Ten Steps to GIPS® Compliance - Cascade Compliance

Is your firm considering GIPS Compliance?

Cascade Compliance can help asset managers achieve and maintain independently verified GIPS compliance. Compliance with the GIPS standards is a firm-wide process, often required by consultants and institutional investors. Third-party verification brings additional credibility to that process and supports the overall guiding principles of full disclosure and fair representation.

Cascade Compliance was established with a 100% dedication to consultation and verification services for the investment industry. With that focus comes thought leadership and a commitment to keeping clients informed about operational and compliance developments and upcoming changes from the CFA Institute.

Here are 10 helpful tips for becoming GIPS compliant:

Step 1 – Gain Management Support: Management must commit time and resources to bring the firm into compliance. Create a GIPS committee that includes leaders from different departments at the firm.

Step 2 – Know the Standards: There is no way you’re going to get your whole firm to read the 400+ page GIPS Handbook or sit through a day-long work shop. If you’re the point person, read the standards in manageable sections and train the GIPS committee as you go. Start with the requirements; attend a workshop; work with someone whose been down the path before; get familiar with resources on the GIPS website.

Step 3 – Define the Firm: The definition should accurately reflect how your firm is held out to the public and will determine the firm-wide assets under management reported in GIPS Reports. Read the Guidance Statement on Definition of the Firm – only 3-1/2 pages and full of critical fundamental information.

Step 4 – Define Investment Discretion: The standards use the term “discretion” differently than the term is used by regulators. Defining investment discretion is an important step in determining whether accounts must be included in a composite.

Step 5 – List all Accounts Under Management: Identify all accounts under management within the defined firm as of the most recent period-end and at a date at least five years prior, or since firm inception if less than five years. This should include all discretionary and non-discretionary managed accounts, including terminated ones. Advisory-only accounts with no accompanying trading component are not included in the firm’s managed assets.

Step 6 – Assess Books and Records: Determine if your firm has the appropriate books and records to support historical discretionary account performance. To claim compliance, a firm needs a minimum five years of compliant performance. Are terminated accounts still accessible in your portfolio accounting system?

Step 7 – Draft Composites: Separate the firm’s accounts into groups based on discretionary status, investment strategy or mandate, or other criteria. Read the Guidance Statement on Composite Definition – 7-1/2 pages of pure gold. This will be the basis for creating your composites. Pooled funds don’t have to be included in a composite unless they are managed in the same strategy as segregated accounts. Then, list and define the composites that will be constructed and establish processes for composite management. Also, list and define any limited distribution pooled funds the firm manages.

Step 8 – Document Policies and Procedures: Document decisions made in Steps 3, 4 and 7 in your firm’s policies and procedures for establishing and maintaining compliance with the GIPS standards. Read the U.S. IPC whitepaper on Best Practices for Creating and Maintaining Policies and Procedures. It’s the longest of the three must-read documents referenced in this article, but it’s worth it – you’re far enough along in the process that you’ll have context, if not first-hand experience, with the guidance offered in establishing meaningful policies and procedures.

Step 9 – Calculate Performance: Calculate composite performance and required annual statistics in accordance with required/recommended calculation methodologies for each of your firm’s composites and pooled funds. Your portfolio accounting system can do the heavy lifting, but you will need to ensure that you’re selecting compliant options: i.e. be sure to calculate performance that accrues for interest income. These decisions will be added to your policy and procedure document.

Step 10 – Compile Performance Presentations: Develop compliant presentations for each of the firm’s composites and limited distribution pooled funds. How your firm maintains these presentations going forward, how you ensure they are provided to prospective clients, and how you check and correct for errors in these presentations will also be added to your policy and procedure document.