CFM Investor Relations & Reporting 4 — Questions and Answers
Question 1: A fund manager wants to claim GIPS compliance. Which of the following is a prerequisite before making this claim?
- Receiving third-party GIPS verification
- Adopting and implementing all required GIPS provisions firm-wide (Correct answer)
- Filing the composite schedule with the CFA Institute
- Obtaining SEC approval for the performance record
Correct answer: Adopting and implementing all required GIPS provisions firm-wide
GIPS compliance is a firm-wide obligation; a firm must adopt all required provisions before claiming compliance, though verification is recommended but not required.
Question 2: Which of the following best describes the 'since inception IRR' (SI-IRR) metric commonly reported to private fund LPs?
- The annualized return calculated from the fund's first drawdown to the current date using actual cash flows (Correct answer)
- The time-weighted return since the fund's first close
- The average holding period return across all realized investments
- The fund's return relative to a public market equivalent benchmark
Correct answer: The annualized return calculated from the fund's first drawdown to the current date using actual cash flows
SI-IRR is the money-weighted internal rate of return calculated from the fund's inception using all capital calls and distributions to date.
Question 3: Under SEC Marketing Rule (Rule 206(4)-1), hypothetical performance presented to investors must include:
- Only the time period that shows the best performance
- Policies and procedures for calculating and presenting such performance (Correct answer)
- A disclaimer that actual results will differ with no further detail required
- SEC approval prior to distribution
Correct answer: Policies and procedures for calculating and presenting such performance
The SEC Marketing Rule requires advisers presenting hypothetical performance to have policies and procedures governing its calculation and presentation.
Question 4: An LP notice of withdrawal states a 90-day redemption notice requirement with a quarterly liquidity window. If an investor submits notice on February 15, what is the earliest redemption date?
- May 15 (next quarter-end after 90 days)
- June 30 (first quarter-end after a full 90-day period) (Correct answer)
- March 31 (next quarter-end)
- April 30 (90 days from notice)
Correct answer: June 30 (first quarter-end after a full 90-day period)
90 days from Feb 15 is May 16; the next quarterly window after that is June 30, making June 30 the earliest redemption date.
Question 5: A fund's financial statements classify an investment in a private company using ASC 820's three-level fair value hierarchy. An input derived from observable market data for similar assets would be classified as:
- Level 1
- Level 2 (Correct answer)
- Level 3
- Level 4
Correct answer: Level 2
Level 2 inputs are observable market data other than quoted prices (Level 1), such as prices of similar assets or market-corroborated inputs.
Question 6: What is the primary purpose of a fund's Confidential Information Memorandum (CIM) in the investor relations process?
- To file required disclosures with the SEC on Form D
- To market the fund to prospective investors by describing strategy, team, and terms (Correct answer)
- To document the annual general meeting (AGM) proceedings
- To satisfy ERISA reporting requirements for pension fund LPs
Correct answer: To market the fund to prospective investors by describing strategy, team, and terms
A CIM (or PPM — Private Placement Memorandum) is the primary marketing document used to present the fund to prospective investors.
Question 7: A limited partner exercises its 'key person' clause rights after the fund's lead portfolio manager departs. What is the typical consequence?
- The LP receives an immediate pro-rata distribution of fund assets
- New investments are suspended until the GP satisfies the clause, often by naming a replacement (Correct answer)
- The GP must pay a penalty fee equal to 2% of committed capital
- The fund is immediately wound down and liquidated
Correct answer: New investments are suspended until the GP satisfies the clause, often by naming a replacement
A key person event typically triggers a suspension of new investment activity until LPs vote to remove the clause or the GP installs a qualifying replacement.
CFM Investor Relations & Reporting 4
A fund manager wants to claim GIPS compliance.
Which of the following is a prerequisite before making this claim?