Friday, June 1, 2012

Why I Oppose Mandatory GIPS Compliance

The May 31, 2012 issue of FundFire reported that the majority of participants of a recent poll support making compliance with the Global Investment Performance Standards (GIPS(R)) mandatory.

I object!



I have never been a fan of being told what to do, at least as an adult. Granted, there have been and always will be exceptions. The military, for instance, isn't a democracy; one is expected to carry out legal orders made by their superiors. But for much of the other things we encounter in life, most people like to have the freedom to choose. Yes, of course we do what our bosses and clients tell us, but we aren't often in agreement with what our government tell us to do.

New York City's controversial and outspoken mayor, Michael Bloomberg recently proposed that the city ban soft drinks larger than 16 ounces to protect people who tend to consume large quantities of the non-diet varieties, that may contribute to obesity. Now, I'm no fan of obesity, but I am a fan of free choice. If a person wants to consume a 32 oz. or larger of their favorite sugary substance, it's their choice; we don't need "big brother" to decide for us or to tell us that we can't.

The same with GIPS compliance. The market directs our choices here, by its reception of firms that choose not to comply.

I felt the same way about mandatory verification. I strongly opposed this idea, and with the help and cooperation of folks like Stefan Illmer and Carl Bacon, succeeded in it not becoming a reality.

The Spaulding Group regularly surveys the industry on various performance and risk-related topics; we will conduct our eighth presentation standards survey later this year (prior surveys were conducted in 1993, 1995, 1997, 2000, 2002, 2005, and 2008; the first few dealt with the AIMR-PPS(R)). We probably won't ask if participants want compliance to be mandatory, as the idea is an abhorrent one to us and in the end it doesn't matter, for who would make it mandatory? We believe the market has made compliance (as well as verification) a de facto requirement, at least in the institutional space, but firms still have a choice.

We asked about mandatory verification at one time, because we wanted to take the pulse of the investment performance industry at a time when this was being considered (and we found strong opposition). Since the topic has been dropped, there is no point to bring the subject up again.

Adults can usually decide for themselves. If an investment firm wants to comply, it's their choice, and if they see no value in compliance, that's fine. And for verification, while we strongly support it (as well as compliance itself), it's their money. Oh, and by the way, I want to buy 32 ounce cups of my favorite soda, but it's the diet version, so Mayor Bloomberg, stop taking our freedom away!


  1. Stephen Campisi, CFAJune 1, 2012 at 9:27 AM

    I would wager that the majority of those who favor mandatory GIPS compliance also believe that a verification is the equivalent of an audit, and that the benefit of verification might be the elimination of fraud. Of course, neither of these expectations is correct, so this calls into question the significance of this call for mandatory verification. IF, on the other hand (and this is a BIG if) the verification process were to become equivalent to an audit, then it would be reasonable to expect verifiers to pass a stringent training, examination and experience requirement equivalent to what is required for accounting professionals who perform legitimate audits. I also think it's odd that those who want to mandate verifications are in favor of letting anyone "hang a shingle" and call themselves verifiers. The value of a verification lies in the capability of the verifier. We have all seen the harm done by unqualified verifiers who give passing grades to firms with faulty performance presentations. Making verifications mandatory would just make this problem worse.

  2. Interesting and insightful points, Steve; thanks! MANY folks think of verification as an "audit," but it's technically not. Even an examination isn't. And if we were to be responsible for "detecting fraud," I suspect a lot of verifiers would drop out.


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