1. FIRMA 21 st National Training Conference April 18, 2007 The GIPS ® Standards: Key Issue and Considerations Karyn D. Vincent, CFA, CIPM

2. 2 Topics  Overview of the GIPS standards  AIMR-PPS standards: where did they go?  What does it mean to comply with the GIPS standards?  Overview of requirements of the GIPS standards  Current developments with the GIPS standards

3. 3 Overview of the GIPS standards  The Global Investment Performance Standards (GIPS ® ) are a set of voluntary standards developed by CFA Institute, in partnership with other organizations worldwide  CFA Institute, with corporate headquarters in Charlottesville, VA, is the professional organization for Chartered Financial Analysts (CFA charterholders)  84,000+ members in 128 countries

4. 4 What about the AIMR-PPS standards?  Since the early 1990s, firms in the US and Canada claimed compliance with the AIMR-PPS standards  CFA Institute was previously named the Association for Investment Management and Research (AIMR)  The AIMR-PPS standards were one of many sets of country-specific standards used throughout the world  Effective January 1, 2006, all country-specific standards converged to create one standard used globally: the GIPS standards

5. 5 Transition to the GIPS standards  Once a firm presents performance for periods that begin after January 1, 2006, a firm may no longer claim compliance with the AIMR-PPS standards  A firm that previously claimed compliance with the AIMR-PPS standards is granted full reciprocity for historical periods

6. 6 Transition to the GIPS standards: is it difficult?  Transitioning from the AIMR-PPS standards to the GIPS standards is a simple exercise for most firms  The GIPS standards are based primarily on the AIMR-PPS standards  Most differences are related to disclosures  No differences in calculations

7. 7 Why claim compliance with the GIPS standards?  Claiming compliance is voluntary, but  In the U.S., claiming compliance with the GIPS standards is required by many client, sponsors, and consultants  A majority of large U.S. firms claim compliance  The SEC does not require compliance, but if a firm claims compliance, the SEC may test the firm’s claim of compliance

8. 8 Claiming compliance with the GIPS standards: what does it mean?  Helps assure investors that performance information is both complete and fairly presented  Requires ongoing commitment to a voluntary set of evolving ethical standards  Requires an ongoing commitment of resources

9. 9 Periods of compliance  A firm must be in compliance for a minimum of five years  If the firm has at least five years of history  The firm must then work towards building a 10 year compliant track record  If the firm wishes to present more than an initial five year track record, the firm must be in compliance as of January 1, 2000 at a minimum

10. 10 Periods of compliance  For periods prior to January 1, 2000, performance does not have to be in compliance with the GIPS standards  If prior periods are not in compliance, must disclose the periods of non-compliance, and why the track record is not in compliance  E.g. For periods prior to January 1, 1999 performance of a representative account is used.  These rules are only for a firm that did not previously claim compliance with the AIMR-PPS standards

11. 11 Periods of compliance  If a firm previously claimed compliance with the AIMR-PPS standards  the firm must be in compliance as of January 1, 1993 at a minimum  The firm must continue to show at least a 10 year track record

12. 12 Key concepts of the GIPS standards  Firm definition  Creating composites  Calculating account-level returns  Calculating composite-level returns  Preparing compliant presentations  Fundamentals of compliance

13. 13 Firm definition  A firm must be in compliance on a firm-wide basis  For the purpose of complying with the GIPS standards, the firm must be defined according to how the firm, subsidiary, or division is held out and marketed to clients and should be a distinct business entity  A firm may no longer be defined based solely on legal entity

14. 14 Firm definition  The firm definition determines the universe of portfolios that must be considered for inclusion in a composite  From this universe, all actual, fee paying, discretionary accounts must be included in at least one composite  A composite is a grouping of accounts managed in a similar style

15. 15 Actual accounts  Only actual accounts may be included in composites  Model or hypothetical accounts may not be included in composites  Model results may be shown as supplemental information, but such performance may not be linked to actual results

16. 16 Non-fee paying accounts  Non-fee paying accounts may be excluded from composites  If a firm wishes to, they may include non-fee paying accounts in composites, with appropriate disclosures  Must disclose, for each period, the % of the composite represented by non-fee paying portfolios

17. 17 Discretion  The firm must define discretion  Discretion is the ability of the firm to manage an account in its intended strategy  Just because an account is legally discretionary does not mean it is discretionary for GIPS-compliance purposes  Must consider restrictions and mandates  However discretion is defined, it must be applied consistently

18. 18 Composite criteria  Composites must be created that represent the firm’s strategies  Accounts must be assigned to composites in accordance with established criteria  E.g. new accounts are included in a composite the first full month under management  Only fully discretionary accounts are included in composites; accounts with any kind of restriction are considered excluded accounts and are not included in composites

19. 19 Account-level calculations  Account-level returns must use a time weighted rate of return  Securities must be valued at market value, not cost  Performance must be calculated at least monthly as of January 1, 2001  If performance is calculated monthly, cash flows must be day weighted as of January 1, 2005  Mid-month assumption could be used previously

20. 20 Composite-level calculations  Composite-level returns must be calculated by weighting account returns by beginning market value, or a method that combined beginning market value plus cash flows during the period  As of January 1, 2006 composites must be calculated at least quarterly  As of January 1, 2010, composites must be calculated at least monthly

21. 21 Composite presentations  The next step is to prepare a compliant presentation for each composite  The Standards require certain composite information and disclosures, for the required periods previously described

22. 22 Required annual disclosures  Annual composite returns  Gross (recommended) only, net only, or both  Total return for an appropriate benchmark(s)  If no benchmark, disclose why  Measure of internal dispersion (or n/a if < 5 portfolios included in the composite for the full year)  Composite assets as well as number of portfolios in the composite at the end of period (or n/a if < 5)

23. 23 Required annual disclosures  Total firm assets or the % of composite assets to total firm assets at end of period  Percentage of non-fee-paying portfolios (if any) at the end of period  If carve-outs are included in the composite, the % of the composite the carve-outs represent (for periods that begin after January 1, 2006)  If bundled-fee portfolios are included in the composite, the % of composite assets that is made up of bundled fee portfolios (for periods that begin after January 1, 2006)

24. 24 Then come the disclosures….  Compliance statement  ABC Company has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS ® ).  Definition of the “firm” for the purpose of complying with the GIPS standards  The availability of a complete list and description of firm composites  Composite minimum size, if applicable, and any change to the minimum  If no minimum, no requirement to disclose that there is no composite minimum

25. 25 Then come the disclosures….  Currency used to express performance  Presence, use, and extent of leverage or derivatives (if material)  Returns must be clearly labeled as gross- or net-of- fees  Relevant details about withholding taxes  Known inconsistencies in exchange rates (benchmark versus composite, and portfolios within the composite)

26. 26 Then come the disclosures….  If performance for periods prior to January 1, 2000 does not comply with GIPS  If any part of the presentation conforms with local laws and regulations that differ from GIPS  If carve-outs are used, the policy used to allocate cash  If composite contains portfolios with bundled fees, the types of fees included in the bundled fee  Appropriate fee schedule  Referencing the fee schedule’s availability in Form ADV or another document does not meet the requirement

27. 27 Then come the disclosures….  If gross returns are presented, any other fees deducted (in addition to trading expenses)  If net returns are presented, any other fees deducted (in addition to trading and management)  Benchmarks  If no benchmark is disclosed, explain why  If the benchmark changed, the date and reason for the change  If custom/ combination benchmark is used, a description of the creation and rebalancing process.

28. 28  That additional information regarding policies for calculating and reporting returns is available upon request  The use of sub-advisors and the periods used (for periods that begin after 1 January 2006)  All significant events that would help a prospective client interpret the performance presentation  The composite’s description  If the firm was redefined, the date and reason for redefinition Then come the disclosures….

29. 29  If the composite was redefined, the date and nature of the change  Any changes in composite name  Composite creation date (the date the portfolios were first grouped to create a composite)  If, prior to January 1, 2010 calendar month-end portfolio valuations or valuations on the last business day are not used  Which dispersion measure is presented Then come the disclosures….

30. 30 Compliant presentations  Once a firm claims compliance with the GIPS standards, the firm must attempt to provide a compliant presentation to all prospective clients  Sample compliant presentation follows

31. Sample compliant presentation

32. 32 Other Fundamental Responsibilities  Firms are required to document, in writing, policies and procedures used in establishing and maintaining compliance with all the applicable requirements of the GIPS standards  Ensure all requirements are addressed  Must provide a list and description of composites upon request  Discontinued composites must stay on the list for 5 years

33. 33 Other Fundamental Responsibilities  Must be able to provide a compliant presentation for all composites on list  Must include terminated composites  Must comply with all requirements including updates, reports, guidance statements, interpretations, or clarifications  All guidance issued to date is included in the GIPS Handbook  Purchasing information is on CFA Institute’s website (www.cfainstitute.org)

34. 34 Other asset classes  Asset class guidance specific to  Private equity  Real estate  Wrap fee/separately managed accounts

35. 35 Guidance Statements  Performance Examination Guidance Statement  Recently finalized  Provides guidance to verifiers who conduct composite specific performance examinations  Only verification guidance is included in the GIPS standards  Reminder: only a firm is verified  Verification is a firm-wide test of compliance with the GIPS standards

36. 36 Guidance Statements  Leverage and Derivatives Guidance Statement  Currently being reconsidered by the Interpretations Subcommittee  Stay tuned for additional information  Portfolio Recordkeeping  Addresses the requirement to maintain all data and information necessary to support a firm’s performance presentation (1.A.1.)  Guidance should be issued shortly

37. 37 Guidance Statements  Error Correction Guidance Statement  GIPS standards do not address the issue of accuracy  Guidance for how a firm should handle errors or restatements of performance  Guidance should be issued later this year

38. 38 GIPS Executive Committee Investment Manager Interpretations Investor/Consultant Verification/ Practitioner RIPS-Asia PacRIPS-Americas Council Chair RIPS-EMEA Asia Pacific RIPS Americas RIPS EMEA RIPS Appointed by CFA Institute Appointed by Country Sponsors Chair GIPS Council Director

39. 39 The CIPM Program (previously named the CGIPS Program)  Specialized, practice-based study and exam program  Professional ethics  Performance measurement, attribution, and appraisal  The GIPS standards  Must pass two exams  Principles and Expert  Must also have two years of performance-related experience

40. 40 The CIPM Program  Next enrollment period is from May - July  Next testing window is from September - October  Fee of $975 includes  Enrollment  Online curriculum Access  One examination seating  For further information  Web: www.cfainstitute.org/cipmwww.cfainstitute.org/cipm  E-mail: cipm@cfainstitute.org

41. 41 Available Resources  CFA Institute website (www.cfainstitute.org/centre/ips)  Helpdesk - Q&As (gips@cfainstitute.org)  E-mail alert list (standards@cfainstitute.org)standards@cfainstitute.org  VPS Newsletters (newsletters@vincentperformance.com)

42. 42 Your Questions Contact info Karyn D. Vincent, CFA Vincent Performance Services LLC Portland, Oregon 503-288-2704 kvincent@vincentperformance.com