Discretion: GIPS® vs. SEC

by Julia Reyes, CIPM

The Global Investment Performance Standards (GIPS®) require that firms establish policies and procedures to ensure that composites and total firm assets properly reflect only actual assets managed by the firm. This process is typically conducted on a quarterly basis or as frequently as the firm is presenting assets under management. When capturing firm assets under management for GIPS purposes, the firm is required to include all discretionary and non-discretionary assets at the firm. Determining whether assets are discretionary or non-discretionary for GIPS purposes versus from a regulatory standpoint, like the SEC, can be difficult.

When considering portfolios that have a discretionary agreement under SEC guidelines, discretion can be a fairly simple hurdle.

  1. Do you have control over the implementation of investment decisions and trading authority?
  2. Do you have continuous regular supervisory or management services?

In most cases the answer will be yes. Within the GIPS framework, discretion means something a little different. Discretion is defined as the ability of the firm to implement its intended strategy. If the intended strategy is not able to be implemented, the account would be considered non-discretionary from a GIPS perspective. These accounts would not be included in a composite, but would still be included in the firm’s total assets under management. Firms have some latitude when deciding what factors to consider when determining an account’s discretionary status. Oftentimes there is consideration for client imposed restrictions that apply to the firm’s strategies.

There may be relationships developed where the firm does not have control over the implementation of trades or investment decisions. This is most often the case with model driven platforms. In those instances, the assets are considered advisory-only from a GIPS perspective and should not be captured in firm assets. Not all model delivery systems are created the same and some provide the portfolio manager with more discretion than others. I would encourage firms that have such relationships to review their contracts and ensure the treatment of those relationships is appropriate.


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