Best Practices for Creating and Maintaining Policies and ... - GIPS

Since error correction policies will vary greatly from one firm to another, it is not reasonable toprovide one example policy that would be applicable to a wide audience. Please refer to therequirements in the Guidance Statement on Error Correction as well as the considerationsprovided below.Procedures to consider:• The firm should create a procedure for documenting any error identified. Suchdocumentation would include the date of the error, the cause of the error, the level ofmateriality, how the error was ultimately addressed, and actions taken to prevent similarerrors in the future.• The firm should establish procedures for tracking which compliant presentation(s) wereprovided to which prospective clients and when. Doing so will allow the firm to knowwho must receive a corrected compliant presentation in case the firm subsequentlydetermines a previously distributed compliant presentation includes a material error. Suchprocedures will also allow the firm to determine when ongoing prospective clients mustreceive an updated compliant presentation.• The firm should also consider implementing procedures for identifying potential errors,such as reviewing composites and performance advertising materials on a regular basis.Helpful hints:• Materiality must be defined and documented within the scope of the firm’s errorcorrection policy. In developing criteria for assessing the materiality of an error, keep inmind a key determinant of materiality: Could the error potentially change a prospectiveclient’s decision to invest?• Consider how material the error is within the context of the entire compliant presentation.A number of immaterial errors in a presentation may add up to a material error whenconsidering the presentation as a whole. In addition, both current and prior time periodsshould be considered.• Remember that even a very small error may be material if it moves a composite fromoutperforming to underperforming its benchmark’s return.• Materiality thresholds may differ across asset classes (equities, fixed income, emergingmarkets, etc.), reporting frequency (monthly, quarterly or annual results), and timeperiods (more recent results may be considered more material than historical results, insome contexts).• Consider a higher materiality threshold for volatile equity styles and a lower threshold forless volatile fixed income strategies.• A number of disclosures required in a compliant presentation involve an offer to provideinformation, such as the firm’s list of composite descriptions. Since the offer is a requiredBest Practices for Creating and Maintaining GIPS Policies & Procedures Page 24