Resources - Page 4 of 7 - Cascade Compliance

GIPS^® Error Correction Basics

March 18, 2021/in Resources/by Janice Kitzman

Einstein said to make mistakes, because that’s how we learn and grow. And we all make them. That’s why the GIPS Standards include error correction requirements to provide transparency in reporting after a material error has been made. Below are our answers to error correction questions from attendees at this past year’s GIPS Conference.

What constitutes a material error versus a non-material error?

This is a common question, and the answer is dependent on the firm. Each firm has the ability to define materiality as they wish. The most important question that the firm needs to ask themselves is: would this error affect a prospects decision on investing with us or not? Most firms have three levels of materiality explicitly defined in their GIPS Policy Manual.

Global Investment Performance Standards (GIPS®) For Marketers

January 28, 2021/in Resources/by Janice Kitzman

With the finalization of 2020 performance, most marketing departments are completing their presentations. We have compiled pertinent questions from the GIPS Annual Conference to help compliant firms create marketing materials that follow the latest GIPS standards updates.

Must the GIPS Report reference be on the Table of Contents for pitch books or can it be referenced on the performance pages at the beginning of the performance section?

A GIPS Report can be provided in a slide deck with other material and still meet the distribution requirement. What is new in 2020 is that firms are now required to indicate that a GIPS Report is included. According to the Handbook, the disclosure should be prominent and the GIPS standards suggest adding it to the Table of Contents. A firm can indicate the inclusion of a GIPS Reports in the table of contents or applicable page, such as in the footnote of a relevant composite/representative performance page.

GIPS^® Report Distribution Requirements

January 21, 2021/in Resources/by Janice Kitzman

2020 performance updates are being added to presentations and pitchbooks this month. As firms consider their GIPS Report Distribution policies we have compiled pertinent questions from the GIPS Annual Conference to help compliant firms distribute GIPS Reports and ensure disclosures are properly included. Plus: Bonus Question – when to use the name GIPS Composite Report, GIPS Pooled Fund Report, or GIPS Reports. Databases Compliant firms must provide a GIPS Report to all prospective clients and investors, including databases. If the database does not have a clear way to upload a GIPS Report, the next best thing would be to provide it via email to your contact at the database and document this in your CRM or marketing log. If you do not have an email contact, the last option would be to send it to a general email address at the database. I thought we always had to track the distribution of GIPS reports per the Error Correction Guidance Statement. Don’t firms have to track who receives what GIPS Report, regardless of the new requirement to be able to demonstrate that all prospects received the GIPS report? That is correct, firms were always required to keep track of who received a GIPS Report for error correction purposes. However, the new requirement is that a firm must be able to demonstrate how it has distributed a GIPS Report to all prospective clients/investors. The best way to meet this requirement is to maintain a list of prospects, which report was provided, when and by whom. If a prospect expresses interest in the strategy today, how long does a firm have to provide the GIPS report? A firm is required to provide a GIPS Report to a prospect when they initially become prospect clients. However, the definition of a prospective client includes expressing interest and qualifying for a specific strategy, so many potential wealth management clients may meet with a firm—might even hire the firm—before the firm determines that they are a prospective client for a specific strategy. The GIPS Report can be included in the strategy’s marketing material or performance reports that are given to prospective clients when they express interest in a particular strategy. The GIPS standards do say that firms must be able to provide a GIPS Report within a reasonable amount of time but the GIPS standards do not define “reasonable amount of time”, so this is up to the firm’s discretion. We have a relationship with a bank that sponsors a program in which our strategy is offered. Since the bank is no longer a prospect from the third party prospective, are we required to distribute a GIPS report in accordance with 1.A.12? Yes. Since the bank is offering the Firm’s product, the bank would be considered an investment consultant or other third party representing prospective clients, and your firm is required to provide a GIPS Report to the bank every 12 months. Be sure to document the delivery in your marketing log, so you can also fulfill the new requirement to demonstrate distribution. Is it ok for a firm to apply an existing procedure of setting a very high internal threshold of ranking prospects that will omit the need to provide a GIPS Report until the prospect is in the finals stage of an active search? The GIPS standards define 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.” If the ranking is based solely on the likelihood of actually being hired, such a procedure is not within the spirit of the GIPS standards nor does it meet requirement 1.A.13 “The firm must not choose to which prospective clients it presents a GIPS composite report.” That said, it can take time to know which composite a prospective client may best be invested in. For some wealth managers, not all advisory clients are offered an internally managed strategy, so there can be a delay in providing GIPS reports based on a ranking due to lack of information. Once the firm has concluded that the person or entity is interested and qualifies in a composite strategy, the firm must provide a GIPS Report to the prospective client. Does a firm have to deliver a GIPS report to an “intermediary” of a BDPF or is a BDPF completely exempt from providing a report? No. Firms are not required to create or provide a GIPS Report to intermediaries of a BDPF. BONUS QUESTION: Do we need to refer to our firm’s GIPS Composite Reports or is it okay to simply shorten to GIPS Reports? In the GIPS Standards for Firms Glossary, a “GIPS Report” is defined as either a GIPS Composite Report or a GIPS Pooled Fund Report. Technically then, it is permissible to reference the short form GIPS Report. In context, “GIPS Reports” is a very useful term when documenting requirements that apply to both types of GIPS Reports, i.e. a GIPS Report distribution log. Since GIPS Composite Reports and GIPS Pooled Fund Reports have different presentation and disclosure requirements, though, we recommend specifying which type of report is being presented in the title, especially if your firm offers both types of GIPS Reports. Going forward, the more specific reference could be explicitly required, even though it is longer, to ensure clarity as the marketplace adjusts to having more than one type of GIPS Report.

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Getting Year-End Assets Right

January 14, 2021/in Resources/by Janice Kitzman

It’s time for calendar year updates to assets under management. Three questions from the attendees at the GIPS conference are worth a little extra attention when updating your GIPS reports with year-end composite assets.

Q. Our performance system requires us to include accounts in a composite on the day prior to the first month – e.g. we have to include an account as of 12/31 for it to be included in the composite for January. We included these accounts in composite assets as of 12/31. Is this an error?

A. This would be an error. Accounts should not be included in composite assets until they are included in the composite (1/1) for the performance period. Depending on the accounting system there are different ways to ensure that these accounts are not included in the assets of the month prior. These assets should always be included in 12/31 firmwide AUM regardless of composite inclusion.

GIPS^® Report Do’s and Don’ts

January 4, 2021/in Resources/by Kim Cash

Wondering what updates need to be made to you compliant presentations/GIPS Reports to meet the 2020 GIPS Standards? Check out this PDF which summarizes many of the updates.

GIPS^® Verification Basics

December 30, 2020/in Resources/by Janice Kitzman

GIPS Verification Basics

Attendees at this fall’s Annual GIPS Standards Conference submitted questions about verification and CFA Institute notification. We’ve answered 5 of those questions below.

Why would a GIPS-compliant firm want to be verified?

More than 1,700 firms currently claim compliance with the GIPS standards. Over 80% of these firms choose to have a verification conducted even though it is not required. Verification adds to the assurance that the standards are fully implemented on a firm-wide basis. Experienced verifiers have worked with hundreds of different types of composites and have tested policy manuals at dozens of firms. They have first-hand knowledge of what works and how to make workflows better. A verifier can provide suggestions on how to enhance the firm’s policies and procedures as well as test that they have been implemented. They also keep firms updated on changes and new interpretations, so the firm isn’t learning that they have been incorrectly claiming GIPS Compliance during a regulatory examination.