In his April 1, page 6 article, "AIMR compliance no seal of approval," Fred Williams states there is "only" a 57% chance a money manager is in compliance with the AIMR performance presentation standards. While Mr. Williams seems to view the glass as one-third empty, we prefer to view the glass as close to two-thirds full. In three short years, a significant majority of money managers have voluntarily accepted standards for performance without the strong arm of regulators forcing compliance. This is a significant accomplishment.
Mr. Williams' article also implies that, although the AIMR's performance presentation standards have resulted in more standardized reporting by money managers, so many firms are making false claims of compliance that the standards are meaningless. AIMR believes the standards have greatly reduced the potential for "game playing" by money managers in reporting performance and any false claims of compliance, whether made out of ignorance or with intent to deceive, do not lessen the standards' value to the investing public.
The AIMR PPS are ethical standards for reporting investment performance that may be adopted voluntarily by money managers. The standards are designed to promote fair representation and full disclosure of a firm's performance to give prospective clients the ability to evaluate investment performance of money managers.
The fundamental requirement of the standards is that firms must include all discretionary, fee-paying accounts into composite portfolios based on similar investment strategies or objectives. The AIMR PPS are designed to prevent managers from "cherry-picking" their best accounts when presenting performance. The AIMR PPS state that all portfolios of the firm must be included in a composite and that composites must be based on similar investment strategy or objectives. A firm must make available a complete list and description of the firm's composites. Managers cannot create composites of their best portfolios with unrelated investment strategies or exclude accounts with poor performance and claim compliance with the standards.
Does the existence of the AIMR PPS guarantee that all managers claiming compliance are properly applying the standards? Of course not. Any standards are subject to manipulation by unscrupulous money managers. Complying with the AIMR PPS requires a conscientious, good-faith commitment to adhere to the spirit of fair representation and full disclosure.
As for those managers that claim compliance but inadvertently are not adhering to the requirements of the standards, AIMR is making every effort to educate both the firms presenting performance and the end user of the presentation on the requirements of the standards:
AIMR prints interpretations of its standards in a variety of publications including the AIMR Newsletter, AIMR's Advocacy Bulletin and AIMR's Internet site. These sources of information are available to all investment managers and their clients.
AIMR responds to an average of over 400 written inquiries a month seeking interpretation of the AIMR PPS.
Over the past year, AIMR has sponsored or participated in over 30 programs to educate money managers, their clients and regulators on the AIMR PPS with over 2,000 individuals attending these sessions.
AIMR recommends that firms have their claims of compliance verified by an independent party. Although verification, like compliance with the standards themselves is voluntary, AIMR has set out very specific minimum procedures for verifiers to follow when issuing verifications. If a firm chooses to verify its performance, the verifier must follow these procedures. If not, the verifier cannot claim to issue an AIMR PPS verification report. The guidelines include the requirement that a list of firmwide composites be provided to ensure that no selectivity of portfolios has occurred.
All those making false claims of compliance or verification for whatever reason are subject to sanction by either AIMR for individual members or the Securities and Exchange Commission for individuals and firms. Specifically, any AIMR member or CFA charterholder making a false claim of compliance is subject to sanctions by AIMR's Professional Conduct Program. Sanctions include suspension of membership and/or the CFA designation. False claims of compliance are also in violation of the anti-fraud provision of the Investment Advisors Act and subject to the SEC's penalties for false and misleading performance advertisement.
Finally, the AIMR PPS are not intended to obviate the need for due diligence on the part of plan sponsors and others in evaluating performance data.
As Mr. Williams correctly points out in his article, there is almost universal agreement that performance reporting is vastly more fair and meaningful than before the promulgation of the AIMR PPS. We should not "throw the baby out with the bath water" but continue to educate users of the AIMR PPS to ensure a full understanding of the mandates of the standards.
Lee N. Price
R. Charles Tschampion
CFAs and co-chairs
AIMR PPS Implementation Committee