As firms prepare to showcase their 2024 performance, it’s essential to consider what markets and where those investment returns will be presented. Whether your firm claims compliance with the GIPS Standards or aims to stay aligned with the SEC Marketing Rule, year-end is an excellent opportunity to review your firm’s 2025 target market distribution requirements, appropriateness of net returns, and data integrity reasonableness checks.

Providing Marketing Materials

The SEC Marketing Rule requires firms to meticulously track who receives their marketing materials and what materials are being distributed. Similarly, the GIPS Standards require that firms are able to demonstrate that they have distributed a GIPS Report to databases and the Firm’s prospective clients. This aspect of compliance remains frequently misunderstood. Based on our reviews and verifications, we recommend that firms evaluate their policies and procedures regarding:

         ·        Responsibility: Who is accountable for tracking this information?

          ·        Record-Keeping: Where is this information stored?

          ·        Updates: How frequently is the information reviewed and updated?

Some of Cascade’s clients transitioning from other verifiers have been unaware of this requirement, often lacking adequate policies and procedures. In many cases, firms have had to retrospectively compile lists using emails and CRM records—a time-intensive and avoidable process. Year-end is an excellent opportunity to re-evaluate your tracking systems and ensure they meet current compliance requirements.

Net of Fees Returns

Net of fee returns in advertisements is now mandatory if performance is shown (SEC Marketing Rule). This requires ensuring that the deducted fees align with current offerings to prospective clients. There are two main challenges to consider:

        1.     GIPS Requirement: Net returns calculated using model fees must produce results that are equal to or lower than those using actual fees.

        2.     SEC Requirement: Net returns must reflect what a prospective client could expect to receive.

When calculating fees, you have two options: actual fees and model fees. Actual fees reflect the current client experience but may positively skew returns when reduced fees are granted to certain clients. Model fees offer a standardized approach but can be overly conservative.  At the 2024 GIPS Conference it was made clear that actual fees are likely not conservative enough and that model fees should be used in most cases.  It's essential to test whether actual or model fees are appropriate by comparing gross vs. net returns to the standard fee schedule and to consider if there have been any fee schedule changes in the past year.  

Data Integrity

When looking at the composite/strategy data at year-end we recommend reviewing account membership and doing some reasonableness checks.

Monthly/Quarterly/Year-End Membership Reviews: Keep the review process simple. Ensure that accounts belong in composites by using CRM/client advisor or service team file notes. Conduct quantitative reviews for outlier performance and ensure that excluded accounts remain non-discretionary or fit the composite definition.

Capture Reasonableness Checks: Firms may need to use MS Excel for outlier testing, including performance and dispersion checks, if their system does not have the capability. Regular firmwide discussions, involving representatives from various departments, are also crucial.

At Cascade Compliance, we believe that every firm deserves personalized, timely service provided by experienced professionals.  Cascade Compliance has over 35 years of combined experience working with SEC Regulations, the GIPS standards, and performance.  Our employees have worked with hundreds of firms in the U.S. and abroad. One of the best parts of working with clients is getting to share expertise and knowledge of best practices across the industry.  Whether you are a client of ours or not, we are here to help you get better at what you do and answer any questions you may have.  Contact us atconnect@cascadecompliance.com.