The accompanying comments, submitted as letters to the editor, and the rebuttal, address the June 12 Commentary Page article by Ronald J. Surz,
"Accountants ruining performance standards."
In it, he is critical of how extensively and how well money managers have complied with the AIMR investment performance presentation standards, developed by Association for Investment Management and Research,
The AIMR Performance Presentation Standards have been widely adopted way beyond the wildest expectations of its founders in 1987. Since then, the standards have been reviewed extensively by members of the industry and have been embraced as guidelines for the presentation of investment performance. A recent industry survey (The Spaulding Group) indicated more than 90% of investment management firms claim compliance with the standards. Some 70% of firms claiming compliance do so for a marketing advantage. Obviously, investors are aware of the benefits the standards provide and are pressuring money managers to comply.
Also, recent industry surveys show a majority of the firms claiming to comply with the standards are going the step beyond compliance and having verification of compliance performed by an independent third party. Compliance must be met on a firmwide basis before seeking verification services. Verifiers are reporting there is a wide variance of actual compliance being met, but that 43% of firms claiming compliance do require adjustments to their performance presentations.
AIMR's Verification Subcommittee was formed to provide clarification and promote consistency in issuing AIMR Level 1 and Level 2 verifications. The Verification Subcommittee includes representation from the plan sponsor and consultant communities, in addition to the Investment Counsel Association of America, the American Institute for Certified Public Accountants, along with a non-North American representative.
The Verification Subcommittee issued a report stressing all requirements and disclosures of the standards must be met for all actual, discretionary, fee-paying portfolios of the firm. Compliance is not a two-step process (it is firmwide or not at all), but verification allows two levels of attesting to the firm's compliance. While verification of claims of compliance is recommended rather than required, it is important to remember that the standards themselves are voluntary. The report sets forth very specific minimum procedures required to be followed when issuing verifications, including that a list of firmwide composites must be provided. This list will ensure no selectivity of portfolios has occurred. Further, any composite specific verification must include a Level 1 verification including procedures regarding the completeness of composites, not just a representation from the firm on its composite construction.
No finite set of guidelines can cover all potential situations or anticipate future developments in industry structure, technology or practices. These are voluntary standards, and meeting the primary objectives of fair representation and full disclosure requires a conscientious, good-faith commitment to the spirit of the standards. Any AIMR member or certified financial analysts making a false claim of compliance to the standards is subject to: (i) a private censure; (ii) public censure; (iii) suspension of AIMR membership and/or CFA designation; (iv) revocation of AIMR membership and/or CFA designation. Also, false claims of compliance are in violation of the anti-fraud provision of the Investment Advisors Act and subject to the Securities and Exchange Commission rules on false, misleading performance advertisement. Controversy over the development of the standards is to be expected in a diverse industry.
The standards are a manifestation of a set of guiding ethical principles and are to be interpreted as minimum standards for presenting investment performance. These standards are designed to satisfy several goals: to improve the service offered to investment management clients, to enhance the professionalism of the industry, and to bolster the notion of self-regulation. They set expectations and provide for an industry yardstick in evaluating fairness and full disclosure of performance results. AIMR recognizes its responsibility to continue to review the standards so they remain current, effectively representing the investment management industry as it evolves. R. Charles Tschampion, CFA, writes as co-chair of the Implementation Committee of the AIMR Performance Presentation Standards, Association for Investment Management and Research, Charlottesville, Va. He works as managing director-investment strategies and asset allocation of General Motors Investment Management Corp., N.Y.