Intl MoneyYou probably know why your firm should be GIPS compliant (check out our whitepaper “Six Things You Need To Know About Composite Management and GIPS” on the topic) but even if you are on board, there is a good chance that you are violating GIPS standards unknowingly. We recently attended the GIPS Standard annual conference where verifier Karyn D. Vincent of ACA Performance Services, LLC gave a presentation on common errors she sees when assessing GIPS compliance. For those of you who don’t have the time to watch her full presentation, we distilled three key areas where your compliance may be falling through the cracks.

1. Vague Definitions and Policies

Often firms understand what GIPS policies must be met and adhere to them, but do not document procedures for maintaining compliance. It is vital for investment managers to specify not only what policies they have in place, but each step necessary to achieve it.

Another area that firms struggle with is clearly defining their mandate in their clients’ investment management agreement. This is especially important if your firm manages multiple, similar composites. Often firms will list a non-specific investment policy statement as their investment guidelines but if the agreement doesn’t define mandate, it’s hard to prove you have selected the right composites.

Once you have a clear documentation of mandate and place an account in a certain composite, it should stay there. Having a complicated inclusion and exclusion policy can confuse a tactical move with a change in mandate. Unless your client directs you to substantially change the strategy of their portfolio or this is a composite redefinition, changes to their account should not affect composite inclusion.

2. Lack of Communication

Your firm must make every effort to deliver a GIPS-compliant presentation to all clients and prospects. Many firms are diligent in drafting compliant reports but then do not distribute them appropriately. These presentations should go out on a yearly basis to all clients of a current strategy, clients who are interested in a new strategy, consultants, and prospects. It is up to you to define what constitutes a prospective client, but you must define and document it. It’s also key to track this information as you are likely to be questioned on your distribution by regulators.

Likewise, you should have documented policies and procedures on what constitutes a material error in a presentation and how to communicate that error to clients.

3. Inconsistent Return Calculations

To present accurate returns, you must calculate net of trading expenses for the period. One area where this is a problem is in deducting commissions. You may think that account commissions are being automatically deducted, but sometimes this isn’t the case. Returns on dual contract accounts and new custodian/brokerage accounts often are not paying typical commissions and therefore being calculated incorrectly. Check with your traders to ensure you are aware of these exceptions.

Withholding taxes can also be a point of confusion in calculating returns. Taxes are either reclaimable or non-reclaimable and while your return calculations are probably net of non-reclaimable taxes, you need to consider whether to deduct reclaimable taxes. If you are unsure of whether these taxes can actually be reclaimed, you should not accrue for them.

Lastly, ensure that if you are using model fees to calculate returns, these fees do not generate higher returns than if you had used actual fees. That means you should use the highest management fee incurred by portfolios in the composite or highest fee applicable to each specific client or prospect and test to prove that returns are not overstated.



iStock_000011926782XSmall[1]As the final version of the FATCA regulations have been passed and deadlines are fast approaching, global Foreign Financial Institutions (FFIs) are preparing their organizations to ensure compliance.  But, as China is still questioning whether they will comply with the legislation, some are wondering how this would affect the overall regulations.

From FATCA’s inception, China has been adamantly against the legislation, citing the enormous implementation costs, the little (if any) value to their country and the fact that complying could be in direct conflict with their bankruptcy and banking laws.  China’s other major concern is what non-compliance may do to their domestic financial institutions and their access to international markets.  If China continues to hold out, the fear is that this would trigger a domino effect of non-compliance.  If China doesn’t comply, for example, will Hong Kong or Macau?  What about other offshore banking centers in Asia and beyond? If the rules aren’t applied globally, are they valid for any country?

Since China’s inclusion is crucial to the effectiveness of FATCA, the U.S. has been working with them in recent months and it seems China has been more open to discussions.   Although these talks have been behind closed doors and specifics are not known, it has been reported that a key negotiating term is some type of information reciprocity from the U.S., which other countries have been pushing the U.S. for as well (ex: Germany).

The U.S. wants to see China commit to FATCA regulations and will continue to negotiate hard to make this happen.  Recent negotiations show progress, making FATCA’s relevance even greater.  If this deal is worked out, it is likely that many other countries will follow suit and therefore global financial institutions should begin preparing for compliance. 

What do you predict will happen with FATCA, and how is your organization preparing?

–  Sara Gilbert,  Regional Managing Director of Asia

Preparing for FATCA

March 26, 2013

“The long-awaited final Foreign Account Tax Compliance Act (FATCA) regulations have arrived and while much analysis still needs to be done, the US Department of Treasury and the Internal Revenue Service (IRS) provided welcome relief on a number of key issues for the asset management industry.

 That being said, significant implementation challenges still remain for the asset management industry and substantial work must be undertaken through the course of 2013 in order for asset managers to be compliant by January 1, 2014.  Failure to undertake the necessary tasks in 2013 could expose investment managers to a variety of business and investor relation risks.” – PwC,  Global IRW Newsbrief, Feb 6, 2013 – read full brief here.

On January 17th, 2013, the US Department of Treasury and the IRS published the final version of the Foreign Account Tax Compliance Act (FATCA).   Even though the regulations were delayed from their original timeline, the January 1st, 2014 effective date is now approaching and asset management firms need to prepare.

FATCA’s reach is one of the broadest of all regulations. The legislation applies to any entity which has U.S. clients on its books (with account limit thresholds), including banks, investment managers, custody banks, etc. It was passed into law in order to compel foreign financial institutions to disclose U.S. account holders’ information to the IRS.  It is intended to increase transparency for the IRS with respect to U.S. persons that may be earning income through non-U.S. institutions. 

Within asset management organizations, the impact of FATCA is just as far reaching – from the on-boarding of clients (and Know Your Customer rules) all the way through back office operations and associated systems.  Financial firms need to be working throughout their organization to make the necessary changes to policies and procedures and preparing their systems to assist in adhering to new legislation in a timely and efficient manner. 

At PORTIA, we have been monitoring the regulations and requirements as they evolved, and have published a paper to help our clients understand the main provisions of FATCA and the reporting requirements this legislation will involve.  The paper also provides suggestions on how PORTIA can be configured to store and report on the information needed for FATCA. (Current PORTIA clients can click here to access the paper from the PORTIA Client Service Portal.)  With PORTIA’s data management and reporting flexibility, our clients have the ability to report on the information necessary to adhere to the FATCA regulations, without any new releases or versions being implemented.  

In addition to the FATCA paper, we also offer our clients a service specifically designed to help them address FATCA regulations, where we:

  • Assist in the identification and storage of key data items
  • Identify best practices for data storage and usage
  • Create reports that capture FATCA holdings and transaction information
  • Calculate  withholding amounts on qualifying transactions 

The work to be done to comply with FATCA will impact every aspect of asset management organizations.   Companies and their end-clients will benefit greatly from a full understanding of this regulation and how it affects the organization, coupled with a comprehensive plan of what processes, procedures and systems need to be addressed to fully comply.

– Rosemary Cook, Project Manager/Product Consultant