The impact of proposed changes to GIPS® 2020: Part 2

Date: October 25, 2018

In the third and final installment of our series on the CFA Institute’s Global Investment Performance Standards (GIPS®) 2020 revision, we continue to look at some of the proposed changes outlined in the standards and how they may affect financial analysts. The GIPS® 2020 project seeks to revise and bring up-to-date many of the statutes in the current GIPS® standards, which were last revised almost a decade ago.

The proposed draft of the standards are still in a period of public comment, which remains in effect until December 31st, 2018. So, while certain aspects may change before the new reporting standards are codified, we can assess the general direction the drafted revisions are taking at this stage – updates which, if adopted, will come into effect at the beginning of 2020. Following our last blog, here are a few more of the proposed changes we will be tracking.

GIPS 2020 blog 3 - quote imageEstimated transaction costs

The GIPS® 2020 Exposure Draft, viewable here, gives firms the right to estimate transaction costs – which are currently referred to as “trading expenses” – when the actual transaction costs are not able to be known. At the time GIPS® was first created, trading costs were more standardized and more easily calculable. Today, they can be calculated in a multitude of different ways, and in many cases may not be within a firm’s control.

That’s why in the draft, the term “trading expenses” has been changed to “transaction costs” – to reflect a broader concept and give firms more leeway in how these costs are calculated. The draft standards also allow for estimated transaction costs for composites, provided that estimated returns are equal to or less than that which would have been calculated using actual transaction costs.

Reorganization to reduce complexity

As mentioned in part 2 of our blog series, the Exposure Draft aims to reorganize the GIPS® structure, with the goal of reducing complexity. In addition, this new structure includes all items that must be considered when creating a performance report within a single section, making the reporting process easier and clearer.

Advisory-only assets

Under the current GIPS® standards, total firm assets must include both discretionary and non-discretionary assets managed by the firm. This statute still stands in the GIPS® 2020 draft. The draft is also looking at redefining the way firms report capital. It recommends firms not include committed capital –  that is, money an investor contributed over several years into a fund – when calculating total firm assets.

“This approach is to recognize that many firms’ business models are changing,” the draft reads. “Also, firms have approached the treatment of committed capital differently when calculating total firm assets. Some firms consider committed capital to be part of total firm assets because the firm is charging an investment management fee on the committed capital. Other firms exclude committed capital because it is not under management before capital is called. We propose that firms must not include committed capital in total firm assets.”

However, as part of the public comment, the CFA Institute is seeking feedback on whether firms should be required to include committed capital in total firm assets, so this aspect could still change.

Looking ahead

Ultimately, the GIPS® 2020 revision aims to incorporate all the technological innovations, new regulations and market developments over the past ten years while rectifying, clarifying and adjusting the current body of standards to be effective to the widest universe of managers possible. The 2010 GIPS® revisions simply weren’t broad enough to apply to all types and flavors of managers that have developed in the last decade of the industry’s evolution.

The public comment period will surely shape the current draft, with some parts emphasized and others perhaps eliminated. We will be watching closely to see which will be included in the final iteration of GIPS® 2020.


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.