By Michael S. Caccese, Douglas Y. Charton, and Michael J. Rohr
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.
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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:
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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).