by Michael S. Caccese, Douglas Y. Charton, and Michael J. Rohr
Excerpt:
On May 18, 2012, the CFA
Institute's GIPS Executive Committee, governing body for the Global Investment
Performance Standards ("GIPS" or "GIPS Standards"),
formally adopted the "Guidance Statement on Alternative Investment
Strategies and Structures" (the "Guidance Statement"), which
becomes effective on October 1, 2012. The Guidance Statement is primarily
intended to address difficulties that arise in applying the GIPS Standards to
non-traditional asset classes; however, firms that claim compliance with the
GIPS Standards must comply with the new guidance for all of the firm's
composites regardless of the asset classes the firm manages.
* * *
Fundamentals of Compliance
Firm Definition
The Guidance Statement advises that in situations where it may be difficult to
assess whether a particular portfolio should be included in the definition of
the firm (e.g., where a firm manages alternative investment portfolios
or other portfolios that involve complex legal arrangements), firms must apply
a "substance over form" principle, as it would be inappropriate and
against the ethical spirit of the GIPS Standards to make use of formal legal
structures to avoid inclusion of certain portfolios or assets in the definition
of the firm.
The Questions & Answers section of the Guidance Statement also provides
that where a firm acts as an investment sub-adviser to a foreign fund that is
managed by a third party who is theoretically free to follow the firm's advice
or not, the firm definition should be based on the "substance over
form" principle. The Guidance Statement states that in the preceding
situation, if the firm can demonstrate that it effectively exercises discretionary
investment management and can provide documented evidence that all investment
advice has been implemented accordingly, it must include the foreign fund in
the firm definition.
Composite Construction
Strategies with Unique Defining Characteristics
The customization of alternative strategy portfolios can often present
difficulties with respect to composite membership and assignment. The Guidance
Statement advises that when constructing composites for alternative strategies,
a firm should assess: (1) whether an alternative investment vehicle may be
included in an existing composite; (2) whether it can be grouped with other
alternative (or traditional) vehicles for a new composite; or (3) whether a
separate single-portfolio (e.g., fund) composite should be created. The
firm should consider the following factors, among others, when constructing
alternative composites:
- investment mandate,objective, or strategy;
- concentration and/or degree of diversification;
- leverage; and
- risk objectives.
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Michael S. Caccese is
one of three Practice Area Leaders of K&L Gates' Financial Services
practice, which includes the firm's Investment Management and Broker Dealer
practice groups, and sits on the firm's Management Committee. Mr. Caccese
focuses his practice in the areas of investment management, including mutual
funds, closed-end funds, registered fund of hedge funds, hedge funds and
separately managed accounts, in addition to advising on investment management
and broker-dealer regulatory compliance. Mr. Caccese also advises on
structuring investment management professional team "lift-outs" and
"placement", "soft dollar" compliance, investment
performance, the Global Investment Performance Standards ("GIPS"),
and the CFA Soft Dollar Standards and the Trade Management (Best Execution)
Guidelines, along with other investment management industry standards of
practice. His focus is on serving the needs of investment advisory firms of all
sizes, including helping them design and comply with the investment industry's
"best practices" and policies, under GIPS, AIMR-PPS and Soft Dollar
Standards.
Douglas Y. Charton is an associate at K&L Gates. Mr. Charton
practices in the firm's investment management group and focuses his practice on
advising investment advisers, mutual funds, closed-end funds, registered funds
of hedge funds, hedge funds, separately managed account programs and broker
dealers. Mr. Charton has experience drafting and reviewing registration
statements, proxy statements, tender offer documents, credit agreements, as
well as other legal documentation for the formation, organization and ongoing
operations of registered investment companies and hedge funds. Mr. Charton also
advises clients on various legal and regulatory issues, including SEC
compliance, advertising and marketing issues under SEC and FINRA rules, the
Global Investment Performance Standards (GIPS), industry "best
practices" and policies, and contract negotiation and drafting. Mr.
Charton also has experience assisting clients on various international
investment-related issues, including adviser registration, private placements
and significant shareholding obligations.
Michael J. Rohr is an associate in the K&L Gates investment
management practice group where he concentrates his practice on advising
investment advisers, broker-dealers, registered and unregistered funds and
other financial service providers on the legal and regulatory aspects of their
operations. Mr. Rohr focuses his practice on SEC and FINRA rules and
regulations, in addition to Investment Advisers Act, Investment Company Act and
Exchange Act regulatory requirements and compliance issues. Mr. Rohr has
experience advising clients on various legal and regulatory issues, including
compliance policies and procedures, recordkeeping requirements, and performance
presentation and marketing issues under SEC and FINRA rules and the Global
Investment Performance Standards (GIPS).