Tag Archive for: GIPS Report

Year-End Marketing Material Updates

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And a new FAQ from the SEC

RIAs across the country are preparing year-end 2022 performance presentations, and for most GIPS compliant firms, it’s time to update annual performance on your GIPS Reports.  Or is it?  Below are four timely Q&As as we kick-off annual verifications and performance examinations.

1) Is it better to send updated GIPS Reports to your verifier at the beginning or end of the verification?

Most verifiers provide an initial request list asking for policies, performance data, and GIPS Reports right from the start. However, many firms prefer waiting right until the end of the verification to update their GIPS Reports, in case there are updates made to a composite that could change year-end statistics.  At Cascade, we’ll work with your preferences, while also making suggestions to make the process more efficient.  We encourage firms to draft GIPS Reports using their best data, generally the performance data being provided as part of the initial request at the beginning of the verification, and send the GIPS Reports along with the performance.  That way, your verifier can triangulate the most up-to-date policies, performance, and GIPS Reports from the beginning.  Firms may have to make an update to their GIPS Reports at the end of the verification, however more general updates can be communicated from the onset of the initial data review, rather than after multiple rounds of open items at the end of the verification.

2) With the new SEC Marketing Rule in effect, can we distribute GIPS Reports as stand-alone performance presentations with just the performance updated by January 31 (and the rest of the statistics provided through 2021)?

Yes.  Only the required time period performance (1-, 5-, and 10 year returns) is required to be updated within 30 days.  However, as stand-alone presentations, GIPS Reports must include 5- and 10-year returns (or since inception returns, if 5 or 10 year returns aren’t available) through December 2022, in addition to annual 2022 performance.  GIPS Reports must also include benchmark performance for the same time periods composite performance is presented.

January 2023 is the first time firms are required to make annual updates to GIPS Reports while also taking the new Marketing Rule into consideration. For firms that distribute GIPS Reports annually to databases, it’s a great time to consider adding a separate table for SEC required performance time periods, if you haven’t already.

3) With the new SEC Marketing Rule in effect, can we leave 2021 performance in GIPS Reports unchanged until our firm’s AUM is finalized and the GIPS Reports are verified, which is usually during February or March, as long as the GIPS Reports are part of a fair and balanced presentation that includes 2022 performance?

Maybe.  Firms may satisfy SEC general prohibitions by documenting procedures for fair and balanced presentations that prominently present SEC required performance time periods, updated through December 2022 by the end of January. It depends on each firm’s appetite for risk, because what a fair and balanced presentation is under the Marketing Rule is still untested.  At a minimum, we would recommend including references from GIPS Reports to performance pages that have been updated through 2022 and to include required performance time periods.

Because of the significant differences between strong 2021 performance and bearish 2022 performance, we also recommend firms not updating their GIPS Reports to be prepared with an answer if an SEC examiner asks why they weren’t updated, since the performance numbers were available.  Even firms that elect not to include the SEC’s required time period performance on their GIPS Reports this year, may want to update just the annual performance (net and benchmark, and optional gross) through 2022 by the end of January.

The fourth and final Q&A below isn’t our own – it’s an FAQ published by the SEC in January, specifically for firms that manage private funds and want to show investment level returns.  Presenting deal level returns to prospective clients net of fees requires firms to make assumptions that aren’t necessarily helpful/meaningful when applied to unrealized gains and losses of individual investments. The SEC knows this and included a statement to that effect in the proposed PF guidance for reporting to existing clients.  The new marketing rule FAQ below emphasizes subjective selection of best performers as a concern when reporting to prospective clients, and it addresses case studies and groups of investments, rather than addressing a complete side-by-side presentation of all gross deal level returns.  A law firm might argue that such a breakdown of every investment return could still be shown gross of fees in support of fund level returns presented both net and gross of fees.  With only three published FAQs, however, we believe the SEC’s decision to not explicitly permit such a presentation speaks volumes.

What do you think?  We’re not lawyers, but we’d be happy to help you with straightforward assumptions and methodologies for allocating management fees to deal level returns and documenting calculations in performance disclosures.

From: SEC.gov | Marketing Compliance Frequently Asked Questions

 Q. When an adviser displays the gross performance of one investment (e.g., a case study) or a group of investments from a private fund, must the adviser show the net performance of the single investment and the group of investments?

A. Yes. The staff believes that displaying the performance of one investment or a group of investments in a private fund is an example of extracted performance under the new marketing rule.[1]Because the extracted performance provision was intended, in part, to address the risk that advisers would present misleadingly selective profitable performance with the benefit of hindsight, the staff believes the provision should be read to apply to a subset of investments (i.e., one or more). Accordingly, an adviser may not show gross performance of one investment or a group of investments without also showing the net performance of that single investment or group of investments, respectively.[2]In addition, the adviser must satisfy the other tailored disclosure requirements as well as the general prohibitions, including the general prohibition against specific investment advice not presented in a fair and balanced manner, when showing extracted performance.[3]

At Cascade Compliance, we believe that every firm deserves personalized, timely service provided by experienced professionals.  Cascade Compliance has over 34 years of combined experience working with SEC Regulations, the GIPS standards, and performance.  Our 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.  Contact us at connect@cascadecompliance.com.

[1] Extracted performance means “the performance results of a subset of investments extracted from a portfolio.” Rule 206(4)-1(e)(6). See section II.E.5 of the adopting release.

[2] The rule prohibits any presentation of gross performance in an advertisement unless the advertisement also presents net performance. See section II.E.1 of the adopting release. The gross and net performance requirement applies to not only an entire portfolio but also to any portion of a portfolio that is included in extracted performance. See sections II.E.1(a) and (b) and the definitions of gross and net performance in rule 206(4)-1(e)(7) and (10) (“Net performance means the performance results of a portfolio (or portions of a portfolio that are included in extracted performance…”)). The adopting release also states that the rule requires that advisers that show extracted performance must show net and gross performance for the applicable subset of investments extracted from a portfolio. See section II.E.1.a. of the adopting release (discussing gross performance).

[3] The adopting release states that “advisers should evaluate the particular facts and circumstances that may be relevant to investors, including the assumptions, factors, and conditions that contributed to the performance, and include appropriate disclosures or other information such that the advertisement does not violate the general prohibitions…or other applicable law.” See section II.E.1 of the adopting release (discussing the net performance requirement). In addition, it would be considered “misleading under the final rule to present extracted performance in an advertisement without disclosing whether it reflects an allocation of the cash held by the entire portfolio and the effect of such cash allocation, or of the absence of such an allocation, on the results portrayed.” See section II.E.5 of the adopting release (discussing extracted performance).

GIPS® Error Correction Basics

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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.

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Global Investment Performance Standards (GIPS®) For Marketers

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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.

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GIPS® Report Distribution Requirements

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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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GIPS® Report Do’s and Don’ts

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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.

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GIPS® Advertising Guidelines

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It is hard to believe year-end reporting was completed just 3 months ago, and 2019 double-digit returns were something to be celebrated.  It feels like the last 3 months have lasted the equivalent of 12 months. While first quarter 2020 was challenging for most firms on many levels, prospective investors are looking to asset managers for what to do now, how did the firm do during 1Q20 and what else does the firm bring to the table?   It is a great time to show prospects and clients the firm’s commitment to industry best practices along with first quarter performance updates. 

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