Changes to GIPS for Compliance in 2011 (part 1)

Date: January 7, 2011

Firms that claim compliance with the Global Investment Performance Standards (GIPS®) will soon be obligated to comply with the new edition of the standards: GIPS 2010. This version goes into effect January 2011.

There are too many changes to highlight all in a series of blog posts, but we’ll discuss what we consider to be the major ones broken up into a 3 day blog series.  I hope that you find my insight valuable. I encourage your engagement!  Please post any comments or feedback.

Effective date

While GIPS 2010 goes into effect January 2011, compliant firms aren’t required to abide by the changes until they begin to report on 2011 returns, meaning that for those who only report on an annual basis, the changes need not appear until some time in 2012.

And while firms can comply early, requirements from the 2010 edition cannot be removed or altered unless the firm is fully compliant with the 2010 edition. This means that you can incorporate new requirements, such as the three-year annualized standard deviation early without fully complying, but couldn’t, for example, alter the compliance statement without full compliance.

Fair value

The standards have replaced “market value” with “fair value”, which on the service sounds like a major change, but for many it won’t be, as you can see when you review the recommended hierarchy (taken from  ¶ II.c.1):

a.   Investments must be valued using objective, observable, unadjusted quoted market prices for identical investments in active markets on the measurement date, if available. If not available, then investments should be valued using:

b.   Objective, observable quoted prices for similar investments in active markets. If not available or appropriate, then investments should be valued using:

c.   Quoted prices for identical or similar investments in markets that are not active (markets in which there are few transactions for the investment, the prices are not current, or price quotations vary substantially over time and/or between market makers). If not available or appropriate, then investments should be valued based on:

d.   Market-based inputs, other than quoted prices, that are observable for the investments. If not available or appropriate, then base on:

e.   Subjective unobservable inputs for the investment where markets are not active at the measurement date. Unobservable inputs should only be used to measure fair value to the extent that observable inputs and prices are not available or appropriate. Unobservable inputs reflect the firm’s own assumptions about the assumptions that market participants would use in pricing the investments and should be developed based on the best information available under the circumstances.
Many firms invest in assets with market prices, so for them the change will have no impact.

Although this hierarchy isn’t mandated, the firm must disclose if a composite’s valuation hierarchy materially differs from it (see ¶ I.4.A.28). In addition, the firm must “disclose the use of subjective unobservable inputs” to value portfolio investments, if the “investments valued using subjective unobservable inputs are material to the composite (see ¶ 4.A.27).”

To learn more about 13f-2 watch our webinar replay Part 1: Unpacking the SEC's New Disclosure Rules for Shareholders
Join us for Part 2: Operationalizing the SEC's New Disclosure Rules, for Shareholders on December 12.