It came to my attention yesterday that a new GIPS(R) (Global Investment Performance Standards) rule is being introduced into the GIPS Handbook regarding the treatment of significant cash flows (SCF): compliant firms will no longer be able to use the "number of portfolios" as a factor to employ the firm's SCF policy.
Where did this new rule come from? And more importantly, why wasn't the public given a chance to comment? Would such a change not be better handled through a revision to the SCF guidance statement, with the traditional public comment period?
This change is no doubt being couched within a "Q&A," that was perhaps fabricated for the purpose of introducing it, but the Q&As were never intended to be the source of new rules but rather interpretation of existing rules. Was this a Question that was asked of and Answered by the GIPS Help Desk? I suspect not, since it's not listed in the Q&A section of the GIPS website. Was this rule vetted with the Interpretations subcommitte or the GIPS Executive Committee? Or, was it added as part of the last minute editing process, without the benefit of public discourse?
The irony here, as you will see, is that the earlier version of the guidance statement conflicts with what is now apparently a rule!
Here's what is being changed: Let's say you have an SCF policy that you employ firm wide, that says if there's a flow greater than 30%, you will remove the portfolio for one month. Great! BUT, you have a few small composites (small in number of portfolios) that could have "gaps" or breaks in performance if you ever employed the SCF rule here. And so, you want to condition your policy by having something like "if the composite has less than five accounts, the policy does not apply." I.e., you'd rather suffer from the impact of the flow rather than experience a break in your performance history.
Or, what if you want a policy that says that composites with ten or more accounts have a 30% threshold, while composites with 5-10 have 40%, and below five will not participate in the SCF policy, so as to avoid possible breaks; what is the harm with such a policy?
This new rule will prohibit firms from doing this. Why? What's the point? What is the harm with firms having such policies? I find the change unnecessary, but more important, the manner in which it is being done in total conflict with the traditional methods to introduce new rules. What happened to protocol?
I mentioned above that these new "rules" seem to conflict with language in the earlier version of the SGF guidance:
Since this is clearly a rule change, why isn't there an effective date?
I find this frustrating, ridiculous, absurd, and senseless! What do you think?
By the way, firms can STILL accomplish having their policy sensitive to the number of portfolios in a composite; they will have to specifically identify those composites which will employ the SCF policy. It's a little more cumbersome, perhaps, but can still be done. There is no requirement that firms must have a single SCF policy that must apply to all composites (at least not yet!).
Also, one might wonder what other new rules are being introduced this way; I guess we'll find out soon.