Imagine you’re making a cake, and that you have the recipe in front of you. You follow the instructions, step-by-step. But, at the end, your cake doesn’t taste and/or look right. How come? Well, the baker who came up with the recipe failed to include some of the details in the instruction part of the recipe, but instead, had them buried elsewhere, hiding in not-so-clear sight.

Well, the Global Investment Performance Standards (GIPS®) are kind of like that. And like the baker, there was no intention to mislead or confuse; it’s just that certain rules get placed in certain places, and if you’re not paying close attention, you might miss them. Specifically, rules regarding a firm’s policies & procedures; e.g.,

GIPS Common Errors: overlooking the “Bernie Madoff” Rule

I may be the only person who refers to this rule with such endearment. But given

• it was added after the public comment period for GIPS 2010 (just before the new version of the Standards was finalized),
• and the proximate revelations of the once highly respected Bernie Madoff’s creative accounting,

there has to be a link.

GIPS compliant firms are required to ensure the existence and ownership of client assets. Specifically, they’re required to document how they do this. This rule can be found here:

While it may sound onerous, even perhaps suggesting that you need to go to DTC to the custodian to actually look at the securities, it’s not that bad. By simply stating something like “To ensure the existence and  ownership of client assets, the Firm reconciles its records with each client’s custodian(s).” Not so bad. BUT, you’re required to include it in your P&P.

GIPS Common Errors: transitioning from “interested party” to “prospective client”

GIPS requires compliant firms to make every reasonable effort to provide all prospective clients a copy of the appropriate composite presentation(s). But how does an “interested party” become a “prospective client“? That’s something you need to explain. The following can be found on page 84 of the GIPS Handbook, 2012 edition:

Is it time for a Guidance Statement on Policies & Procedures?

Since the Standards don’t speak a great deal about a firm’s policies and procedures, it’s easy to miss these. Perhaps a “Guidance Statement on Policies & Procedures” is in order?

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