Bernardin, CFA, CIPM, is a Managing Director with ACA Performance Services, a division of ACA Compliance. Working from the New York City office, Joel manages many of ACA’s GIPS compliance verification and performance consulting projects. He specializes in derivative and alternative investment engagements and has served as relationship manager for more than 90 clients at ACA. Prior to joining ACA in 2017, Joel served as a Senior Manager with Ashland Partners & Company LLP where he had similar responsibilities. Joel earned his M.B.A in Finance from The Peter J. Tobin College of Business at St. John’s University and his Bachelor of Science degree in Applied Mathematics and Statistics from Stony Brook University.