Reading 5 The GIPS Standards

Definition of the firm- Requirements:

- Apply GIPS on a firm- wide basis. - Firm must be defined as distinct business unit. - Total firm assets include total market value of discretionary and non-discretionary assets, including fee-paying and non-fee-paying accounts. - Include assets performance of sub-advisors, as long a s the firm has discretion over sub-advisor selection. - If a firm changes its organization, historical composite results cannot be changed.

Document policies and procedures- Requirements:

- Document, in writing, policies and procedures the firm uses to comply with GIPS.

Firm Fundamental Responsibilities- Requirements:

- Firms must provide a compliant presentation to all prospects (prospects must have received a presentation within the previous 12 months). - Provide a composite list and composite description to all the prospects that make a request. List discontinued composites for at least five years. -Provide, to clients requesting it, a compliant presentation and a composite description for any composite included on the firm's list. - When jointly marketing with other firms, if one of the firms claims GIPS compliance, be sure it is clearly defined as separate from noncompliant firms. -Firms are encouraged to comply with recommendations and must comply with all requirements. Be aware of updates, guidance statements, and the like.

Definition of the firm- Recommendations:

- Include the broadest definition of the firm, including all geographical offices marketed under the same brand name.

Claim of Compliance- Requirements:

- Once GIPS requirements have been met, the following compliance statement must be used " (Insert name of the firm) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS Circle R thing)." - There is no such thing as partial compliance. -There are to be no statements referring to calculation methodologies used in a composite presentation as being "in accordance with GIPS" or the like. - Similarly, there should be no such statements referring to the performance of an individual, existing client as being " calculated in accordance with GIPS" or the like, unless a compliant firm is reporting results directly to the client.

0. Fundamentals of compliance: In addition a GIPS-complaint firm must not

- Present false or misleading performance information. -Claim any kind of partial GIPS compliance. - State that a specific calculation is in compliance with GIPS -State that an individual portfolio's performance has been calculated in compliance with GIPS, except when reporting a single client's portfolio performance to that client. - Choose which prospective clients will receive a GIPS-compliant presentation. -Alter historical performance of composites based on a change in the firm's organization.

0. Fundamentals of compliance: To claim GIPS compliance, a firm must:

-Comply with all GIPS requirements, guidance, and updates. -Comply with all applicable laws and regulations concerning performance presentation. -Apply GIPS on a firmwide basis. - Document their policies for maintaining GIPS compliance. -Make reasonable efforts to provide all prospective clients a GIPS-complaint presentation. -Provide a complete list of composites and their descriptions to any prospective clients who requests one. The list must include all current composites and any that were terminated within the last five years. - Provide a GIPS-compliant performance presentation for any composite to any perspective client who request one. - Define the firm as the distinct business entity that is held out to clients or prospective clients. - Calculate total firm assets as the fair value of all assets managed by the firm, including discretionary, non-discretionary, fee-paying and non-fee-paying accounts. -Clearly define the firm that is claiming GIPS compliance, when marketing jointly with other firms.

Key Characteristics of GIPS

-To claim compliance, an investment firm must define its "firm." This definition should reflect the "distinct business entity" that is held out to clients and prospects as the investment firm. - GIPS are ethical standards for performance presentation which ensure fair representation of results and full disclosure. - Include all actual fee-paying, discretionary portfolios in composites for a minimum of five years or since firms or composite inception. After presenting five years of compliant data, the firm must add annual performance each year going forward to a minimum often years. - Firms are required to use certain calculation and presentation standards to make specific disclosures. - Input data must be accurate. -GIPS contain both required and recommended provisions- firms are encouraged to adopt the recommended provisions. - Firms are encouraged to present all pertinent additional and supplemental information. - There will be no partial compliance and only full compliance can be claimed. - Follow the local laws for cases in which a local or country-specific law or regulation conflicts with GIPS, but disclose the conflict. - Certain recommendations may become requirements in the future. -Supplemental private equity and real estate provisions contained in GIPS are to be applied to those asset classes.

GIPS Objectives

-To obtain global acceptance of calculation and presentation standards in a fair comparable format with full disclosure. - To ensure consistent, accurate investment performance data in areas of reporting, records, marketing, and presentations. - To promote fair competition among investment management firms in all markets without unnecessary entry barriers for new firms. - To promote global "self regulation."

4. Disclosures

The firm must disclose information about the presentation and the policies adopted by the firm so that the raw numbers presented in the report are understandable to the user. There are some disclosures that all firms must make, but some disclosures may not apply to all firms. If a disclosure is not applicable to a specific firm, the firm is not required to include any statement regarding it.

2. Calculation Methodology

Certain methodologies are required for portfolio return calculations and certain other methodologies are required for composite return calculations. Uniformity in methods across firms is required so that their results are comparable.

6. Real Estate

Certain provisions apply to all real estate investments (land, buildings, etc.) regardless of the level of control the firm has over management of the investment. These provisions apply regardless of whether the asset is producing revenue or there is leverage involved in the investment.

Fundamentals of COmpliance

Contain both requirements and recommendations:

3. Composite Construction

Creation of meaningful, asset-weighted composites is important to achieve a fair presentation. Composite performance is based on the performance of one or more portfolios that have the same investment strategy or investment objective. Composite returns are the asset-weighted average (not a simple average) of the returns on the portfolios that are included in each composite.

LOS 5C: Explain how the GIPS standards are implemented in countries with existing standards for performance reporting and describe the appropriate response when the GIPS standards and local regulations conflict:

Firms that previously presented performance in compliance with a particular Country Version of GIPS (CVG) may claim GIPS compliance for any CVG-complain results prior to January 1, 2006. Firms that report such CVG-complaint performance data must continue to include that performance data in subsequent GIPS-complaint presentations until a minimum of ten years of complaint performance is presented. In any cases where the country-specific regulations conflict with GIPS, firms must follow the applicable country-specific regulations but must also disclose the nature of the conflict with GIPS.

8. Wrap fee/Separately Manage Account (SMA) portfolios

For these portfolios, some of the requirements and recommendations in Sections 0 through 5 are supplemented or replaced by the requirements specified in this section.

1. Input Data

Input data should be consistent in order to establish full, fair, and comparable investment performance presentations.

5. Presentation and Reporting

Investment performance must be presented according to GIPS requirements. Other firm-specific information not specifically required by GIPS should be included when appropriate.

LOS 5A: Describe the key features of the GIPS standards and the fundamentals of compliance:

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LOS 5D: Describe the nine major sections of the GIPS standards:

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7. Private Equity

Private equity investments must be valued according to the GIPS Private Equity Valuation Principles, which are contained in Appendix D, unless the investment is an open-end or evergreen fund (which must follow regular GIPS). Private equity investments include all investment in companies that are not publicly traded, regardless of their stage of business development. This would include venture capital investments, ownership of a previously public company that has been purchased ( taken private), and mezzanine financing, as well as limited partnership shares in such investments and fund-of-funds investments.

LOS 5B: Describe the scope of the GIPS standards with respect to an investment firm's definition and historical performance Record:

The definition of the firm, for purposes of GIPS compliance, must be the corporation, subsidiary, or division that is held out to clients as a business entity. IF a firm has different geographic locations (e.g. all doing business under the name of Blusestone Advisers), then the definition of the firm should include all the various geographic locations and their clients. Firms based in any country may present GIPS compliant performance histories. A firm must initially present a minimum of five years of compliant performance presentation for the firm and each composite unless the firm or composite has been in existence less than five years. For firms or composites in existence less than five years, compliant performance since inception must be presented in order to claim compliance. After the initial complaint performance presentation, one year of complaint performance must be added each year to a required (minimum) performance history of ten years. Firms may present periods of noncompliant performance immediately prior to the compliant performance history as long as no noncompliant performance is presented for any periods after January 1, 2000. Firms must specify which performance results are noncompliant and the ways in which such (noncompliant) performance does not comply with GIPS.

0. Fundamentals of compliance.

The fundamental issues involved in complying with GIPS are (a) definition of the firm, (b) documentation of firm policies and procedures with respect to GIPS compliance, (c) complying with GIPS updates, (d) claiming compliance in the appropriate manner, and (e) appropriate verification statement when a third-party verifier is employed.