The Global Investment Performance Standards now requires firms that claim compliance to register on an annual basis.
The registration requirement raises interesting questions for investment managers and asset owners. This was the first year the rule went into effect, and 1,572 firms participated. Their names appear on the GIPS website unless they specifically asked not to be listed; some 18% asked to be excluded from the public list.
Firms that fail to register will be considered non-compliant. This might seem a bit surprising, since GIPS compliance has meant the firm created composites for its various strategies, properly assigned accounts to these composites, derived returns in a prescribed manner, had written policies and procedures in place to support compliance, and prepared presentations that contain returns, other statistics and certain disclosures for each composite. What does registering with the CFA Institute have to do with compliance?
Because the CFA Institute owns the GIPS registration, it can establish these rules. Compliance with the standards means firms agree to abide by all rules — those embodied within the standards as well as those documented in other ways, such as in guidance statements and Q&As. Any entity claiming GIPS compliance must comply with this requirement to register annually.
How does the industry benefit from registration? It should provide us with greater insight into the extent of compliance. It also provides a publicly accessible database of compliant firms (less those who chose not to be listed).
How likely is a pension fund or endowment looking for a manager to turn to this list for firms to consider? We don't think it's very likely given that only names appear, so asset owners will likely continue to use the resources they previously employed.
Why would firms opt not to have their name included? I'm forced to speculate a bit here. One concern might be that they will be bombarded by verifiers who want their business, another is that they might be subject to greater scrutiny by the Securities and Exchange Commission. Because registration is probably not seen as being beneficial to these firms, perhaps it's simply to maintain a degree of confidentiality about their business. Not all firms that choose to comply advertise their compliance.
Our firm, like anyone who's interested, has access to the list and we may use it for our own marketing purposes. The information on the website is quite limited, and only provides links to the firms' websites. More information is provided to the CFA Institute, but access to that is limited.
Some firms appear to be concerned with the security of the information they share. The registration form has quite a number of questions, although not all need to be answered. Nevertheless, there seems to be some concern about what might happen with the information that's provided. With the frequent disclosures of database hacking, even at the highest levels of government, is such concern warranted, at least to some extent?
Previously, I could gauge the extent of compliance by industry surveys that were conducted by various institutions. Our firm, for example, has regularly inquired into compliance with GIPS as well as the old AIMR-performance presentation standards on a fairly regular basis since 1993. These surveys are, of course, optional. Annual registration, on the other hand, is mandatory and provides the CFA Institute with an official count of firms, by region and country, that comply, which no doubt will prove beneficial to them. And, depending on what they share, it might prove to be insightful for others in the industry.
Pension funds and other asset owners should, we believe, require compliance. The standards are global in more than just its name, with close to 40 countries on record endorsing them. They're a set of ethical principles that ensure full disclosure of the most relevant information for purchasers of asset management services. They help provide a level playing field for those who offer such services, and afford asset owners with a relatively easy vehicle to compare competing firms, since the requirements are the same for all. These standards also have helped many asset managers develop better controls for their data and returns, improve the accuracy and relevance of their performance, and position their firms as ones that wish to comply with industry best practice.
I suspect many in the industry who learned that fewer than 1,600 managers registered might wonder why the number is so low. Is it because managers chose not to register at all? One country sponsor objected strenuously to this new rule, as it felt the rule was unnecessary and unwarranted, and threatened to direct the firms within its borders not to comply. While I believe that country has since backed away from this position, it appears not everyone was happy with this new rule.
In reality, registration is not overly invasive, not very time consuming and provides the registrant the opportunity to not be publicly listed. And while additional information is requested, most of it is optional. Consequently, it's not a burden on compliant firms.
The CFA Institute now has a great deal of information available to it. As for benefits to the industry at large, we will have to wait to see what they might be. n
David D. Spaulding is founder and CEO, Spaulding Group Inc., Somerset, N.J.