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Subject 2. The Scope of GIPS Standards with Respect to Definition of the Firm, Historical Performance Record, and Compliance PDF Download
Definition of the Firm

It is intended that GIPS compliance be available to any firm. A firm must comply with GIPS on a firm-wide basis to claim compliance with the standards. All actual, fee-paying, discretionary portfolios managed by the firm must be included in the performance-measurement process.

To be in compliance, an entity must state how it defines itself as a firm.

  • A firm may be defined as an investment firm, subsidiary or division held out to be a distinct business unit for managing investment assets. It could be part of a larger organization.
  • Total firm assets must be the aggregate of the fair value of all discretionary and nondiscretionary assets under management within the defined firm. This includes both fee-paying and non-fee-paying assets.
  • Firms must include the performance of assets assigned to a sub-advisor in a composite, provided that the firm has discretion over the selection of the sub-advisor.
  • Changes in a firm's organization are not permitted to lead to alteration of historical composite results.

Historical Performance Record

Firms should present their long-term performance records. To be in compliance, a firm must:

  • Initially present a minimum of five years of compliant annual investment performance results, except for composites which have been in existence for less than five years (in which case, composite performance since inception must be presented).
  • Add an additional year of compliant performance results each year until they reach 10 years of results.

The goal is to have 10 years of GIPS-compliant performance results presented. To encourage firms to participate, GIPS only requires five years of data to initially come into compliance, allowing the full 10 years of performance results to be built over time. There is nothing to prevent a firm from initially presenting a full 10 years of compliance results. To maintain compliance, a firm presenting less than 10 years of performance results must increase the number of years of performance results presented.

Claim of Compliance

Which version of GIPS standards should firms comply with?

The revised GIPS standards were adopted in 2010 and became effective on January 1, 2011. Although early adoption of these revised GIPS standards is encouraged, firms can still use the old version for performance presentations that include results through December 31, 2010.

In order to claim compliance, a firm must meet ALL the requirements set forth in GIPS. Firms that fully comply with GIPS may use the following compliance statement in their performance presentations: "[Name of the firm] has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS)."

With regard to compliance, a firm is either in compliance or not in compliance. Firms may not make any claims to being "in compliance except for..."

Appropriate disclosure when the GIPS standards and local regulations are in conflict:

GIPS standards serve as minimum worldwide standards. If local laws are stricter than GIPS, local laws should be applied. If local laws don't exist or are less strict than the GIPS, the GIPS should apply. In cases of conflicts with GIPS, the standards require that local laws and regulations take precedence over GIPS.

Firms should disclose any conflicts.

Learning Outcome Statements

b. describe the scope of the GIPS standards with respect to an investment firm's definition and historical performance record;

c. explain how the GIPS standards are implemented in countries with existing standards for performance reporting and describe the appropriate response when the GIPS standards and local regulations conflict;

CFA® 2022 Level II Curriculum, , Volume 1, Reading 5

User Contributed Comments 15

User Comment
geet Returns are computed net of transactions cost but the firm has to disclose if they are using net or gross of costs.....if they have to use net of cost why do they have to disclose?
tengo The issue is returns are reported net of transaction costs but a management fee is not technically a transaction cost so you could report net of mgmt fees or gross but you must disclose what approach you take
Slothrop How is the "net of transaction costs" issue relevant to the Vision statement?
surob For real, how?
Khadria Under section

(e) Why is a global standard needed? How is it being implemented?

it is stated:
"When applicable local or country-specific law or regulation conflicts with the GIPS standards, firms should comply with the GIPS standards in addition to those local requirements."

but in this section it says:
"In cases of conflicts with GIPS, the standards require that local laws and regulations take precedence over GIPS."

AnhDoUM I noticed that too. I think the latter one is true. CFAI's readings are confusing.
Challs yeh...that one kinda stumped me too
bobert Oh, ok I think i got it. If the local law is more strict, there is really no conflict from the way things are already done. If there is, GIPS is used because it is more strict, but in addition to all other local requirements because they need to be adhered to as well.

That sound about right?
StanleyMo firms should comply with the GIPS standards in addition to those local requirements

means we need to follow local requirement and only comply with the GIPs standards additionally.
jainrajeshv No qualifications should be added.
Mamakuboy What the mean is where local laws are less strict than the GIPS, the GIPS should be followed in addittion to meeting the local regulations. However, where local regulations expressly state that information is only to be presentated in a particular manner, and this is in conflict with the GIPS, the local regulations are to be followed not the GIPS. Remembering that while you only need to present this information following the local regs, you need to state that this is in conflict with the GIPS. This last disclosure is required for companies claiming compliance to the GIPS.
YOUCANDOIT StanleyMo's explanation made the most sense to me.
tybe0012 minimum of 5 years with an additional year added up to 10 years. For performance less than 5 years, track performance since inception.
tybe0012 no partial compliance, no parital designation.. no partial nottin
gerdvar I think the law/GIPS conflict is solved by the comments above, should the local law conflict with GIPS in a exclusionary manner (ie. performance should only be presented in particular manner), then applying the local law and disclosing the conflict is needed to comply. On the other hand, where local laws are not exclusionary (ie. performance should be presented in particular manner, but one can present it in another), one would need to present both presentations (law and GIPS) simultaneously, disclosure of conflicts wouldnt be enough in this case. What do you think?
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I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!


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