Perfomance Verification

GIPS and the New SEC Marketing Rule

How can small and mid-sized managers merge the requirements?

As GIPS Verifiers, we are tasked with reviewing a firm’s claim of GIPS compliance. And while it is common knowledge that the GIPS Standards originated and are monitored by the CFA Institute, some may not know that the SEC holds jurisdiction over a firm’s claim of GIPS compliance.

The examiner who oversees the inspection of a GIPS-compliant firm has the responsibility to confirm that the firm is indeed compliant. And one step further, with the release of the SEC’s new Marketing Rule, the examiner may also scrutinize the firm’s endeavors toward marrying GIPS and the SEC Marketing Rule.

The crux of this matter is that a firm’s GIPS Reports are now considered advertising. The SEC defines an advertisement as any direct or indirect communication an investment advisor makes that 1) offers its services regarding securities to existing or prospective clients, or 2) includes any endorsement or testimonial for which an advisor provides cash or noncash compensation.

Some of the key matters firms must now address revolve around the issue of Net-of-Fee returns presentation. While the institutional space values gross returns for their ability to help consultants and institutions measure manager skill, managers at every point in the spectrum are now required to present Net-of-Fees performance.

And not just performance, but also any risk measures that utilize returns as underlying data must now also be created from Net-of-Fees returns. This includes metrics such as the Information Ratio, the Sharpe ratio, and risk-reward tables.

Additionally, rules around the use of non-fee-paying accounts, attribution data, social media, and testimonials will apply as well.

Please do not hesitate to reach out to us for help with reconciling GIPS and the SEC Marketing Rule. We’re here for you!