Performance Perspectives Blog

GIPS Common Errors: #1 – Error Correction Policy

by | Feb 19, 2015

error correction

It’s “verification time,” when our firm’s verifiers are busy visiting clients (we only do onsite verifications) and conducting their annual GIPS® (Global Investment Performance Standards) verifications (while we’ll do quarterly, we recommend annual, and all of our clients currently have annual done). We frequently encounter similar mistakes. And so, I thought I’d share some of them with you. This will be the first in a series of postings on this topic.

Common GIPS Errors: Error Correction

It may seem odd that our first error would deal with error correction, but it is a topic that we often find issues with.

Overlaps and gaps in the numbers

It’s typical for firms to define the ranges of returns (or other statistics) that will be considered “material” or “non-material.” But, there can be problems. For example:

  • Errors less than 25 basis points are immaterial
  • Errors greater than 25 basis points are material.

Okay, so what are errors of 25 basis points? There’s a gap, which can be filled by either changing (a) the first to “less than or equal to 25 basis points” or (b) the second to “greater than or equal to 25 basis points.” But don’t do both, because then you’d have…

  • Errors less than or equal to 25 basis points are immaterial
  • Errors greater than or equal to 25 basis points are material.

Again, so what are errors of 25 basis points? There’s an overlap: 25 basis points is represented in both statements, making them both immaterial and material. This can be corrected by either changing (a) the first to “less than 25 basis points” or the second to “greater than 25 basis points.” But again, not both, or you’ll introduce a gap.

Missing rules

When it comes to errors, many firms think only of returns, but everything that appears on their composite presentations must be addressed, both numeric (e.g., measures of dispersion, firm assets, standard deviation) and nonnumeric (i.e., the disclosures).

And speaking of disclosures …

On occasion, firms make broad statements that lack the specificity that’s required to ensure the consistent application of their error correction policy. This can be something like “any required disclosure that is found to be in error which is determined to be such that it would be meaningful to a prospect will be considered material.” I.e., this will be determined when an error arises. But how can we be sure that it will be treated in a consistent fashion? And might the decision to label it “material” be influenced by other factors? To ensure consistency and objectivity, the firm has to specify within their P&P what will constitute a material error.

I’ve encountered a few firms that do group all their disclosures under a single statement: “if any required disclosure is found to be in error or missing, it will be considered an immaterial error.” Sorry, but this won’t work. Given that these are required disclosures, at least some must be considered material.

And so, what’s a firm to do?

I see two options:

  • State that “any required disclosure that is found to be missing or in error will be considered material”
  • Go through the list of required disclosures and identify those that will be considered material, and list them in the P&P.

Error correction can be confusing, but …

I’ll be the first to admit that the error correction guidance statement is confusing (in fact, I think I was), but it’s definitely workable. I’ve mentioned multiple times that the third recommended level (immaterial: correct, don’t distribute, but include a disclosure) makes no sense to me, and I always recommend against using it. As for the first recommended level (immaterial: do nothing), we rarely see it employed, and think it, too, can be ignored. That leaves the second (immaterial: correct, only) and the fourth (material: correct, disclose, distribute) recommended levels. For most firms, these are adequate and sufficient.

But the content of the policy is what this first of the “Common GIPS Errors” series addresses. It’s important that your firm’s policies are complete and reasonable. Questions, thoughts? Please chime in!

Oh, and if you’re considering a new verifier, please visit our website and complete a no-obligation questionnaire, or contact Chris Spaulding ( or Steve Sobhi (

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