Why Investment Performance Standards Matter

To find evidence of the growing acceptance of the Global Investment Performance Standards (GIPS) by the international investment community, you need look no farther than the more than 300 investment professionals representing a large global cross section who gathered recently in Boston for the 2013 GIPS Standards Annual Conference.

The GIPS standards serve as the guidelines that investment managers should follow when reporting performance to prospective clients, making it possible for investment managers around the world to “transport” their historical investment returns to other countries without having to restate these figures using different calculation and presentation rules. So it should come as no surprise that the GIPS standards are being used by more and more investment firms and money managers around the world and are widely accepted on a global basis. Organizations in 37 countries are committed to promoting and developing the standards; when the partner in Mexico adopted the GIPS standards in July 2012, transparency was cited as a major reason for the decision.

Transparency

The GIPS standards provide needed transparency surrounding investment performance for prospective clients whether it relates to greater ease in comparing performance of investment strategies across countries or ways to disclose risk. This theme resonates with investment professionals and investors alike because market participants have become increasingly skeptical of the information that they receive from financial services professionals after the global financial crisis. Investors are seeking the best information available and a clear, transparent presentation can distinguish an investment adviser or money manager from others in the global marketplace. Further, many believe that increased transparency decreases the possibility of the reputational risk that can arise when clients do not fully understand performance results.

Growing Use by U.S. Regulators

Now that the GIPS standards are well established in the United States and on a global basis, the U.S. Securities and Exchange Commission (SEC) is increasingly examining how the GIPS standards are used by firms and what these firms are sharing about their implementation of the standards. In fact, the new head of the SEC’s Office of Compliance Inspections and Examinations, Andrew Bowden, told GIPS Standards Annual Conference attendees that the SEC is supportive of the GIPS standards, calling their increased global use a “positive development in the industry.”

Bowden noted that SEC staff look for issues related to GIPS standards compliance as part of their investment adviser examinations, with a recent false claim of compliance leading to the first GIPS standards-based SEC enforcement action. In April 2013, the SEC’s Division of Enforcement brought an administrative order against ZPR Investment Management Inc. and its principal, asserting that the firm made false and misleading statements in financial magazines and monthly newsletters to clients discussing whether it met its benchmarks, and falsely asserted that it was GIPS compliant. It further asserted that ZPR made false statements in advertisements about its performance being verified by an appropriate GIPS verification firm. The message seems to be that, if your firm claims it is in compliance with the GIPS standards, it must actually be in compliance with the GIPS standards, as stated in your advertising and marketing materials.

Responding to Evolving Industry Needs

The GIPS standards are periodically revised to make them more relevant and useful to money managers. Areas of guidance currently under development include pooled funds and risk —important topics for those utilizing the standards.

Further, the draft guidance statement on applying the GIPS standards to asset owners was released for public comment earlier this year. In addition, enhancing guidance for performance record portability and for overlay strategies is being considered by the GIPS Executive Committee and other global experts.

GIPS Standards Complemented by “Principles for Investment Reporting”

The Principles for Investment Reporting were published in 2013 as a part of the CFA Institute Future of Finance initiative. The Principles for Investment Reporting specifically address reporting to existing clients whereas the GIPS standards primarily address presentations to prospective clients. The principles focus on creating a simple, transparent investment report for use by both investment professionals and investors. They focus on ensuring adequate communication between preparers and the users of investment reporting data.

Under the “transparency” umbrella, they focus on whether enough information is provided to users so that they have a full understanding of reporting data. Thus, the principles focus on topics such as whether the valuation is based on fair values; what is the benchmark; and whether the return is gross or net of fees, among other things.

The Principles for Investment Reporting’s second primary focus is on “fairness” and the creation of materials that are free from bias and prejudice. They focus on topics such as disclosure of who designed the report; whether the return is calculated from the view of the asset manager or the client; and the total fees earned by those involved, including the asset manager and custodian, among others.

This first edition outlines the key principles, and the upcoming sec­ond edition will contain a series of recommendations specific to typical report types and the information that they should contain.

Check back for updates on the guidance statement on risk and other proposed changes to the GIPS standards, as well as for information on the second edition of the Principles for Investment Reporting.

For regular updates on financial industry regulation and enforcement, visit the Future of Finance online hub.

Photo credit: @iStockphoto.com/TommL