Notification Requirement for Firms Claiming Compliance with the Global Investment Performance Standards (GIPS)

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The GIPS Executive Committee has approved a new requirement, effective January 1, 2015, that any firm claiming compliance with GIPS must annually notify the CFA Institute of such claim by June 30.[1] Each GIPS-compliant firm submitting such notice will have its name listed on the CFA Institute’s website unless it declines to be publicly listed. Claims of compliance will be submitted through an online form that is expected to contain basic information on the firm, similar to the existing notification requirement for firms complying with the CFA Institute’s Asset Management Code of Professional Conduct.[2]

On April 7, 2014, the CFA Institute released an exposure draft that sought comment on a proposed firm compliance notification requirement.[3] Despite a mixed reception from the investment industry and in the comment letters received,[4] the GIPS Executive Committee adopted the requirement. As proposed, the form would require the firm’s name, a contact person, verification information, whether the firm is a subsidiary of a larger parent, firm assets, the asset classes managed, and the investment vehicles offered.[5] However, the final version of the form has not yet been released and may differ from the proposed version.  Each firm will have the choice to opt out of listing its name on the CFA Institute’s website as a firm claiming compliance with GIPS. If a firm does not opt out in its notification form, the firm’s name and website address will be publicly listed on the GIPS website.

Failure to notify the CFA Institute of a claim of GIPS compliance will be deemed a failure to comply with GIPS and may call into question the validity of a firm’s claim of compliance, including any claims made in a firm’s marketing materials. The United States Securities and Exchange Commission (SEC) has taken a strong position that a firm that advertises its claim of GIPS compliance in marketing materials but that does not comply with all of the GIPS requirements is misleading under Section 206 of the Investment Advisers Act of 1940, as amended (the general anti-fraud provision) and Rule 206(4)-1 thereunder (the advertisement rule).[6]

While some firms may view a public listing on the CFA Institute’s website as a form of free advertising, such a listing invites additional regulatory scrutiny of a firm’s claim of compliance. Furthermore, the public listing of a firm that only manages privately placed funds relying on Regulation D under the Securities Act of 1933 may raise questions about whether such listing constitutes general advertising or solicitation to buy interests in such funds. Rule 506(b) of Regulation D provides a safe harbor from the registration requirements under the Securities Act for offerings that, among other things, do not involve any general advertising or solicitation.[7] Any public website advertisement for such an offering would be deemed a general solicitation undermining a fund’s reliance on Rule 506(b) of Regulation D. Similarly, firms that sponsor fund offerings relying on the safe harbor provided by Regulation S under the Securities Act may also want to consider the implications of a public listing on the CFA’s website. Offerings may rely on the Regulation S safe harbor only if they do not involve any directed selling efforts or otherwise condition the United States market for any offered security.[8] To the extent that a firm’s listing on the CFA’s website might be deemed a promotion of its managed fund in the United States or conditioning the domestic market, such fund’s reliance on Regulation S may be put in jeopardy. Accordingly, we recommend that firms carefully consider the benefits and risks of a public listing on the CFA Institute’s website in completing and submitting their notification forms in the coming year.

Compliance Dates

This requirement will become effective as of January 1, 2015.  The annual deadline to notify the CFA Institute of compliance is June 30. The final version of the online notification submission form has not yet been released.

Notes:

[1] Press release located at: http://www.gipsstandards.org/news/Pages/detail.aspx?ID=47.

[2] The CFA Institute’s Asset Management Code of Professional Conduct claim of compliance form is available at: http://www.cfainstitute.org/ethics/Documents/Codes%20Documents/amc_reg_form.pdf.

[3]] Exposure Draft of the Requirement for Firms that Claim Compliance with the GIPS Standards
to Notify CFA Institute of Their Claim of Compliance (the “Exposure Draft”), available at http://www.gipsstandards.org/standards/guidance/Documents/Comments/firm_reg_req_exposure_draft.pdf.

[4] Comments available at: http://www.gipsstandards.org/standards/guidance/Pages/ProposedRequirement.aspx.

[5] The proposed notification form can be found in the Exposure Draft.

[6] See ZPR Inv. Mgmt., Inc., SEC Initial Decision Release No. 602, Admin. Proceeding File No. 3-1526, at 3 (SEC May 27, 2014) (internal citation omitted) (“ZPR”). For a more detailed discussion of the ZPR case and its implications, see the K&L Gates client alert SEC Administrative Law Judge Bars Investment Manager for Misrepresenting GIPS Compliance, available at http://www.klgates.com/sec-administrative-law-judge-bars-investment-manager-for-misrepresenting-gips-compliance-06-17-2014/.

[7] Regulation D, 17 CFR § 230.501 et seq., available at http://www.ecfr.gov/cgi-bin/text-idx?SID=647faaebe6bac0a7cf1d52b36095c133&node=sg17.3.230_1498.sg11&rgn=div7.

[8] Regulation S, 17 CFR § 230.901 et seq., available at http://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=647faaebe6bac0a7cf1d52b36095c133&n=pt17.3.230&r=PART&ty=HTML#se17.3.230_1901.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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