The Impact of the GIPS Standards on Regulations Around the Globe
Creating investment performance standards that help protect the investing public is not an easy task. Yet decades ago, CFA Institute set out to do just that, creating what are now the Global Investment Performance Standards (GIPS®). As of 30 June 2021, more than 1,800 organizations in 48 markets claim compliance with the GIPS standards. But it’s not only organizations that appreciate the value of the GIPS standards—regulators do, too. Three recent cases illustrate how the GIPS standards have shaped regulations.
Impact on Fiduciary Management Providers in the United Kingdom
In 2016, CFA Institute met with key participants in the UK fiduciary management industry to discuss creating a voluntary standard that would address the presentation of past performance of fiduciary managers to UK pension plans. Drawing on the GIPS standards, at least two UK consulting firms had already undertaken the initial work. Fast forward to 2018. Having completed its Asset Management Market Study, the Financial Conduct Authority—which regulates conduct for nearly 60,000 financial services firms and financial markets in the United Kingdom—made a market investigation reference to the UK Competition and Markets Authority (CMA) regarding investment consultancy and fiduciary management services.
The CMA issued several decisions and remedies, one of which (Remedy 6) required fiduciary management firms to report their past performance to prospective customers using a standardized methodology and template. Building on the work already done for the voluntary standard and combined with feedback from volunteers, including all UK fiduciary managers that would be subject to the new standard, the GIPS Standards for Fiduciary Management Providers to UK Pension Schemes (GIPS Standards for FMPs) were created. CFA Institute submitted the GIPS Standards for FMPs to the CMA as a proposal to satisfy the requirements of Remedy 6.
The CMA accepted the GIPS Standards for FMPs as the solution for Remedy 6, immediately requiring fiduciary managers to comply beginning 9 December 2019.
In April 2021, a leading independent UK professional services consultancy published its 2020 fiduciary manager investment performance study. The report states, “Thanks to newly-launched requirements and standardised methodology for fiduciary managers, we are now able to assess performance across total pension fund assets relative to changes in liabilities. That means, for the first time ever, we can build a reliable picture of how fiduciary managers have impacted pension funding positions.”
We are delighted that the industry sees the value of standards created through the combined efforts of industry practitioners, the regulator, and CFA Institute.
Impact on Broker/Dealers in the United States
The Financial Industry Regulation Authority (FINRA) is the government-authorized, not-for-profit organization that oversees US broker/dealers. In July 2020, FINRA issued Regulatory Notice 20-21, which provides guidance on retail communications concerning private placement offerings. The notice states that FINRA will “permit the inclusion of IRR if it is calculated in a manner consistent with the Global Investment Performance Standards (GIPS) adopted by the CFA Institute and includes additional GIPS-required metrics such as paid-in capital, committed capital and distributions paid to investors.”
This notice therefore allows retail communications for a private placement offering to include IRRs for funds that are ongoing (i.e., have not fully liquidated) but only if the IRR is calculated in a manner consistent with the GIPS standards and the advertisement also includes additional metrics required by the GIPS standards.
Instead of specifying a calculation method or performance metrics, FINRA relied on guidance that already existed. The GIPS standards provided FINRA with an off-the-shelf set of industry best practices for calculating and presenting fund returns and metrics for inclusion in private placement offerings.
The GIPS standards requirements dealing with IRR input data and calculations and the corresponding metrics were developed with input from many industry experts throughout the world. Additionally, the GIPS standards continuously evolve and reflect current best practices for performance calculations. These two factors exemplify why regulators such as FINRA choose to incorporate the GIPS standards into their rules rather than create new requirements.
Impact on SEC Registrants
The US Securities and Exchange Commission (SEC), an independent federal government regulatory agency, oversees financial markets in the United States. In December 2020, the SEC issued a new Marketing Rule that governs investment adviser advertisements. The Marketing Rule includes more specific requirements for advertising performance versus the broad concepts included in the original Advertising Rule.
In November 2019, the SEC issued an exposure draft, offering the industry an opportunity to comment on these proposed rules, and CFA Institute provided a detailed comment letter. Although the Commission did not act on all of our comments, they were clearly considered. Our comment letter was cited 69 times, and the GIPS standards were cited 26 times. For example, the final Adopting Release states that an adviser may use the same criteria to construct any composites to meet the GIPS standards in order to satisfy the Marketing Rule’s requirement for presenting performance of related portfolios. The Adopting Release also mentions that costs for complying with the Marketing Rule may be mitigated because information required by the Marketing Rule is similar to the information required to comply with the GIPS standards. An investment adviser that claims compliance with the GIPS standards clearly will have an easier time complying with the Marketing Rule, given that the adviser will already have composites created in line with the SEC’s expectations.
The GIPS standards have been created through the collective effort of hundreds of industry experts over more than three decades, and they continue to evolve as the industry changes. The GIPS standards provide an invaluable resource for investment firms, asset owners, prospective clients, and regulators. We hope to see more regulators look to the GIPS standards as a set of best practices they can rely on, which will continue to help CFA Institute meet our goal of protecting investors.
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