Minutes of the GIPS EXECUTIVE COMMITTEE Open Session

Transcription

1 GIPS EC Open Minutes 18 Minutes of the GIPS EXECUTIVE COMMITTEE Open Session Date: Friday 18 Location: Time: Members Present: Open Conference Call 8:00 p.m. to 9:00 a.m. ET Carl Bacon, CIPM EC Chair and Verification/Practitioner Chair Jonathan Boersma, CFA GIPS Executive Director Louis Boulanger, CFA GIPS Council Chair Yoh Kuwabara Interpretations Chair Iain McAra Investment Manager Chair Colin Morrison Investor/Consultant Chair Trevor Persaud Asia Pacific RIPS Chair and EC Chair Elect Ann Putallaz, Ph.D., CIPM Americas RIPS Chair Dimitri Senik, CFA EMEA RIPS Chair Observers: Garvin Deokiesingh, CFA Canada Alicia Hyde, CIPM United States Paolo Carvajal Chile Christine Iannacone, CIPM United States Hans Pieper Germany Jason Inman, CIPM United States Jenny Lor, CIPM Hong Kong Erik Johnsen, CFA, CIPM United States Jatin Gandhi, CIPM India Therese Johnson United States Kazumichi Karita Japan Todd Juillerat, CFA United States Erick Morales - Mexico Krista Kreicas, CFA, CIPM United States Erwin Jager, CFA, CIPM The Netherlands Valerie Lamanna, CIPM United States Miguel Mora Santesmases, CIPM Spain James McCann United States Yves Hennard Switzerland Coleman McKinstry, CFA, CIPM United States Susanne Klemm Switzerland Timothy Peterson, CFA, CIPM United States Anthony Howland United Kingdom Sue Pike, CFA, CIPM United States Kathleen Abreau United States Antonella Puca, CFA, CIPM United States Lulu Alaquli United States Tim Ryan, CIPM United States Bobby Ankar United States Kaitlin Savino United States Kamelia Dari, CIPM United States Jed Schneider, CIPM United States Ambika D Souza, CIPM United States Shamya Sermons, CIPM United States Barry Finkle, CIPM United States Mike Sonnenburg, CIPM United States Stephen Gaudette, CFA United States David Spaulding, CIPM United States Brad Giardino United States Arin Stancil, CFA, CIPM United States Justin Guthrie, CFA United States Hans Vander Plaats United States James Hendricksen United States John Welp, CIPM United States Page 1 of 13

2 GIPS EC Open Minutes 18 Staff Present: Fannie Fang, CFA, CIPM Director, Global Investment Performance Standards Anju Grover, CIPM Senior GIPS Analyst Polly Johnson Administrative Assistant Beth Kaiser, CFA, CIPM Director, Global Investment Performance Standards Cindy Kent Director, Global Investment Performance Standards Ken Robinson, CFA, CIPM Director, Global Investment Performance Standards Trudy Via Administrative Assistant Robin Willis Administrative Assistant Action Items CFA Institute staff will announce through the GIPS standards newsletter when the Guidance Statement on Alternative Investment Strategies and Structures is posted on the GIPS standards website. Decision Points Executive Committee members approved the revised Guidance Statement on Alternative Investment Strategies and Structures as amended. (9 Votes) It was announced that the GIPS Executive Committee Open Conference Call is being recorded and will be posted for the public on the GIPS Standards website. Mr. Bacon welcomed the observers to the GIPS Executive Committee Open Conference Call. He mentioned that the conference lines would be opened at the end of the call for a question and answer session. 1. Highlight Key Elements of the Guidance Statement on Alternative Investment Strategies and Structures Mr. Senik clarified that the GIPS Executive Committee is reviewing a revised final draft of the Guidance Statement on Alternative Investment Strategies and Structures that incorporates minor changes from the draft that was posted on the GIPS Standards website. He stated the two main objectives in development of this guidance were: 1) to eliminate the perception that the GIPS standards were not applicable to some alternative investments such as hedge funds; and 2) to address various technical issues specific to alternative investments that was not explicitly covered by the GIPS standards or historically required a great deal of interpretation and judgment. It was mentioned that the guidance has been under development for the past four years. The public comment period for the Exposure Draft of the Guidance Statement on Alternative Investment Strategies and Structures closed June 2011 and generated over 40 very detailed comments from around the world. It was noted that many of the comments received were incorporated into the final draft of the Guidance Statement. Mr. Senik thanked the Alternative Investment Strategies Working Group members for their contributions and the successful completion of this project. He further reported that the scope of the Guidance Statement on Alternative Investment Strategies and Structures applies to all asset classes and compliments the existing framework of the GIPS standards. The specific GIPS provisions for Private Equity and Real Estate have priority over this Guidance, with Page 2 of 13

3 GIPS EC Open Minutes 18 the exception of situations that the GIPS Private Equity and Real Estate provisions do not address specific issues addressed by this Guidance; in these cases this Guidance applies. The Guidance Statement on Alternative Investment Strategies and Structures addresses various issues specific to the alternative investment business, including: Investment valuation; Composite construction; Performance calculations; Treatment of fees; and Disclosures. A summary of the provisions introduced in the Guidance Statement on Alternative Investment Strategies and Structures can be found in Sections 1 through 3 while Section 4 includes various Q&As that elaborate on particular situations. The following are a few key provisions of the Guidance Statement that were briefly reviewed: Definition of the Firm The Guidance Statement discusses the subject of the definition of the firm and states that firms must apply a substance over form principle when defining the firm and it would be inappropriate to make use of formal legal structures simply to avoid the inclusion of certain portfolios or assets in the definition of the firm. Treatment of Structured Products Structured products should be included in the definition of the firm and in a composite only if the underlying product is represented by actively or passively managed portfolio investments. On the other hand if holding the underlying assets does not involve any investment management activity, (e.g., if it holds just a fixed basket of stocks or an equity index of the underlying structured product) then it must not be included in total firm assets or any composite. Investment Valuation Issues The guidance acknowledges that for some alternative investments it may not be possible to obtain valuations monthly or at the time of large cash flows due to illiquidity or because the pricing source does not provide the valuations on a monthly or more frequent basis. Valuations may be performed on a less than monthly basis when underlying investments of a pooled fund do not lend themselves to monthly valuations. However, valuations must be conducted at least on an annual basis and firms must disclose if they choose to opt out of the monthly valuation. Firms are recommended to present the three-year annualized standard deviation of the benchmark returns, provided that monthly returns of the benchmark are available. Firms must disclose when the three-year annualized ex-post standard deviation is not presented for the composite (and benchmark, if applicable) because monthly returns for the composite (benchmark) are not available. Page 3 of 13

4 GIPS EC Open Minutes 18 Estimated Values The guidance also acknowledges that with some alternative investments, such as portfolios investing in hedge funds, the final valuations of the underlying funds may only be provided after a significant time lag. Due to this problem, firms may also use estimated values or last available historical prices if they believe it represents the current fair value. If estimated values are used to determine the net asset value of the pooled fund, at which investors can buy or sell funds units, that asset value becomes an effective tradable market price and, therefore, would satisfy the requirement of fair valuation. If the firm uses estimated values or the last available historical prices, when final values are received, the firms must assess the differences in values and the impact on composite assets, total firm assets, and performance. If the final values and resulting performance are materially different, firms must determine whether any adjustments to the composite must be made on a prospective basis or retroactively and must consider any changes in relation to the Guidance Statement on Error Correction and the firm s error correction policies. Trade Date Accounting The guidance contains clarification regarding the definition of the trade date accounting principle. Firms need to differentiate between the date of placing a trading order and the date of the effective asset ownership transfer. The date of the execution or transfer of ownership is the date that should be considered the trade date for GIPS compliance purposes. This also implies that the definite quantity and settlement price of the asset being purchased or sold is determined and known by that date. This clarification addresses the problem that arises with subscriptions and redemptions in hedge funds when the transaction cannot be recognized on the trade date because the information of the final quantity and price may only be provided after several days or even weeks after the subscription and redemption trading order was submitted. Treatment of Fees The guidance includes discussion on the treatment of fees for the purpose of presenting gross-of-fees returns and net-of-fees returns. The current GIPS standards require that when presenting gross-of-fees returns for a fund-of-funds composite strategy, firms must present the gross-of-fees returns net of all underlying funds fees and expenses. This is typically achieved because the net asset values of the underlying funds reflect the deduction of the underlying funds fees and expenses. The Guidance Statement on Alternative Investment Strategies and Structures introduces an option that firms may calculate gross-of-fees returns that do not deduct the underlying funds management fees, but only in the following two situations: 1. Both underlying funds and the fund-of-funds are managed by the same firm and there is effectively a fee rebate or waiver at the fund-of-funds level for those fees charged at the underlying fund level. 2. A fund-of-funds resembles a master-feeder structure or a segregated portfolio invests in one or multiple underlying funds managed by the same firm and its investment management fee model is structured so that the investment management fee is either partially or fully charged at the underlying fund level. The GIPS standards allow firms when presenting net-of-fees returns to initially calculate a gross-of-fees return and then deduct a model fee, which must be the highest management fee incurred by portfolios in the composite. The guidance recognizes that in some situations it may be impossible to definitively determine which management fee is the highest among all portfolios within a composite, for example when portfolios use a mix of fixed and performance-based management fees. Page 4 of 13

5 GIPS EC Open Minutes 18 For precise situations, the Guidance Statement on Alternative Investment Strategies and Structures introduces a new option to use the highest model fee applicable to the specific, prospective client or the intended recipient of the GIPS presentation as long as doing so results in the net-of-fees returns that are no higher than those that would have been calculated if actual fees had been used. Leverage with Derivatives The guidance contains a Q&A regarding portfolios that are leveraged with derivatives. It provides three options that are applicable in such situations: 1. Derivatives are included in the portfolio and their return contribution to the portfolio is based on their market value. A fully-leveraged return, and only that fully-leveraged return, must be presented for the GIPS standards purposes regardless of whether the use of derivatives is discretionary or nondiscretionary (imposed by the client and not a part of the firm investment strategy). 2. Derivatives are included in the portfolio, but their return contribution is not based on their market value but on their effective underlying exposure. This calculation is an unleveraged return and is not allowed to be presented as part of a GIPS compliant presentation. It can only be presented as supplemental information. 3. Derivatives are entirely removed from the portfolio. This treatment is only allowed for nondiscretionary derivatives (derivatives imposed by the client). This is in line with the existing guidance contained in the Guidance Statement on the Composite Definition that non-discretionary securities can be removed from the portfolio. Share Classes The guidance also includes specific discussion about the treatment of funds with share classes expressed in different reference currencies. It is not appropriate to use returns expressed in different base currencies but hedged in the composite currency for the composite return calculation. Because even with a perfect hedging, there will always be differences between the hedged returns as compared to the composite currency base return due to hedging imperfections. Double Counting of Assets The performance calculation area of the guidance includes a Q&A regarding eliminating double-counting of assets. The GIPS standards do not permit double-counting assets when calculating composite assets and total firm assets. The Guidance Statement on Alternative Investment Strategies and Structures now explains that firms are also allowed to eliminate cross investments for the calculation of portfolio and composite performance, although it is not required. However, firms that eliminate cross investments must disclose this fact in the GIPS compliant presentation. Creation of Composites for Alternative Portfolios The Guidance Statement on Alternative Investment Strategies and Structures contains several guidelines on the creation of composites for alternative portfolios. Many alternative portfolios or funds follow a unique investment strategy and are not necessarily comparable with other managed portfolios. The creation of a single portfolio or single fund composite may be the most straight-forward solution for such vehicles with unique investment strategies. Master-Feeder Structures In relation to the master-feeder structures firms can chose, depending upon the circumstances, whether the master fund or the individual feeder funds are included in the composite. Page 5 of 13

6 GIPS EC Open Minutes 18 Side Pockets The guidance includes several interesting provisions with respect to the treatment of side pockets as commonly found in hedge funds. There is a difference between discretionary and non-discretionary sidepockets. When side pockets are created for investment purposes at the discretion of the firm, the performance of the side pocket must always be included in the performance of the entire fund, and also in the respective composites; and firms must also present returns both including and excluding the side pockets, provided that the fund with the side pocket is the only portfolio in the composite (i.e., a single fund composite). The reason for this requirement is that prospective investors are equally interested in seeing the performance history without the impact of the side pocket because the prospective investors will not be able to participate in the performance of the side pocket going forward. The nature of a side pocket is that it is not open to further investors. A side-pocket can be classified as non-discretionary and excluded from the performance of the composite when it is created at the explicit direction of a client or only if all of the following criteria are met: 1. The side pocket is segregated in a separate subportfolio; 2. Side pocketed assets are no longer considered in the portfolio asset allocation; 3. There are no investment decisions for side-pocketed assets, except for monitoring and liquidating; and 4. There are no or reduced investment management fees charged on the side-pocketed assets. Firms must disclose in a compliant presentation if a portfolio or fund in the composite creates a side pocket. This applies to both discretionary and non-discretionary side pockets. Illiquid Investments It is prohibited for firms to claim that illiquid investments are non-discretionary just because of their illiquidity in order to exclude their performance from the portfolio or the composite. Subscriptions and Redemptions The Guidance Statement on Alternative Investment Strategies and Structures acknowledges the situation where hedge funds accept subscriptions and redemptions only on a monthly or quarterly basis. External cash flows from investors received before the subscription date may not be invested in accordance with the investment strategy. Cash flows received prior to being invested should be put in a separate subaccount and excluded from the composite performance until it is invested on the subscription date. Disclosures The guidance introduces several new disclosure requirements and recommendations, highlights include: If illiquid securities form a significant part of the composite strategy, firms must disclose this in the composite description. Typical limitations of alternative investment benchmarks such as peer group indices, firms are recommended describe these limitations in compliant presentations. A manager of alternative investment strategies should also consider whether additional risk measures beyond those required by the GIPS standards should be presented. For example, for leveraged or non-linear payoff portfolios useful risk measures may include the effective delta-adjusted exposure, value-at-risk; expected shortfall, downside volatility, drawdown, etc. Page 6 of 13

7 Page 7 of 13 GIPS EC Open Minutes 18 Effective Date The Guidance Statement on Alternative Investment Strategies and Structures is proposed to become effective as of 1 June This Guidance Statement is not required to be applied retroactively. However, firms may voluntarily choose to apply this Guidance Statement retroactively and in this case must disclose if any restatement of the historical track record was necessary as a result of the retroactive application. Minor changes to the revised final draft of the Guidance Statement on Alternative Investment Strategies and Structures, different from the draft that was posted on the GIPS Standards website, were outlined as follows: Under Estimated Versus Values, page 6, paragraph nine: Firms must define the use of estimated values, last available historical values and the treatment of subsequent final values in their composite-specific fair valuation policy that must be followed consistently and made available upon request. If the firm uses estimated values or the last available historical values, when final values are received the firm must assess the differences in values and the impact on composite assets, total firm assets, and performance. If the final values and resulting performance are materially different, firms must determine whether any adjustments to the composite must be made on a prospective basis or retroactively. If composite valuations are revised retroactively, firms must consider the Guidance Statement on Error Correction and the firm s error correction policies. Differences between final and estimated values are not necessarily errors, but are treated in a similar manner as under the GIPS Guidance Statement on Error Correction. Firms must define the use of estimated values, last available historical values and the treatment of subsequent final values in their composite-specific fair valuation policy that must be followed consistently and made available upon request. If differences between the estimated and final values are consistently material, the firm should reassess whether it is proper to use estimates as the fair value. Under Investment Management Fees, page 8, paragraphs four and six: Firms may calculate gross-of-fees returns that do not deduct the underlying funds fees and expenses only when the following criteria are met cumulatively: 2. A fund-of-funds resembles a master-feeder structure or a segregated portfolio invests in one or multiple underlying funds managed by the same firm and has an its investment management fee model is structured so that the investment management fee is either partially or fully charged at the underlying fund level. Under Master-feeder Structures Fees, page 8, paragraph one: If a firm manages a fund-of-funds with a master-feeder structure, and the firm manages both the master fund and the feeder fund, where investment management fees are not charged in the master fund but are charged at the feeder level, the return of the master fund would be considered a gross-of-fees return. If calculation of the net-of-fees returns is desired and a firm uses the master fund return in the composite, the gross-of-fees return of the master fund will require an adjustment. The firm may identify the relevant investment management fees charged in the feeder funds and use these fees to reduce the gross-of-fees return of the master fund to arrive at the net-of-fees return. Alternatively, when calculating net-of-fees composite returns, a firm may calculate gross-of-fees composite returns and deduct a model fee which must be the highest investment management fee incurred by portfolios (either at the master fund level or at the feeder level, wherever the investment management fees are charged) in the composite. In some

8 GIPS EC Open Minutes 18 situations it may be impossible to definitively determine which investment management fee is the highest among all portfolios within a composite, such as when portfolios use a mix of fixed and performance-based management fees. In this example, it is acceptable to use the highest model fee applicable to the specific prospective client or the intended recipient of the compliant presentation as long as doing so results in net-of-fees returns that are no higher than those that would have been calculated if actual fees had been used that are lower than those that would have been calculated if actual (effectively charged) fees had been used. Under Q&A Composite Construction in the answer, page 22, paragraph three: When calculating net-of-fees returns using model fees, the model fee must reflect the current fee schedule. When initially calculating net-of-fees returns for historical periods, the firm must determine whether it is appropriate to use the current fee schedule or the fee schedule that was in effect for the respective historical period. In all cases net-of-fees returns calculated using model fees must result in net-of-fees returns that are no higher than those that would have been calculated if investment management actual fees had been used that are lower than those that would have been calculated if actual (effectively charged) fees had been used. Under Q&A Performance measurement in the answer, page 18, second table: The following table summarizes the possible options of the treatment of leverage: Meaning: Option 1. Leveraged return Derivatives are included in the portfolio and their return contribution is based on their market value (13.33% in the above example). Treatment: Must be presented for the GIPS purposes, regardless if the use of derivatives is discretionary or non-discretionary. Option 2. Unleveraged return Derivatives are included in the portfolio and their return contribution is based on their effective underlying exposure (0.67% in the above example). Must not be presented for the GIPS purposes. Allowed to be presented as supplemental information only. Option 3 Removing derivatives Derivatives are entirely removed from the portfolio as if they had never existed, i.e., their return contribution is nil. Only allowed for non-discretionary derivatives. It was pointed out that the three options in the second table in Q&A 4.3.1, Performance measurement, does not change the substance of the Guidance Statement on Alternative Investment Strategies and Structures but presents the information in a different format to clearly illustrate the options. Page 8 of 13

9 GIPS EC Open Minutes 18 There was a brief discussion regarding the term alternatives and the fact that the Guidance Statement on Alternative Investment Strategies and Structures also addresses non-alternative investments and that all firms claiming compliance must consider this guidance as well as all of the provisions, guidance and interpretations of the GIPS standards. A suggestion was made to change the term alternatives to nontraditional. It was mentioned that it should be highlighted in the cover sheet of the Guidance Statement on Alternative Investment Strategies and Structures that this guidance applies to all asset classes. It was also mentioned that a solution to clarify that the guidance applies to all asset classes would be in the presentation of the Guidance Statement and through education to the industry. There was a discussion on postponing the effective date of 1 June 2012 of the Guidance Statement on Alternative Investment Strategies and Structures to allow firms more time to initiate the necessary actions. There was a general consensus of the Executive Committee members to change the effective date of the Guidance Statement on Alternative Investment Strategies and Structures to 1 October 2012 providing firms a six-month time period to become familiar with and implement the guidance. 2. Approve the Guidance Statement on Alternative Investment Strategies and Structures The Executive Committee members approved the revised final draft Guidance Statement on Alternative Investment Strategies and Structures as amended. (9 Votes) 3. Observer Questions Mr. Jager, The Netherlands, thanked Mr. Senik and the Alternative Investment Strategies Working Group for their work in producing the Guidance Statement. He inquired about Q&A regarding use of returns in local currencies for the purpose of composite return calculation. There are several hedge fund managers in The Netherlands with some clients that may want to hedge and some clients that may not. So the hedging is not a choice of the asset manager, they are asked to find the highest local return. Mr. Jager asked how this should be handled when it is not the manager s choice whether to hedge or not to hedge? In addition, managers are sometimes mandated to select investee funds on the basis of their exceptional local returns without considering currency hedging implications, as currency hedging remains at the discretion of the client. Mr. Senik responded that this situation poses an issue of whether it would actually be appropriate to include all the portfolios (both with hedging and without hedging) in the same composite. The act of hedging may also warrant different investment strategies and putting these portfolios into different composites. The Q&A addresses that all the share classes are actually managed under the same strategy and all the portfolios are hedged into the base currency of the fund. The question is about how to translate the returns to make sure that the composite returns is correctly expressed. Separate composites should be considered for those with partial hedging requirement or for those that have a full hedging requirement. Another situation is when the whole hedging is imposed by the client and not part of the manager s strategy whether this hedging piece is actually a non-discretionary element of the strategy. There are lots of implications around the composite construction that must be considered. Mr. Bacon explained that it depends upon whether the portfolios are grouped together. But if there is hedging included in there, then there is a cost or a benefit attached to that and it would be inappropriate to include them together. So the issue is not whether the manager has discretion or not, the issue is whether those returns should be grouped together hedged and not hedged. He stated that clearly the portfolios with returns expressed in different currencies, even hedged, should not be grouped together as they are, but should be translated into the composite currency. Asset classes with different hedge types attached to them should not be included in the same composite. Page 9 of 13

10 GIPS EC Open Minutes 18 Mr. Spaulding, United States, thanked the Executive Committee, Mr. Senik, and the Alternative Investment Strategies Working Group for this important Guidance Statement. He then asked the following three questions: 1. Why was this guidance developed as a Guidance Statement and not included in the GIPS standards as a provision just like real estate and private equity? 2. The alternatives guidance allows for flexibility, when an asset is partially or completely illiquid. Why isn t this a general rule for any asset, why is it just for alternatives? 3. What is the release date for the GIPS Standards Handbook? Mr. Boersma explained that the rules regarding valuation of illiquid assets in this Guidance Statement are the same as what is currently in the valuation principles of the GIPS standards. But the Guidance Statement on Alternative Investment Strategies and Structures provides the information in greater detail. The explanation of issues that are particularly relevant for hedge funds and for other alternative investments is no different than what is presented in the valuation principles of the GIPS standards; this guidance simply provides samples of application and examples of what that looks like in practice. Mr. Boersma responded to Mr. Spaulding s first question that requirements in Guidance Statement on Alternative Investment Strategies and Structures may become incorporated into the GIPS standards at some time in the future. Mr. Bacon pointed out that requirements can be introduced in Guidance Statements, which is precisely why there is a public comment period and for open discussion as well. Mr. Boersma stated that they are very careful about the introduction of new requirements of the GIPS standards and the importance of having a conversation about each requirement being appropriate and necessary. Mr. Boersma answered Mr. Spaulding s third question by stating that the GIPS Standards Handbook is in progress. He explained the need to go through the process of updating all of the Guidance Statements for the new provisions relevant to the changes in the 2010 edition of the GIPS standards has been a lengthy procedure. It is anticipated that the GIPS Standards Handbook will be published in July or August. It was also mentioned that the electronic version of the GIPS Standards Handbook will be available on both the GIPS standards and CFA Institute websites for free with many enhanced features (e.g., hyperlinks, defined terms, etc.). Making the GIPS Standards Handbook available as an e-book is also being reviewed. It is also being considered whether the GIPS Standards Handbook will be available in pdf format so that it can be downloaded and annotated by a firm. Ms. Pike, United States, thanked everyone for all their efforts in producing the Guidance Statement on Alternative Investment Strategies and Structures. Her first comment was to express concern about time needed to budget and implement systems changes that need to be for technology and/or resource purposes. Some of the changes to be incorporated from this Guidance Statement are complicated and will require a lot of business resources to consolidate. Ms. Pike stated that Q&A is probably a good example that a firm is going to need to do a lot of evaluation using the highest model fee applicable to a specific prospective client as long as the fee is lower than those that would have been calculated with actual fees. She stated that the firm she works with uses model fees across the board because in many cases their clients pay their fees outside of the accounts or outside of the funds that they are invested in. Ms. Pike asked if the expectation is for the firm to measure the net returns with actual fees in order do a comparison to make sure it is lower? Page 10 of 13

11 Page 11 of 13 GIPS EC Open Minutes 18 Mr. Senik responded that firms with portfolios in a composite that do pay fees and still want to apply a model fee which is not the highest fee among portfolios in the composite, but just the most appropriate to a specific client, to the gross composite return to net it down would have to compare that theoretical netof-fee return with the net-of-fee return that would have been calculated if you had used the effective fees. Ms. Pike asked even though using actual fees is not a requirement, in and of itself? Mr. Senik confirmed that is right. Ms. Pike, stated that in terms of guidance versus provision, when there is a new provision firms have a lot of time to be able to implement them. Guidance Statements turn around more quickly and some of the changes in the Guidance Statement on Alternative Investment Strategies and Structures are complex and significant. She mentioned that she is concerned about an October 1 st effective date. Mr. Senik pointed out that using a model fee to net down returns is not a new treatment in itself. What is new is the option to use not only the highest fee incurred among the portfolios in the composite but also to use the highest model fee applicable to the specific prospective client or the intended recipient. In those kinds of situations, this should be an advantage for firms because now they have flexibility to address the firm s and prospective clients needs. Ms. Pike stated that she is concerned about the new requirement as compared to actual because it is not something that the firm she works for has ever done and from a verification perspective it needs to be in place to be able to prove that is actually the case. The firm Ms. Pike works for always use highest model fee. Mr. Persaud clarified that although he accepts the practicality of actually having to validate this point, however, if the firm s model fee was not consistent with the actual fee or indeed shows something that was significantly different to the actual fee then using the model fee may be misleading. He stated that the change is simply consistent with the ethos of the GIPS standards. The expectation might be that a firm may not have to go through the process of calculating all of the actual fees, for all of the firm s underlying clients, but could validate the fact that the model fee is representative of the actual fee, and then the firm would be able to get through the verification point. The other side of the issue is if the firm s model fee cannot be demonstrated to be reflective of the firm s actual fee or the impact of the actual fee then the firm has a much bigger issue from a GIPS verification or validation perspective. Ms. Pike stated that comparing the fees and the rate is straight forward, but validating actual impact to each member of the composite feels like a much larger effort. Mr. Boersma asked if for a net return it is not in a better position if the firm used the model fee as opposed to using the actual return. He stated that he believes that is consistent with most regulatory requirements in most jurisdictions. The current GIPS standards say that firms can use the highest fee charged to a portfolio within a composite as the model and this actually gives firms a little bit more flexibility in terms of doing that. Under the current standards the allowance to use model fees would put a firm in a place where they would use a model fee that is less than the return they would calculate if they used actual fees. Mr. Boersma stated that it was believed that this, if anything, made it a little bit easier for firms and perhaps a little bit more clear. Ms. Pike stated that their firm actually uses model fees for their client net returns as well. They do not calculate the actual net return so maybe that is why it is a little bit more complicated, the actual versus model language, for their firm.

12 GIPS EC Open Minutes 18 Ms. Pike provided the following situation for firms that have an approach that offer both a fixed and performance-based management fee, and use a model fee on both composites and client returns. For different annual periods the small asset-based plus performance-based fee could be higher or lower than the asset-based fee alternative, in other words it could go back and forth year to year. What is the expectation if a firm has a composite that has accounts that are a mix of flat and performance-based fees? Do you need to calculate both for the composite every year and pull the most conservative for each year? She mentioned that this would get confusing. Mr. Senik stated that always the preferred treatment to use is the effectively charged management fees to net down the returns. Ms. Pike acknowledged that would be actual fees, which the firm she works for does not do today. Mr. Senik mentioned that if the firm wants to use a simplified approach and just use a model fee, then yes firms either have to use the model fee, which is the highest fee, for all portfolios in the composite or firms need to determine that the model fee most appropriate to a specific prospective client is not higher than those fees that would have been calculated if the firm used actual fees. He agreed that if you have a mix of performance-based fees and fixed fees, then this could become a challenge to determine the higher fee. Mr. Senik agreed that in that situation it would be more appropriate to use the effectively charged management fees to net down the returns. Mr. Bacon stated that the Executive Committee will not be able to find a solution during the conference call but perhaps a solution or advice can be given after further review. Mr. Karita, Japan, thanked everyone for this significant work which he believes is the biggest Guidance Statement. He stated that due to the size of the Guidance Statement on Alternative Investment Strategies and Structures he has not had a chance to fully digest the contents but it appears very well written. Mr. Karita stated that he does not have any questions at this time but he welcomes changing the effective date to 1 October Mr. Karita also agrees with the comments regarding the terminology issue about the word alternatives. He mentioned that in Japan, when many individuals hear the term alternatives they think it only applies to real estate and those types of investments. In the future, the terminology should be carefully considered. He believes that for the time being additional Q&As can be created to explain the Guidance Statement and that this will be a very good Guidance Statement. Mr. Karita mentioned that the Japan Country Sponsor will work on creating a Japanese translation of the Guidance Statement on Alternative Investment Strategies and Structures. Currently the Japan Country Sponsor has finished translating six of the Guidance Statements into Japanese and plans to work on many more. Because the Guidance Statement on Alternative Investment Strategies and Structures is so large the Japan Country Sponsor plans to translate it later this year or perhaps next year. Mr. Bacon thanked Mr. Karita for his comments. Mr. Boersma responded by also thanking Mr. Karita for his comments. He has received several suggestions of different terminology to use for the Guidance Statement instead of the term alternatives. Mr. Boersma stated that the ideas will be reviewed and perhaps incorporate several of the ideas into the title or into some sort of label on the website to make sure it is clear that the Guidance Statement covers more than just alternative investments. Mr. Boersma mentioned that there is an obligation to be clear that the Guidance Statement on Alternative Investment Strategies and Structures covers all asset types. It is vital that firms understand that they need to be familiar with all of the guidance. Mr. Boersma thanked Page 12 of 13

13 GIPS EC Open Minutes 18 Mr. Karita for the work the Japan Country Sponsor is doing on translating Guidance Statements and offered continued support to assist them when possible through that process. Mr. Juillerat, CFA, United States, applauded the Alternative Investment Strategies Working Group and the Executive Committee for all their hard work. This Guidance Statement has been long-awaited by the industry and he believes it will be very well received. Mr. Juillerat stated that he agrees with delaying the effective date until 1 October He asked for the projected date of when the final version of the Guidance Statement on Alternative Investment Strategies and Structures, incorporating the minor revisions, will be released for the public through an adopting release, posted on the website, and through the newsletter. Mr. Boersma stated that it is anticipated that the final version of the Guidance Statement on Alternative Investment Strategies and Structures will be posted early next week for the public. A Standards Alert Newsletter will be sent out announcing when the Guidance Statement has been posted on the GIPS Standards website. Other Business Update on GIPS EC In-Person Meetings It was announced that the next open GIPS Executive Committee in-person meeting will be held in Charlottesville, Virginia, USA on Friday 19 October Further information regarding the October Executive Committee open in-person meeting will be posted on the GIPS Standards website in the near future. Mr. Boersma expressed his personal thanks and thanks on behalf of CFA Institute to Mr. Senik, Mr. Morrison, Mr. Kuwabara, the members of the Alternative Investment Strategies Working Group, staff liaison Ms. Kaiser, and everyone that provided comments on the Guidance Statement for the completion of the Guidance Statement on Alternative Investment Strategies and Structures. Mr. Boersma mentioned that at the March 2012 open GIPS Executive Committee in-person meeting in Belgium, revisions were approved to the Guidance Statement on Real Estate. He explained that due to work on the GIPS Standards Handbook, additional time is being taken to make certain that the language in the Guidance Statement on Real Estate and the Guidance Statement on Private Equity is consistent. Mr. Boersma stated that the Guidance Statement on Real Estate will be posted in the near future. Meeting adjourned at 9:22 a.m. Page 13 of 13