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GIPS 2010 Key Issues Summary

 

The following items were addressed relating to the GIPS update project during the in-person Executive Committee (EC) meeting in Amsterdam in March 2008. Below are the key issues that were discussed and the EC’s response and/or planned course of action. 

 

Please note that these are preliminary views on what may be proposed in the upcoming draft of the revised GIPS standards and are subject to change. These comments are provided to give the industry insight into the potential changes that are being considered. The industry will have the opportunity to comment on proposed changes when the draft is released for public comment in 2009. This is not a complete list of all proposed changes – additional issues will be considered and proposed. These comments do not constitute official guidance or interpretation of the GIPS standards. 

 

Timeline

 

The draft of the next version of the GIPS standards will be available for public comment at the beginning of 2009. The final version will be published at the beginning of 2010 with an effective date of 1 January 2011. This means that all performance presentations must be made according to the revised Standards beginning 1 January 2011.

 

2010 Effective Dates

 

Within the current GIPS standards there are a number of provisions with effective dates of 1 January 2010 (e.g., valuation at the time of large cash flows (2.A.2.b.)). The GIPS Executive Committee confirms that these provisions will become effective 1 January 2010.

 

Verification

 

As mentioned in its statement in November 2007, the GIPS Executive Committee decided not to pursue mandatory verification for firms claiming compliance with the GIPS standards. Instead, the draft of the next version of the Standards will include a revised compliance statement that will include an explicit statement regarding if the firm has or has not been verified.

  

Key Issues

 

1.      Should the types of assets that must be included in the definition of the firm be reconsidered?

• The notion of “assets to which the GIPS standards cannot be applied” has changed.
• Originally the exclusion was written contemplating Guaranteed Investment Contracts (GICS); GICS are now normally able to be valued. 
• Current guidance states that art or “hard to value” items must not be included in firm assets. Some alternative investment managers invest in and manage art and other “non-traditional” investments which can be valued.
• Should the differentiator be managed assets versus unmanaged assets?

 

EC Response – Yes, the types of assets that are covered by the GIPS standards and must be included in total firm assets should be reconsidered to incorporate the concept of “managed” versus “unmanaged” assets. Historically, certain assets have been excluded from compliance with the GIPS standards, such as works of art and other assets where there is no market value. If the assets are managed, meaning that the manager invests in them as part of an investment strategy, they should be included in the firm. If they are unmanaged assets, they should be excluded from the firm. 

 

2.      Should the distinction between fee-paying and non-fee-paying portfolios be removed?

• If non-fee-paying portfolios are managed like fee-paying portfolios, why should they be allowed to be excluded from composites based simply on fee-paying status?

 

EC Response – Yes, the distinction between fee-paying and non-fee-paying portfolios should be removed when considering composite construction and total firm assets. If a portfolio is managed in a particular strategy, is discretionary, and is included as part of the firm, it must be included in at least one composite. Additional guidance will be needed to address how non-fee-paying portfolios should be treated when presenting net-of-fee returns. Retroactive application would not be required. Other implementation issues may also need to be addressed.

 

3.      Should the definition of carve-outs be changed or reconsidered? 

• Should portfolios that have segments managed independently, but cash is not included, be allowed to be included in a composite? In many instances these portfolios are no different than a stand alone portfolio that has cash “swept out” every day based on client direction.

 

EC Response – Yes, the definition of carve-outs should be changed in future guidance to differentiate carve-outs from “sub-portfolios.” If a sub-portfolio is managed as a distinct strategy, it can be included in the appropriate composite as determined by the composite definition. Firms should still be prohibited from creating a hypothetical sub-portfolio from a multi-strategy or broader strategy account (e.g., Swiss equities from an EAFE strategy or technology stocks from a global strategy) unless the sub-portfolio is actually managed as its own strategy and representative of a stand alone portfolio managed to that strategy. Composite definition is critical in determining the inclusion of sub-portfolios.

 

As stated in the Guidance Statement on Carve Outs, cash allocation will no longer be allowed after 1 January 2010. Noting that some strategies are managed with zero cash, the EC suggested that the Interpretations Subcommittee consider if sub-portfolios should be permitted to be included in a composite without cash with other similar sub-portfolios if it is clearly labeled as not including cash. The Interpretations Subcommittee will review carve-outs and sub-portfolios, and it is expected that additional guidance will be written. 

 

4.      Should the term “prospective client” be defined in the Standards? Would such a definition assist firms in meeting their obligation to make every reasonable effort to provide a compliant presentation to all prospective clients?

 

EC Response – No, the term “prospective client” should not be defined within the provisions of the Standards, but rather there should be additional guidance issued providing clarity about who qualifies as a “prospective client.”

 

5.      Should the definition of market value in the glossary be expanded to include the notion of fair value for all assets?

 

EC Response – Yes, the definition of market value in the glossary should be expanded to include the notion of fair value for all assets. Additional guidance will be made available on valuation in the form of a guidance statement and/or Questions and Answers. The EC does not believe it is necessary to provide guidance on specific valuation procedures. However, a general valuation framework – similar to the private equity valuation guidelines – should be developed.

 

6.      Should the current recommendation to accrue dividends remain a recommendation?

 

EC Response – Yes, the current recommendation to accrue dividends should remain a recommendation. The EC acknowledged that many markets are not prepared for dividend accruals becoming a requirement; however, it is still considered best practice and recommended where practicable.

 

7.      Is clarification of the treatment and related disclosure of withholding taxes necessary? Should the concept of materiality be added to the disclosure requirements?

 

EC Response - The concept of materiality should be considered. In addition, consideration should be given regarding whether this disclosure is needed at all.

 

8.      Should the requirement to revalue portfolios on the day of large cash as of 1 January 2010 be reconsidered?

• Many firms, particularly smaller firms and managers of less liquid asset classes, have expressed concern about the ability to obtain, and the cost of, intra-month pricing for less liquid asset classes;
• Some firms that do not wish to revalue intra-month may define “large cash flow” as extremely high to avoid triggering an intra-month valuation;
• Some firms that do not wish to revalue intra-month may adopt a significant cash flow policy whereby portfolios that have a significant cash flow during the month are temporarily removed from the composite.
• Some firms may need to use “temporary new accounts,” which are difficult to administer. 

 

EC Response – No, the requirement to revalue the portfolio on the day of large cash flows as of 1 January 2010 should not be reconsidered. This requirement will improve the quality and accuracy of the performance being presented. Guidance should be developed to prevent potential unintended consequences.

 

9.      Should the requirement to value portfolios as of the last calendar day or last business day of the month beginning 1 January 2010 be reconsidered?

 

EC Response – No, the requirement to value portfolios as of the last calendar day or last business day of the month should not be reconsidered. However, country sponsors will be asked if they are aware of any jurisdictions that may have a problem implementing this requirement. Additional guidance may be needed to address implementation issues.

 

10.      Should the Standards recommend, or even require, an internal rate of return (IRR) when managers are responsible for the timing of cash flows?

 

EC Response – Yes, the Standards should consider recommending an IRR when managers are responsible for the timing of the cash flows. Additional work is required to ascertain exactly how this concept might be implemented within the Standards and if an IRR is the most appropriate calculation. A time-weighted return should still be required as it is a point of comparison between firms. The Interpretations Subcommittee will provide a related proposal to the Executive Committee in the coming months.

 

11.      Should guidance be provided for how long certain disclosures must be included in compliant presentations? For example, how long must a firm disclose a composite name change?

 

EC Response – Yes, additional guidance should be provided for how long certain disclosures must be included in compliant presentations. Certain disclosures may not be material after one year, while other disclosures may be material for a longer time period. Additional work is required to ascertain exactly how this concept will be implemented within the Standards. The Interpretations Subcommittee will provide a related proposal to the Executive Committee in the coming months.

 

12.      Real Estate assets must be valued by an external appraisal at least once every three years. Should there be an exception for those situations where independent valuation is not required by the client?

 

EC Response – Unless prohibited by the client, real estate assets should be required to be valued by an external appraisal at least once every three years. External valuation every three years is the industry standard. The Interpretations Subcommittee will provide a related proposal to the Executive Committee in the coming months.