GIPS 2010 has been making headlines all year. An update to the GIPS standards that clarifies and enhances almost every section of the standards is currently in final review, and will most likely be adopted early in 2010. The bad news: Right now, we're in a quiet zone between the date the public comment period was closed and the release of the final version. The good news: Firms won't be required to adopt the redrafted standards until January 2011. Whew!
That said, there are new requirements with January 2010 effective dates, firms should double check that they are in compliance with these provisions to start the New Year out on solid ground.
Year-End Compliance Checklist: (1) Written error corrections policies and procedures.
(2) Carve-out returns managed with their own cash balances.
(3) Month-end portfolio valuations + revaluing portfolios on the date of large external cash flows.
(4) Monthly asset-weighted composites.
(1) The GIPS error correction guidance statement going into effect in January 2010 requires firms to establish a materiality threshold for presentation errors. Any errors on the firm's GIPS compliant annual disclosure presentation that meet the materiality threshold must be 1) corrected, 2) disclosed for 12 months, and 3) every reasonable effort must be made to provide corrected presentations to recipients of the presentation that had errors.
Error correction policies need to consider materiality thresholds for both performance and nonperformance errors, such as assets, number of accounts, and missing or erroneous qualitative disclosures. They should also address the treatment of nonmaterial errors, which might be corrected, but not disclosed or redistributed.
(2) Carve-outs with cash allocation assumptions have been on the chopping block for about a decade, and as of January 1, 2010, firms utilizing carve-outs will need to have made the switch to carve-out segments managed with their own cash. Some firms are dropping carve-outs from their composites. Others are setting up multiple accounts at the custodian (for example, instead of each client having one balanced account, each client will now have both a fixed income and an equity account at the custodian). Still others are breaking out segments of multi-asset portfolios on their own accounting system and keeping them as a single account at the custodian, or they're creating separate cash accounts on the accounting system for each of the different segments.
(3) As of January 2010, portfolios must be valued at calendar month-end or the last business day of the month. Additionally, valuations must also be done on the date of any large cash flow. To be clear, cash flows come in two distinct flavors that must be understood correctly and acted on differently in accordance with the standards. A mainstay in GIPs compliance policies since 2002, the Significant Cash Flowis a cash flow that is so large it essentially makes a portfolio temporarily unrepresentative of the composite strategy. Many firms set significant cash flow thresholds at 25+%. For highly liquid strategies, many firms opt not to have a significant cash flow policy. If a firm does establish a significant cash flow policy, however, the firm must remove accounts from the composite when a significant cash flow occurs. New to the standards in January 2010, a Large Cash Flow is a cash flow that is so large that performance would be distorted if the flow was not revalued. Firms must establish a large cash flow threshold (no opting out), and when a large cash flow occurs, the portfolio or composite must be revalued as of the date of the flow. A common large cash flow threshold is 10%.
(4) Firms have been permitted to compile composites in a spreadsheet on a quarterly basis as long as the portfolios within the composite were valued at least monthly. For the firms compiling composite returns in a quarterly spreadsheet, often pulling returns from multiple portfolio accounting systems for wrap accounts or mutual funds, January 1, 2010, will require the composite performance be compiled monthly.
Check your list and check back in early 2010 for more changes going into effect in 2011!
Kim Cash
kim@ashlandpartners.com |
