GIPS Error Correction

GIPS Requirement 1.A.20 & 1.a.21

The firm must correct material errors in GIPS composite and/or pooled fund reports and must:

• Provide the corrected GIPS composite and/or pooled fund report to the current verifier.

• Provide the corrected GIPS composite and/or pooled fund report to current clients and any former verifiers that received the GIPS composite and/or pooled fund report that had the material error.

• Make every reasonable effort to provide the corrected GIPS composite and/or pooled fund report to all current prospective clients and prospective investors that received the GIPS reports that had the material error. The firm is not required to provide the corrected GIPS reports to former clients, former investors, former prospective clients, or former prospective investors.

• Error correction policies and procedures must be established and then implemented consistently.

• Materiality must be defined in the error correction policies, and a materiality threshold must be created. Materiality is defined as any error that could possibly change the decision of a prospective client to investment in the strategy of the firm. Firms would be wise to implement policies that require redistribution of GIPS Reports only in situations where it is determined that a prospective client’s investment decision making process may have been adversely impacted.

• Error correction policies and procedures should be unambiguous and should include specific steps to discover and correct errors.

• Error correction policies and procedures should include how the corrected presentation will be distributed to all applicable parties.

• Error correction policies and procedures should include procedures for documenting the error and actions taken.

If you find an error, you basically have 4 options:

1. Take no action (for immaterial errors)

2. Correct the GIPS Report with no disclosure of the change (for immaterial items)

3. Correct the GIPS Report with disclosure of the change and no distribution of the corrected report. (for immaterial errors) Solely for the purpose of explaining why something is different from what was previously reported. This is not an uncommon disclosure.

4. Correct the GIPS Report with disclosure of the change and make every reasonable effort to provide a corrected report to all prospective clients and other parties that received the erroneous report. (for material errors) If you do re-state, the disclosure must exist on the presentation for 12 months.

• Your GIPS Error Correction guidelines must FIRST be created, and then followed. You really shouldn't find your errors, and then develop policies around them.

• The more information your Firm inputs into the GIPS Report and the more often your Firm updates them, means you have a greater likelihood of running into a re-statement possibility.

• If you change your Error Correction Guidelines, you must do so on a prospective basis.

• Firms do not have to provide the corrected GIPS Report to former GIPS prospective clients that are no longer considered 'prospective'. Firms may prepare a version of the GIPS Report that does not include the ADDED disclosure of the Material Error that is provided to NEW prospective clients.

• Firms should also look at the error in a wholeistic approach, meaning, is there are problem with the firm's GIPS policies and procedures that caused the error, and is there a systematic problem that needs to be addressed?

• Once the GIPS Report is created & Distributed, the Error Correction comes into play. It does not matter whether you create it with GIPS Preliminary or Final return information. Inserting Preliminary #s with a disclosure saying, 'Numbers are preliminary and subject to change', does not relieve you of the responsibility of Error Correction. Therefore, only create the GIPS Report when you have Final #s that you are comfortable with, then distribute it.

• The SEC has no formal requirements regarding GIPS error correction. The SEC relies on the standard that performance presentations cannot be deemed false and misleading nor have any material facts omitted.

• Develop a definition of materiality that is consistent with your investment strategy. Meaning, make it 'make sense' and not be SO stringent that if any error occurs, that it makes you re-state your GIPS report.