Ethics and Standards - GIPS: Requirements And Recommendations

Input Data - Requirements
1. Data needed to support the firm's performance presentation and to make the necessary calculations must be retained.

2. Portfolio valuation must be market based (not based on book value or on cost).

3. Minimum quarterly valuation for all periods prior to Jan 1, 2001.

4. Minimum monthly valuation for periods between Jan 1, 2001, and Jan 1, 2010. Starting Jan 1, 2010, the monthly valuation must be the calendar month end (i.e. last business day of the month).

5. Portfolios must be valued on the day large external cash flows are received (starting in Jan 1, 2010). The definition of "large external cash flow" is not specified - each firm must identify the amount (or percentage of an account) that constitutes a large cash flow for each composite.

6. Trade date accounting for periods starting in Jan 1, 2005. In other words, the asset is reflected in an account on the day it was traded, not on settlement date.

7. Accrual accounting for all fixed-income securities. In other words, if the income has been earned (if the owner has a legally enforceable claim to that income), it must be included in total asset value.

8. Beginning and ending valuation dates must be consistent, and must be calendar year-end unless the composite is reported on a non-calendar fiscal year.

Input Data - Recommendations
1. Accrual accounting for dividends (i.e. as of the ex-dividend date).

2. A net-of-fees return presentation should accrue all investment management fees.

3. Calendar month-end valuation (until Jan 1, 2010, when it is required).

Calculation Methodology - Requirements
1. Total return - includes income, plus realized gains and losses, plus unrealized gains and losses.

2. Time-weighted rates of return, geometrically linked. Compared to a money-weighted rate of return, this methodology removes the effect of external cash flows.

3. External cash flows, when received, must be treated consistently, i.e. each composite must have a documented policy:

a.For periods starting in Jan 1, 2005, firms must use approximated rates of return that adjust for daily-weighted cash flows.
b.For periods starting in Jan 1, 2010, firms must value any portfolio receiving a large external cash flow.

4. Composites must be constructed by asset-weighted individual portfolio returns using beginning of period values and all external cash flows.

5. Cash (and cash equivalent) returns must be included if there is cash in the individual account.

6. Returns must be net of actual trading costs. Estimating trading expenses is not permitted (in determining either gross or net).

7. Composite returns are asset-weighted, determined by (at minimum) quarterly valuation of the individual portfolios. Starting in Jan 1, 2010, the standard is monthly valuation.

Calculation Methodology - Recommendations
1. Returns must be met on non-reclaimable withholding taxes, but if they can be reclaimed, the amount should be accrued.

2. Composite returns should asset-weight the individual portfolios on a monthly basis (required starting in 2010).

3. Portfolios should be valued on the date large external cash flows are received (required starting in 2010).

Disclosures - Requirements
1. How is "the firm" defined (to determine total firm assets and firm-wide compliance)? If the firm has been redefined, state the date and the reason why.

2. Availability of a list of the firm's composites, and how they are defined. If a composite was redefined, state the date and the reason why.

3. A description of the composite, and its minimum asset level.

4. The currency used to express performance, and whether there are inconsistencies between the composite's treatment and that of the benchmark.

5. The presence, use and extent of derivative securities.

6. "Gross-of-fees" and "net-of-fees" must be clearly labeled on return data.

7. How withholding taxes are treated in calculations (gross or net). If benchmarks are net of taxes, it must disclose the tax basis of the benchmark versus the composite.

8. When local laws conflict with the GIPS, give a description of the conflict and state the fact that local standards are being used.

9. For periods prior to Jan 1, 2000, that are not in compliance, state which periods those are and how they are not in compliance.

10. For carve-out returns (for periods prior to Jan 1, 2010), state the method by which cash is allocated.

11. The appropriate fee schedule.

12. For composites with bundled fees (e.g. wrap fees that allow the client to pay a set amount for investment management fees and broker fees), an indication of the percentage of accounts with bundled fees and the various types of fees included.

13. For gross-of-fee returns, whether any fees other than trading expenses are deducted.

14. State that additional information on performance calculation and reporting is available upon request.

15. State whether a subadvisor was used in any portion of the account.

16. Explain any significant events that will help a client or prospective client interpret the performance record.

Disclosures - Recommendations
1. If the firm has other sister firms within a larger corporate parent, provide disclosure of those other firms.

2. State whether a change in calculation methodology has resulted in a material impact on performance.

3. If the firm has been verified, list the periods covered by the verification and which periods were not subject to firm-wide verification.

Presentation and Reporting - Requirements
1. For each composite:

a. At least five years of performance, or since inception if the firm has been in existence less than five years. After presenting five years, the firm must add performance each year until it has a 10-year record.
b. Annual returns for all years
c. The number of accounts, unless the composite is less than five accounts.
d. The amount of assets in the composite, and the percentage of firm assets represented by that composite.
e. Dispersion (i.e. the spread of the annual returns within a composite), unless the composite is less than five accounts.

2. If non-GIPS-compliant returns are linked (for periods prior to Jan 1, 2000), provide disclosure of this fact.

3. If accounts or composites are less than one year, annualizing the performance number is not permitted.

4. A track record from a previous affiliation must be linked when:

a. all of the investment decision makers are employed at the new firm, the process is intact and records document and support the reported performance.
b.the fact that results are being linked with a previous affiliation is disclosed.

5. If one firm is acquired by another, the performance composites of both firms must be linked to the ongoing returns if substantially all of the assets transferred.

6. If a compliant firm acquires (or is acquired by) a noncompliant firm, the firms have one year to bring composites into compliance.

7. If carve-out returns are being presented, the percentage of the composite represented by the carve-out.

8. If non-fee-paying accounts are being used, the percentage of the composite represented by non-fee-paying accounts.

9. The total return of the appropriate benchmark.

Presentation and Reporting - Recommendations
1. Returns gross of investment management fees, administrative fees and before taxes.

2. Cumulative returns for all periods (composite and benchmark).

3. Equal-weighted mean and median returns for each composite.

4. Charts and graphs of both required and recommended data.

5. Returns for quarterly (and/or shorter) time periods.

6. Annualized composite and benchmark returns (for periods greater than 12 months).

7. Composite-level risk measures (e.g. beta, tracking error, modified duration, Sharpe ratio).

8. After presenting the required five years of compliant data, bring any remaining portions of previous data into compliance.

GIPS: Fundamentals Of Compliance And Conclusion
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