Answer: Portfolios the firm must include in a composite

## Explanation Under the Global Investment Performance Standards (GIPS), a firm's definition of discretion establishes criteria to determine which portfolios must be included in a composite. This is a fundamental requirement for GIPS compliance. ### Key Points: 1. **Definition of Discretion**: According to GIPS standards, firms must define discretion to establish criteria for determining which portfolios must be included in a composite. 2. **Purpose**: The definition of discretion helps ensure that composites are representative of the firm's investment strategy and that all discretionary portfolios are included. 3. **Option Analysis**: - **Option A (Incorrect)**: Investment strategy implementation is determined by the firm's investment mandate, not by the definition of discretion. - **Option B (Correct)**: The definition of discretion establishes criteria for determining which portfolios must be included in a composite. - **Option C (Incorrect)**: GIPS standards prohibit excluding accounts from composites based on performance criteria (this would be considered "cherry-picking"). ### GIPS Requirements: - Firms must include all actual, fee-paying, discretionary portfolios in at least one composite. - The definition of discretion must be applied consistently over time. - Non-discretionary portfolios may be excluded from composites. This question tests understanding of GIPS requirements for composite construction and the role of discretion in determining composite inclusion.

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