Database to verify GIPS compliance

Firms claiming compliance with global investment performance standards must send the CFA Institute a new notification requirement.

The CFA Institute has approved a proposed requirement that firms claiming compliance with the Global Investment Performance Standards (GIPS) must file notification of their compliance, a move that could increase the adoption of the standards among the private equity community, according to industry sources.

GIPS are a voluntary set of standards based on the fair representation and full disclosure of performance results, created by the CFA in 1997. GIPS aims to provide a framework for the calculation and presentation of the investment performance history of an investment management firm.

Historically, GIPS has been more popular among traditional asset managers, but the CFA has been working to increase its usage among alternative asset management firms, launching a PE Working Group during the 2010 revamp of the standards and introducing specific guidelines for fund of fund managers soon after.

Nonetheless, only about one in five private equity or hedge fund managers provide presentation decks compliant with GIPS, according to a 2014 ACA Compliance Group survey.

With the new notification requirement, the list of firms claiming compliance will be posted on the GIPS website. Making this information public for the first time “may motivate firms not currently claiming compliance to do so, resulting in broader adoption,” according to a release from the CFA. 

“For the private equity industry, GIPS can be a tough sell because there are resource constraints, and adopting voluntary ethical standards for evaluating performance might not be at top of a firm’s to-do list,” said GIPS executive director Jonathan Boersma. “But, for example, if a firm sees that four of its top five competitors are all compliant with these standards, they might consider it more seriously.”

The list will also serve as a resource for potential investors during the due diligence process, as they can verify a firm’s compliance with GIPS. This influence from investors may also spur more private equity managers to adopt the standards.

“If I’m an investor and a firm I’m investing with is not on this list, I might go back to the manager and ask ‘Why aren’t you on this list?’” said Jesse Reyes, chairman of the private equity GIPS sub-committee. “From a promotion and awareness perspective, it’s a step in the right direction.”

The reporting requirement also aims to dissuade firms who are currently marketing their products as GIPS-compliant without the necessary third-party verification. The US Securities and Exchange Commission issued its first formal sanction against an adviser for misrepresenting its compliance with GIPS in June, when it barred and fined ZPR Investment Management’s president and owner Max Zavanelli.

The notification requirement is effective January 1. Managers will have until June 30, 2015 to submit the notification form, which will ask for the firm’s name, address, contact information and GIPS verification status, while more extensive data such as firm type, assets under management, asset classes managed and investment vehicles offered will be optional, according to a release from the CFA.