Highlights from the 21st Annual GIPS Standards Conference

The 21st Annual GIPS^® Standards Conference was held in San Diego on September 14-15 with over 300 attendees. A number of topics were covered, including important aspects of the proposed 2020 GIPS Standards updates. Jonathan Boersma, CFA, Moderator, began the conference with opening remarks discussing his time as the Head of Professional Standards and Executive Director of the Global Investment Performance Standards (GIPS) and how the standards have grown and evolved over the last 30 years. Joining in the discussion were Ronald D. Peyton, Lee N. Price, and R. Charles Tschampion, three pioneers in the establishment of what would become today’s GIPS standards. It was interesting to see that some of the original challenges to performance presentations that existed then are still in play today. These included “cherry picking” returns, excluding cash from returns to avoid any cash drag on performance, and issues associated with portability. Other obstacles to overcome were disagreements over the best performance methodologies (equal weighted vs. asset weighted) and the creation of a principles-based rather than a rules-based framework to apply standards to in order to address their concerns. On a side note, Jonathan Boersma also announced that he would be stepping down from CFA Institute at the conclusion of the conference. We thank Jonathan for his guidance and leadership!

Perhaps the most important session during the conference was the 2020 GIPS Standards update. While there are a number of topics up for consideration within the 2020 GIPS Standards initiative, the conference focused primarily on pooled funds and composites. Much of the pooled funds discussion revolved around the evolution of thought from the originally released Guidance Statement on Broadly Distributed Pooled Funds to the 2020 GIPS Standards Consultation Paper to current considerations as a final release is pondered.

In its current form, the Guidance Statement on Broadly Distributed Pooled Funds only addresses funds that meet that very description and is somewhat difficult to fit into the existing GIPS standards framework. The current vision within the 2020 GIPS Standards is to expand the guidance statement to address all fund types. This should help alleviate any confusion readers may have had over what portfolio types are covered in pillar 2 of the 2020 GIPS Standards set up.

Specific issues addressed in the 2020 GIPS Standards presentation included the following:

• Composite construction – Would funds be required to be in composites? If not, would any current single fund composites be counted as closed/terminated composites?
• Marketing – Should a compliant presentation or a ‘GIPS standards fund report’ be shown to prospective clients? How soon (or long) after a period end should the GIPS standards report be made available?
• Performance calculations – When is it appropriate to show a TWR vs. IRR? Should returns be shown gross or net of fees?

It was noted that an exposure draft of the 2020 GIPS Standards is expected to be released by the end of the second quarter of 2018. For more information on the 2020 GIPS Standards Consultation Paper, follow this link. Playbacks of the 2020 GIPS Standards Pooled Funds session can be found here.

Technical Committee Update

Karyn Vincent, CFA, CIPM, Member, GIPS Standards Executive Committee and Chair, GIPS Standards Technical Committee gave an update on the recent work of the GIPS Standards Technical Committee. There are a number of guidance statements and other projects in the works. The following lists past and expected release dates for those works that are in progress, with notes, as applicable.

• Asset Owner Guidance Statement - Final (Release Date: 8/16/17; End of Public Comment Period: Completed): Effective date of 1/1/18, but asset owners can implement now
• Risk Guidance Statement – Exposure Draft (Release Date: 8/16/17; End of Public Comment Period: 9/26/17): Attempts to eliminate any confusion over ‘additional’ three-year ex-post risk measures
• Verifier Independence Guidance Statement – Exposure Draft (Release Date: 7/28/17; End of Public Comment Period: 10/26/17): Solidifies the definition of ‘independent’
• Overlay Guidance Statement – Exposure Draft (Release Date: 8/29/17; End of Comment Period: 11/27/17): Addresses the inclusion of overlay assets in total firm and composite AUM
• Supplemental Information Guidance Statement – Final (Release Date: 9/14/17; End of Comment Period: Completed): Final version should be issued by end of 2017
• Benchmarks – Exposure Draft (Release Date: TBD): Approved for public comment on 9/12/17

It should be noted that other projects are in the works as well, including a Q&A on ‘swing pricing’ (the process of adjusting a fund’s NAV per share to pass on any trading costs to those shareholders purchasing and/or redeeming shares), updates to the Portability Guidance Statement, guidance for the treatment of performance fees, multi-asset class portfolios, and OCIOs.

SEC Update

Peter Driscoll, Acting Director, Office of Compliance Inspections and Examinations (OCIE) of the US Securities and Exchange Commission (SEC), attended the conference and gave the regulatory update. He remarked that OCIE, the eyes and ears of the SEC, continue to focus on risk-based and data-driven exams. In 2016, OCIE conducted some 2,400 exams, which represents a 20% increase YoY, and an 11% coverage ratio. To do this, a 20% increase in staff was necessary. Among the common themes of Mr. Driscoll’s presentation was the overall compliance of an organization, and the importance of protecting the retail investors, given the lower levels of resources with which to conduct due diligence.

One initiative that was addressed was an effort to engage and empower CCOs. It is believed that outreach events, such as regional seminars, webcasts, risk alerts, and other publications will facilitate communication between OCIE and SEC registrants.

Driscoll also commented on top compliance issues with performance advertising (which we have issued an alert on, here). These include the following:

• Hypothetical performance
• Cherry-Picking
• Gross-of-fees performance
• Accolades
• Voluntary performance standards
• Compliance program
• Benchmark comparisons