GIPS 2010 Key Issues Summary
To keep the industry informed on the development of the GIPS standards 2010 edition, a summary of the GIPS 2010 Key Issues was posted on the GIPS website in April 2008. There has been much progress since then and the following is a continuation of the discussions and proposals regarding the GIPS 2010 exposure draft.
While potential changes are still under discussion, the GIPS Executive Committee (EC) has agreed on several issues addressed at the last in-person meeting in Boston in September 2008. The following are highlights of certain changes that will be reflected in Sections 0-5 of the GIPS standards Exposure Draft. These comments are provided to give the industry insight into the potential changes that are being considered. These comments do not constitute official guidance or interpretation of the GIPS standards and are subject to change.
Additional proposals and other sections, including advertising, verification, real estate, and private provisions are currently under review. The complete draft of all provisions will be issued in January 2009 for public comment. The EC encourages industry groups and country sponsors to provide comment on the proposed changes during the public comment period. Comments will be considered for incorporation in the revised GIPS standards to be released in early 2010.
Important Dates and Effective Dates
The existing effective dates in the current 2005 GIPS standards edition will remain in effect. The effective date of the revised GIPS standards will be 1 January 2011. Early adoption is encouraged and compliant presentations that include performance results for periods that begin on or after 1 January 2011 must be prepared in accordance with the revised GIPS standards.
Compliant Presentation
The definition of a compliant presentation will be included in the glossary to clarify that it is the composite-specific report that includes all required data and disclosures and the ‘universe’ that must be considered for error correction policies. The GIPS standards will recommend firms to update compliant presentations quarterly.
The Standards will recommend showing performance history longer than 10 years in addition to the required 5 year minimum (or a record for the period since firm or composite inception if in existence for less than 5 years) building up to 10 years of performance. Regarding the composite’s first year, firms will be required to show returns from the inception through the initial year-end. New guidance is expected to be developed to address when the initial compliant presentation of a new composite must be prepared.
Firms are required to disclose the composite description to include enough information to allow a prospective client to understand all of the key characteristics of the composite strategy. This disclosure will be expanded to require firms to also include information for prospective clients to understand the associated risks of the composite strategy.
Firms will be required to disclose the annualized ex-post standard deviation of the composite and the benchmark for the most recent three year period. The Standards will recommend presenting the three year annualized standard deviation for additional periods. Further guidance will be provided on this topic.
Existing Clients
The Standards will recommend providing relevant compliant presentations to existing clients on an annual basis, in addition to the requirement to provide a compliant presentation to all prospective clients. New Q&As are expected to be issued to clarify who qualifies as a prospective client.
Valuation
The concept of fair value will replace the notion of market value in the Standards. A general framework and additional guidance on fair value will be issued. Firms will be recommended to disclose key assumptions and principles to value investments and further recommended to obtain fair values from an independent third party when possible.
Firms will be required to revalue portfolios at month-end and on the date of all large external cash flows. The GIPS standards will recommend revaluing portfolios on the date of all external cash flows. Separate requirements for real estate and private equity valuations will also be issued.
Non-Fee Paying/Proprietary Portfolios
The exemption for excluding non-fee paying portfolios from composites will be removed. All discretionary portfolios, including non-fee-paying portfolios, will be required to be included in at least one composite. Firms will be required to continue to disclose the percentage of the composite that is composed of non-fee paying portfolios as of each annual period end. Prospectively, firms will also be required to disclose the percentage of the composite that is composed of proprietary portfolios (also known as “seed money” or “house” accounts).
Composite Minimum
Firms that establish a minimum portfolio asset level for inclusion in a composite will be prohibited from showing a composite to a client that is known to have assets below the minimum. Such minimums are intended to represent the amount needed to manage a portfolio according to the composite’s strategy. This provision will be upgraded from a recommendation to a requirement.
Carve-Outs
As previously indicated, as of 1 January 2010 firms may no longer allocate cash to carve-out segments and, if a firm chooses to include carve-outs in composites, the carve-outs must be managed separately with their own cash. In addition, “fully-invested” carve-out segments will not be allowed to be included in composites.
Net-of-Fee Returns
Firms will be required to disclose if actual or model fees are used when presenting net-of-fees returns along with the current requirement to disclose if any other fees are deducted in addition to the investment management fees and direct trading expenses. Firms will also be required to disclose if any performance-based fees are reflected in the calculation.
Withholding Taxes
Firms will only be required to disclose relevant details of the treatment of withholding taxes on dividends, interest income, and capital gain if material. Firms will still be required to disclose if the benchmark returns are net of withholding taxes.
Leverage & Derivatives
Firms are required to disclose the presence, use, and extent of leverage and/or derivatives, including a description of the frequency of use and characteristics of the instruments sufficient to identify risks. This disclosure will be expanded to include disclosure of the use of short positions.