What are the Fundamentals of Compliance under GIPS?

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AcadiFi · Accepted Answer

The Global Investment Performance Standards (GIPS) are voluntary performance-reporting standards sponsored by CFA Institute. A firm claiming GIPS compliance must follow strict requirements, organized into nine sections. Fundamentals of Compliance is Section 0 — the gateway requirements.

Core requirements:

1. Firm definition: the firm must be defined as a distinct business entity, subsidiary, or division held out to clients as a separate unit. All fee-paying discretionary portfolios must be included in at least one composite.

2. Definition of discretionary: firms must document internal policies to define whether portfolios are discretionary. Only discretionary fee-paying portfolios are required to be in composites.

3. Input data and calculation methodology: consistent valuation, transaction recognition, and time-weighted returns (with certain money-weighted exceptions).

4. Composite construction: group portfolios with similar investment objectives/strategies into composites. All fee-paying discretionary portfolios must be in at least one composite, and cannot be cherry-picked.

5. Disclosures and presentation: required disclosures in every GIPS report.

6. Verification (recommended but not required): an independent third party reviews compliance.

7. Error policies: written policies on how to correct and disclose errors in reports.

```mermaid
flowchart TB
    A[GIPS Claim] --> B[Define Firm]
    B --> C[Classify Discretionary]
    C --> D[Build Composites]
    D --> E[Required Disclosures]
    E --> F[Verification Optional]
```

Example: Tamwood Asset Management wants to claim GIPS compliance starting 2026. It must define itself as a distinct entity, group its equity, fixed income, and multi-asset portfolios into composites, disclose fees and benchmark choices, and produce reports following the GIPS presentation format. Partial compliance is not allowed — it's all or nothing. A firm cannot claim GIPS compliance for one composite while excluding others.

What are the Fundamentals of Compliance under GIPS?

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