Checklist

This checklist is designed to help firms that either claim compliance with the Global Investment Performance Standards®, or are coming into compliance with GIPS for the first time. The GIPS standards are ethical standards for investment performance presentation to ensure fair representation and full disclosure of investment performance. In order to claim compliance, firms must adhere to the requirements included in the GIPS standards. This checklist strives to provide a list of the most commonly required elements of a firm’s GIPS Policies and Procedures document. Meeting the objectives of fair representation and full disclosure is likely to require more than simply adhering to the minimum requirements of the GIPS standards. Also, recommended policies and procedures are not included in this checklist. Firms should adhere to the recommendations to achieve best practice in the calculation and presentation of performance. Accordingly, this checklist is not intended to provide a comprehensive list of all possible required procedures. Firms should use this list only as a guide, and are encouraged to tailor this checklist to their own needs and circumstances.

GIPS policies and proceduREs requirements

GENERAL REQUIREMENTS:  Means REQUIREMENT is DOCUMENTED

Firms must document their policies and procedures used in establishing and maintaining compliance with the GIPS standards.

Firms must document their policies and procedures used in ensuring existence and ownership of client assets.

Firms must create policies and procedures to ensure that they adhere to all applicable laws and regulations regarding the calculation and presentation of performance.

Firms must have policies and procedures to identify and monitor changes and additions to laws and regulations regarding the calculation and presentation of performance.

Firms must create policies and procedures to monitor and identify changes to all of the updates, Guidance Statements, interpretations, Questions & Answers (Q&As), and clarifications published by CFA Institute and the GIPS Executive Committee.

Firms must establish policies and procedures to ensure that performance and performance-related information does not include false or misleading information. The following items are misleading and unrepresentative; therefore, firms are prohibited from presenting this information

  • Model, hypothetical, back-tested, or simulated results linked to actual performance results;
  • Non-portable performance from a prior firm linked to current ongoing results;
  • Comparing performance to an inappropriate benchmark; and
  • Selectively presenting (i.e., cherry-picking) performance periods.

If a firm chooses to adopt any recommendations, the firm’s policies and procedures must reflect how that recommendation is applied.

Firms must maintain all policies and procedures (both current and previous versions) that support the claim of compliance.

FIRM DEFINITION AND DISCRETION:

The firm must be defined as an investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity. A distinct business entity is a unit, division, department, or office that (1) is organizationally and functionally segregated from other units, divisions, departments, or offices, (2) retains discretion over the assets it manages, and (3) should have autonomy over the investment decision-making process. The firm definition must be appropriate, rational, and fair. Firms must not use the definition of the firm as a substitute for defining composites, (e.g., defining the firm too narrowly, as to only encompass one product).

Each firm must document its definition of discretion and must apply the definition consistently. Ideally, discretion is defined at the firm level, but may be defined at the composite level or by asset class.

  • Non-discretionary portfolios must not be included in a firm’s composites.
  • The firm must determine if and how any portfolio restrictions will, or could, interfere with the implementation of the intended strategy to the extent that the portfolio is no longer representative of the strategy.

COMPOSITE DEFINITION:

Firms must document policies and procedures related to composite definition. A composite’s definition must include detailed criteria that determine the assignment of portfolios to composites.

Composites must be defined according to investment mandate, objective, or strategy.

  • Firms are only permitted to define different composites for offices, branches, or investment divisions of a firm if the portfolios are managed according to investment objectives, mandates, or strategies that are unique to each particular office, branch, or division.
  • Internal dispersion must not be used as a criterion to define a composite.
  • Firms are not permitted to create composites based solely on inception date.
  • Base currency must not be a criterion used for composite definition unless it is specific to the investment strategy.
  • Firms must consider whether portfolios that use leverage, derivatives, and/or hedging should be included in separate composites from portfolios that are restricted from using such instruments or strategies.

The firm must establish reasonable criteria that support the fundamental principle of fair representation. Firms must apply the criteria for defining composites consistently (e.g., the firm may not select only certain, specific portfolios (i.e., “cherry-picking”) that meet the composite definition, but must include all portfolios that satisfy the criteria for inclusion).

  • Composites must be representative of the firm’s products and be consistent with the firm’s marketing strategy.
  • Firms must review each of their portfolios (both discretionary and non-discretionary) on a regular basis to determine whether any portfolios must be re-classified.

Firms must document policies and procedures for determining which portfolios are considered real estate portfolios for the purpose of complying with the GIPS standards.

COMPOSITE CONSTRUCTION:

The firm has documented policies and procedures for all applicable requirements of Section 3, Composite Construction, of the GIPS Standards, including ensuring all fee-paying, discretionary portfolios are included in at least one composite, and that composites include only actual assets managed by the firm.

Each composite must have a portfolio inclusion policy for new portfolios and an exclusion policy for terminated portfolios.

  • Composites must include new portfolios on a timely and consistent basis after each portfolio comes under management.
  • Firms are only permitted to move portfolios into and out of composites due to documented changes to a portfolio’s investment mandate, objective, or strategy or in the case where the re-definition of the composite makes it appropriate. For purposes of the GIPS standards, documentation can include, but is not limited to, letters, faxes, e-mails, and/or internal memorandums documenting conversations with clients. The historical performance of the portfolio must remain with the original composite.
  • Portfolios must not be moved into or out of composites due to changes in the tactical asset allocation. Only in the case of client-documented strategic asset allocation changes can portfolios be moved into different composites.

Firms must establish a policy that includes terminated portfolios in the historical performance of the composite through the last full measurement period that each portfolio was under management.

OPTIONAL If the firm sets a minimum asset level for portfolios to be included in a composite:

Firms must determine, as part of their policies regarding minimum asset levels, which value will be used to evaluate composite portfolios against the minimum asset level (e.g., beginning value, ending value, beginning value plus cash flows).

Firms must document and disclose changes to the minimum asset level and must not retroactively apply the new limit.

Firms must document its policies regarding how portfolios will be treated if they fall below the minimum and must apply these policies consistently.

  • No portfolios below that asset level can be included in that composite.
  • Once a portfolio is removed, the firm must determine if the portfolio meets any other composite definition and must include it in the appropriate composite(s) in a timely and consistent manner.

OPTIONAL If the firm sets a significant cash flow level for portfolios to be excluded, from a composite:

Firms must document their definitions and policies regarding significant cash flows, including the definition of the grace period and measure of significance. Firms must also document any changes that are made to the definitions or policies.

Firms must establish policies for the timing of excluding portfolios that experience significant cash flows from composites, as well as policies for the timing of adding back those portfolios in composites. These policies must be established on a composite-specific basis.

Cash flow must be defined as the level at which the firm determines that a client directed external cash flow may temporarily prevent the firm from implementing the composite strategy.

The measure of significance must be determined as either a specific monetary amount (e.g., €50,000,000) or a percentage of portfolio assets (based on the most recent valuation).

Grace period policies, as well as definitions and policies concerning significant cash flows, must be established and documented for each composite by the firm before they are implemented.

  • Firms must not retroactively apply these policies to restate performance. Once implemented, the firm must consistently apply these policies. Firms must not reconsider whether a portfolio should be removed from a composite after the fact when it can be determined whether the cash flow has helped or hurt performance.
  • Temporary new accounts must not be included in any composite.

OPTIONAL If the firm utilizes carve-out composites, firms must establish policies and procedures for the creation, use, and calculation of carve-outs and must apply them consistently.

  • The carved-out segment must be discretionary and structured materially the same as a portfolio dedicated to that strategy and have a risk profile that is substantially similar.
  • If a firm creates a carve-out of a particular strategy, then all similar portfolio segments managed to that strategy must also be carved-out and included in the composite.
  • Beginning on or after 1 January 2010, a carve-out must not be included in a composite unless the carve-out is managed separately with its own cash balance.
  • If a composite loses all of its member portfolios (whether that is due to significant cash flows, portfolio termination, or some other reason), the performance record stops.
  • If portfolios are later added to that composite, the periods must not be mathematically linked. The periods both before and after the break in track record must be presented, with the break in performance clearly shown.

VALUATION:

Firms must establish policies and procedures for determining portfolio valuations.

  • For periods beginning on or after 1 January 2011, portfolios must be valued in accordance with the definition of fair value and the GIPS Valuation Principles.

Firms must establish a valuation hierarchy on a composite-specific basis. It is acceptable for firms to apply a different hierarchy provided it satisfies the definition of fair value.

Valuation must be determined using the objective, observable, unadjusted quoted market price for an identical investment in an active market on the measurement date, if available.

Absence a quoted market price for an identical investment in an active market on the measurement date, the valuation must represent the firm’s best estimate of the market value

A firm’s valuation policies and procedures must address situations where:

the market prices may be available for similar but not identical investments.

inputs to valuations are subjective rather than objective.

markets are inactive instead of active.

Firms must value portfolios in accordance with the composite-specific valuation policy. Portfolios must be valued:

  • for periods beginning on or after 1 January 2001, at least monthly.
  • for periods beginning on or after 1 January 2010, on the date of all large cash flows.
  • no more frequently than required by the valuation policy.

For periods beginning on or after 1 January 2010, firms must value portfolios as of the calendar month end or the last business day of the month.

For periods beginning on or after 1 January 2005, firms must use trade date accounting.

The value of fixed-income securities must include accrued income.

For periods beginning on or after 1 January 2006, composites must have consistent beginning and ending annual valuation dates. Unless the composite is reported on a non-calendar fiscal year, the beginning and ending valuation dates must be at calendar year end or on the last business day of the year.

PERFORMANCE CALCULATION:

Total returns must be used.

Firms must calculate time-weighted rates of return that adjust for external cash flows. Both periodic and sub-period returns must be geometrically linked. External cash flows must be treated according to the firm’s composite-specific policy. At a minimum:

For periods beginning on or after 1 January 2001, firms must calculate portfolio returns at least monthly.

For periods beginning on or after 1 January 2005, firms must calculate portfolio returns that adjust for daily-weighted external cash flows.

Returns from cash and cash equivalents held in portfolios must be included in all return calculations.

All returns must be calculated after the deduction of the actual trading expenses incurred during the period. Firms must not use estimated trading expenses.

OPTIONAL For bundled fee portfolios:

When calculating gross-of- fees returns, returns must be reduced by the entire bundled fee or the portion of the bundled fee that includes the trading expenses.

When calculating net-of- fees returns, returns must be reduced by the entire bundled fee or the portion of the bundled fee that includes the trading expenses and the investment management fee.

Composite returns must be calculated by asset-weighting the individual portfolio returns using beginning-of- period values or a method that reflects both beginning-of- period values and external cash flows.

Composite returns must be calculated:

For periods beginning on or after 1 January 2006, by asset-weighting the individual portfolio returns at least quarterly.

For periods beginning on or after 1 January 2010, by asset-weighting the individual portfolio returns at least monthly.

PORTFOLIO RECORDKEEPING:

The firm must have policies and procedures for capturing and maintaining all data and information necessary to support all items included in its compliant presentations. Above all else, a firm must comply with all applicable laws and regulations regarding the calculation and presentation of performance, including any recordkeeping requirements.

Firms must maintain records to support why a portfolio was assigned to a specific composite or was excluded from all composites.

OPTIONAL Firms that have adopted a significant cash flow policy must document each time a portfolio moves into or out of a composite due to a significant cash flow. Documentation must be part of the firm’s record keeping process and, at a minimum, must include:

The date of the significant cash flow, the date the firm removes the portfolio from the composite, and the date the firm returns the portfolio to the composite,

Depending upon the firm’s definition of significant cash flow, the amount of the significant cash flow or the amount of the significant cash flow as a percentage of the most recent portfolio value, and

If the significant cash flow is moving into or out of the portfolio.

DISCLOSURE, PRESENTATION AND REPORTING

The firm must apply all disclosure requirements in Section 4. Disclosure and Section 5. Presentation and Reporting of the GIPS Standards. A separate disclosure checklist is available to ensure compliance.

Firms must establish policies and procedures for determining when an interested party becomes a prospective client. An interested party becomes a prospective client when two tests are met. First, the interested party must have expressed interest in a specific composite strategy or strategies. Second, the firm must have determined that the interested party qualifies to invest in the respective composite strategy.

OPTIONALPolicies and procedures for converting returns into different currencies must be established, documented, and applied consistently.

ERROR CORRECTION

Firms must establish error correction policies and procedures.

Materiality must be defined in the error correction policies.

The lack of a required disclosure is considered an error and the compliant presentation must be corrected.

Completed

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Reviewed & Approved

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1 / GIPS® Policies and Procedures Checklist
GIPS 2010 20130206