Tag Archive for: GIPS Reports

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).

Should SEC Regulations Re-Shape Your GIPS Reports?

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As firms update their annual GIPS Reports this year, unique questions in 2022 include whether to stick with the GIPS Standards requirements checklist or to incorporate new SEC Marketing Rule disclosures.

The SEC Marketing Rule specifically called out GIPS Reports as an example of a standardized presentation that, even if provided in a one-on-one meeting, would still meet the definition of an advertisement.  Why?  Because it is a presentation that is “[quote SEC marketing rule directly]”…typically created once a year and provided unchanged over and over again in many one-on-one presentations.  That said, new SEC statistics and disclosures do not have to be added to every page of a presentation, so firms need to consider the presentation in its entirety and ensure SEC disclosures are included in a fair and balanced manner.

That raises a lot more questions:

  • Should we add supplemental model net returns?
  • Should we continue to show only annual performance statistics, or update more frequently, to reflect any significant market changes since year-end?
  • Should we add the required five (5) and ten (10) year annualized performance to the GIPS Report, in addition to elsewhere? Should we create a table for additional performance statistics, or add as a single line item disclosure?

If your firm uses the GIPS Report as a standalone document, each question above must be considered.  Since the new SEC Marketing Rule requires that net returns are reflective of what a prospective client/investor would receive, the GIPS Report needs to reflect this on its own as well as including the five and ten-year annualized composite and benchmark performance.  The Rule also states that firms need to consider more frequent updates to their marketing materials to account for significant market changes over time.  This could mean updating the GIPS Report as frequently as quarterly to reflect those changes.

Most firms, however, include GIPS Reports as part of a larger, colorful firm/strategy pitch book as a primary means of distributing them to prospective clients and investors.  It is rare that a pitchbook doesn’t have separate performance pages, in addition to the GIPS Report, and the performance section often includes the most recent quarter-end performance, annualized performance, charts, and graphs for the strategy(ies) and benchmarks being presented.

Some firms even include a GIPS Report on the back of strategy fact sheet(s), to ensure they are providing GIPS Reports with performance even before there is any expressed interest in the strategy.  Those firms likely won’t re-shape their GIPS Reports with data and disclosures already on page one of the fact sheet not needing to be repeated in the GIPS Report on page two of the fact sheet.

Many legal experts emphasize that it is the presentation as a whole that needs to include the new required statistics and disclosures, not any individual page.  Important considerations, though, include the prominence of any required regulatory statistics not in the GIPS Reports, and also if material discrepancies exist.  Using the most conservative fee schedule in your GIPS Reports, and tailoring lower fees and better returns to individual prospects, is not a problem; showing better returns in your GIPS Reports than a prospective client could expect to achieve is likely to be considered misleading, though, even if lower returns relevant for the prospective client are included elsewhere in the pitchbook.  It’s also important to consider where the GIPS Reports are stored. Larger firms, with many client-facing professionals, may not know if a professional is using a GIPS Report as a stand-alone presentation.  If the GIPS Reports are in a folder easily accessed by sales and marketing professionals, it might make the most sense for your firm to ensure your GIPS Reports meet all of the GIPS standards and SEC requirements, just in case.

Whatever you choose, keep it simple and consult with your own attorney or SEC compliance consultant, as well.  The easier your policy is to maintain, the more likely you and your team will be able to consistently follow it.  We suggest you avoid maintaining two versions, if possible—a stand-alone version, and a fact sheet only version that doesn’t include statistics (already provided on page one).  It sounds good in writing – but multiple versions used by multiple people increases the likelihood of inputting and distribution missteps.  A single version, with a straight-forward policy is what we recommend, whether you add the SEC disclosures or make it very clear that GIPS Reports are never to be used outside of pitchbooks and factsheets that meet the requirements.

If you do decide to add the required disclosures to your GIPS Reports, check out our worksheet.

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 team.cascade@cascadecompliance.com.

Pooled Fund Net Returns & Expense Ratios

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Looking for a little distraction to kick-start the spring?  We are highlighting five top performance Q&A’s focused on pooled fund expenses.

1. Someone said that the expense ratio should be annualized. What is the source for this requirement?

In the Explanation of the Provisions for Section 6, 6.A.5 it states that “Pooled fund expense ratios that are calculated for periods of less than one year must be annualized.” The expense ratio may also be shown in an exhibit if the exhibit is provided along with the GIPS Report.  Important consideration: During the first year of a fund’s life, expenses are often capped.  An annualized partial-year expense ratio would not ever be larger than the fund’s stated maximum annual expense ratio.

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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® Reports – Managing Distribution Requirements

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GIPS Reports – Managing Distribution Requirements

Does your firm manage segregated accounts and pooled funds? Are you writing 2020 policies to provide a composite report with the fee schedule and expense ratio for the fund in the disclosures? Do you have policies requiring you provide a pooled fund report?  Are there ways to avoid having two different composite reports, one for prospective clients and one for prospective investors? 

Many firms don’t know in advance of initial meetings whether a prospect is going to be a prospective investor (in a pooled fund product) or a prospective client (in a segregated account).  So what if you provide a GIPS Composite Report—without your fund’s expense ratio or fee schedule—and the prospective client turns into a prospective investor?

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Year-end Database Questions

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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:    

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