Q & A Database
The GIPS Standards Q&A database contains questions and answers (Q&As) on various searchable topics that provide additional interpretation on an issue. Q&As are considered to be authoritative guidance and must be followed in order to claim compliance with the GIPS standards.
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CurrentEffective: 1 November, 2012Categories: Cash FlowSource: GIPS Handbook, 3rd Edition
Can we temporarily suspend our significant cash flow policy when we only have one portfolio in the composite and then reinstate it once we have two portfolios in the composite?No. A significant cash flow policy, once adopted, must be applied consistently. If a firm has a single portfolio in a composite and that portfolio is temporarily removed from the composite due to the firm’s significant cash flow policy, then the track record of the composite is broken and the continuous performance history ends. Once the portfolio is added back into the composite and the composite performance is restarted, the performance history must be presented for periods both before and after the break and cannot be linked across the break. A significant cash flow policy can be composite specific and does not need to be applied firm-wide. Firms that choose to adopt a significant cash flow policy for certain composites must define the significant cash flow level on a composite-specific basis. A significant cash flow policy may be amended as long as it is done prospectively and the amendment is documented in the firm’s policies and procedures.
As an alternative to a significant cash flow policy, a firm may consider the use of a temporary new account. This allows a firm to create a new portfolio into which a client’s contributions are directed. Within this new portfolio, the firm will purchase securities. Once the new funds are invested, the securities are transferred in-kind to the existing portfolio contained within a composite. For a withdrawal, the securities are transferred in-kind to the temporary new account and then sold from the temporary new account. Like the significant cash flow policy, the temporary new account policy may be composite-specific. Firms that choose to use temporary new accounts for certain composites must define policies for using temporary new accounts on a composite-specific basis and must apply those policies consistently.