Year-end Database Questions

It’s that time of year for many firms to update annual performance statistics in compliant presentations and send them off to databases.  For firms that want to jump right in and incorporate 2020 GIPS standards requirements into GIPS reports, 2020 Handbook guidance is imminent. Below are three year-end database questions you’ll want to get right:    

1. What assets do we include in firm assets as of 12/31/XX?  What about composite assets as of year-end?  What about an account that opened on 12/17/XX, and is being included in the composite as of 12/31/XX.  Do we include this account in our composite assets?

For firm assets as of 12/31, the firm needs to include all discretionary and non-discretionary accounts (per the GIPS Standards and firm definition) in the total firm assets as of year-end.  Accounts that opened during the month of the December, but are not yet included in a composite, would still be included in firm assets, since the account had funded by 12/31. 

For composite assets, this can be ambiguous.  Composite assets only include assets from the accounts that have contributed to the composite performance.  If the account is not included in the composite for the entire month, then the account is not included in the composite assets as of month end or year-end.  Firms can’t necessarily rely on accounting system composite asset reports as of 12/31 to treat new accounts correctly, though. Some portfolio accounting systems require a new account opened on 12/17 to be added as of 12/31 in order to be included in January performance.

2. Is a database considered a third party prospective client, even if we self-populate? Meaning do we need to provide our GIPS Reports to them every 12 months.  Do we have to submit our verification and performance examination reports to databases? 

Although a database is not a prospective client itself, firms are no doubt populating them so that prospective clients can look at the data available.  The GIPS standards have incorporated “investment consultants and other third parties” into the definition of a prospective client, and a 2013 CFA Institute Q&A specifically notes that “databases” are prospective clients. 

Firms do not have to submit verification/performance examination reports to any prospective client unless requested. However, firms do need to provide all prospective clients—including self-populated databases—with GIPS Reports at least annually.  If space to upload documents in addition to the GIPS reports is available, providing databases with verification and performance examination reports will only help a firm and should be done. 

If there is not a field to provide required information, then we recommend sending it to the database administrator or one of your firm’s contacts at the organization sponsoring the database. Be sure to document the annual delivery to demonstrate that you have met this requirement.  Is January the best time? Even if you are quick to update your annual statistics in your GIPS reports, waiting a month or two or until verification is complete to mass distribute to databases and other prospective clients could save you a lot of republishing communications if there’s an inadvertent material error.

• If our firm is verified, and the question from the database is, “Has the performance been reviewed?” Can our firm answer “yes” to this question?

The answer to this question is, “it depends.”  If the firm receives a verification only then you would have to answer “no” to this question.  However, if the composite performance being uploaded has received a performance examination, then you could answer “yes” to the question has the performance “been reviewed,” “been audited,” “been examined” or even “has the performance been verified.”  Databases rarely get the terminology precise, but it’s important you don’t overstate the scope of third party’s review of your firm’s claim of compliance. 

Performance exams are specifically focused testing of the data on a GIPS Composite or Pooled Fund Report that provides additional assurance regarding the performance, required statistics and disclosures. Performance exams are not required nor recommended by the GIPS standards. The firm must be verified for the period covered by the performance exam.

Often, firms choose to have a performance examination on their most marketed strategies. This can give further integrity to the performance and will lower the chance of a material error slipping through the cracks. All of the items on the corresponding GIPS Report will be tested in some way.

Have a question as your firm is updating databases with 2019 data?  Send them our way. Cascade Compliance has over 34 years of combined experience working with the GIPS standards, and its employees have worked with hundreds of firms in the U.S. and abroad.  One of the best parts of working with clients is getting to share expertise and knowledge of best practices across the industry.  Whether you are a client of ours or not, we are here to help you get better at what you do and answer any questions you may have.