Like any heavily regulated industry, financial services has many sets of third-party compliance standards and guidelines to follow. While compliance with some of these industry standards is voluntary and serves as more of a best practices framework, most responsible firms do make an effort to stay in accordance with them, as doing so helps when keeping in compliance with applicable mandatory regulations. Voluntary compliance also tends to illustrate a company’s commitment to operating at high levels of competence, safety and professionalism to all stakeholders.

Industry Standards

In investment management, one set of industry standards, the Global Investment Performance Standards, or GIPS^®, is set for a revision in 2020. GIPS^® is the latest evolution in investment management industry-driven standards, which began in 1987 when the Association of Investment Management (AIMR) unveiled a voluntary set of North American guidelines for investment performance reporting. Later, the standards were elevated to a global level when the CFA Institute created GIPS^® in 1999. Following the financial crisis, an updated version of GIPS^® was introduced in 2010.

GIPS^® 2020

Now, eight years later, GIPS^® is due for another refresh. The GIPS^® 2020 initiative is aimed at modernizing the standards to both keep up with market developments and cast as wide a net as possible, making them relevant for all types of managers and investors. According to Deloitte, these new standards are intended to address gaps in current GIPS^® compliance. The firm noted that while investment management firms in North America, Europe, Africa, and Asia have largely adopted the GIPS^® standards, including 85 of the top 100 asset managers in the world, uptake has been less robust among alternative investment and pooled fund operations. How the new standards address these market segments’ interests will be important to fulfilling the GIPS^® mission of providing relevant and applicable standards for “all asset managers, regardless of structure, client type, asset class or investment strategy,” Deloitte added.

The old standards simply weren’t broad enough to encompass the various ways alternative investment managers handle subjects like money-weighted rates of return and valuation of illiquid positions, so a broadening of the standards will ensure they can apply to all asset management firms, regardless of the asset classes in which they invest or the manner in which they distribute capital.

Revision considerations

This is hardly the only issue spurring the 2020 revision to GIPS^®. Another is to account for the fact that the correct, full and fair presentation of returns may be different for different types of investment vehicles and even for different types of clients. For example, should a pooled fund use a strategy composite for a presentation to a client? Generally, no – there are already regulatory requirements governing what is “full and fair”, and GIPS^® adds little value by forcing a manager to present something else to those clients.

Firms are also currently now required to include certain numerical information and disclosures in compliant presentations. The CFA Institute is considering whether items that are not particularly helpful or informative can be eliminated, as well as whether to require the inclusion of other items, such as attribution information or asset allocation.

Ultimately, the standards provide a set of globally recognizable protocols for investment management firms to follow. As such, it is imperative to keep abreast of the proposed changes and what the new standards may look like.

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