I'm at an outsourcing client who has a client who NETS cash flows during the month to determine if the account should be removed. NETS cash flows? And why do they do this??? Hopefully we'll find out, but let's think about this.
Their level to remove the account is >25% of the beginning market value. And so, we start with $1 million. On August 3 a $300,000 contribution is made. Then, on August 24, the account withdraws $250,000. Net = 300,000-250,000=5,000; 50,000/1,000,000 < 25%; therefore, don't remove the account. WHAT???
If the firm actually wishes to take advantage of the optional significant cash flow provision, they should have removed the account because of the August 3rd contribution (because presumably there's a bunch of cash they need to get invested). The fact that a few weeks later the client decided to withdraw funds has nothing to do with the earlier flow. In my opinion, they are confused!
Also, in my opinion: this is (a) wrong and (b) shouldn't be permitted by the firm's verifier.
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Mr. Spaulding,
ReplyDeleteYour article implies that such a practice is not allowed. I see that the guidance statement states that 'The “cash flow” may be defined by the firm as a single flow or an aggregate of a number of flows within a stated period of time."
The adopting release states that: In general, the Standards are written so as to not be overly prescriptive. Just as firms must define what “Significant” means, so they must also determine the period of time whereby multiple smaller flows have the cumulative effect of one Significant flow. The length of time will depend on the asset class and the size and frequency of flows.
Hmm...I agree this optional policy should be questioned as to whether it is effective and netting larger flows over extended periods of time may not be prudent, effective,or may have unintended consequences but to say the verifier shouldn't allow this after the fact when it appears to be allowed by the rules goes too far. Maybe you can suggest that the the rules should be revisited. As a verifier, would you currently require restatement and disclosure of any material differences in the returns as a result of your opinion that this polciy can't be permitted by the verifier?
I think there's a misinterpretation here. By aggregate I believe we mean that if, for example, on June 3 you get (in a $1 million portfolio) $100,000, and then on June 4 you get $150,000, you could aggregate these ($250,000), so if your threshold is 25%, then you'd remove the account. To net, as this one firm does, serves no purpose! Think about it...what's the whole point of this provision? To allow firms to temporarily remove accounts because they just got a bunch of cash in, and it will take them time to invest it. If they say "we'll net the flows," then they're not taking advantage of the option, so why even bother?
ReplyDeleteI failed to respond to the question that our anonymous commenter posed: would I require restatement? YES! And more importantly, to ask them what they think this provision is for. I suspect they are confused.
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