This first requirement for firms states that
‘The GIPS standards must be applied on a firm-wide basis. Compliance must be met on a firm-wide basis and cannot be met on a composite, pooled fund or portfolio basis’.
Let’s break this down to master the practical implications for your compliance implementation.
Now, this first requirement of the GIPS standards sets the tone by stating the level at which compliance can take place or be claimed. And it clearly states that it should be at the firm level. Not at an individual portfolio level, composite, or pooled fund level, only at the firm level.
What It Means
What this simply means is that the entire operations of your entity that wants to claim compliance must adhere to the requirements of the standards. You cannot be selective about which parts of your operations to include and which ones to exclude.
The only flexibility you have is to initially define the firm or entity that will be claiming compliance to determine which assets and associated operations will have to meet the requirements of the standards.
Once that scope is set, every applicable aspect of operations, asset classes, vehicles, and strategies that fall under the defined scope of the firm must meet the requirements of the Standards as applicable, before your firm can hold itself compliant.
Why this Provision
The Standards are intended to showcase the performance history of a firm.
The process of firm-wide compliance streamlines and sanitizes the firm’s entire operations, from the client acquisition and strategy assignment stage to the investment management process, performance evaluation process with its calculation methods, and input data and sources, to all supporting operations.
It also infuses trust into the output from this process once performed correctly. Any claim of compliance, therefore, creates the impression that the entire firm is ethically minded and operationally sound and any performance information can be trusted to have emerged from a well structured and streamlined process and can be relied on to make sound decisions without any exceptions.
Claiming to be compliant at any other level other than the firm-wide level can be misleading at best, and at worst, the selective strategy that compliance is claimed for may be flawed, since supporting operations may fall short of the minimum required by the Standards and clients will not be savvy enough to know that the claim is not for the entire firm, nor how the selective implementation impacts the quality of the information they have received.
Some firms may realize after assessing their ability to comply that they may not be able to claim compliance from the current period because they will not be able to meet all applicable requirements for certain aspects of their operations.
This means that your firm may have to wait until a future date when all applicable aspects of operations meet the requirements of the Standards before claiming to be ‘GIPS Compliant’
This does not however preclude a firm from beginning to implement the Standards even though it may have to wait until a future date to claim to be compliant.
And it underlines the importance of beginning the compliance journey early as it will allow you to quickly see where you fall short now and put in measures to be able to claim compliance at a future date, rather than continue to postpone compliance implementation only to realize at a future date that you still have to wait to claim compliance because certain aspects of operations are deficient.
How to Apply this Standard
- Define the firm claiming compliance – creates the boundaries to determine all the assets and strategies that must meet the applicable requirements of the Standards. The GIPS provides guidance on how the firm should be defined.
- Assess the defined firm’s ability to claim compliance by checking against all applicable requirements
- Begin implementation of the Standards now – waiting till a future date to start this will only delay when you can claim compliance if you still do not meet certain requirements that could have been corrected if you had started the implementation process early
- Claim to be compliant if you fulfill all applicable requirements or wait till a future date if a claim cannot be done in the current period
So now that you understand this provision a lot more, sharpen up on some of the terms used that you may not be familiar with. You can check the GIPS Standards glossary or just hover your mouse and click on the terms MUST, FIRM, COMPOSITE, POOLED FUND, and PORTFOLIO, to find out what they are.
Check out the next provision in the series for more about how to define your firm. And also complete the quiz to get your professional Learning Credit Certificate for this micro-course.