Monday, September 23, 2013

Scary stuff ... and it isn't even Halloween yet!

The opening session at this year's GIPS(R) (Global Investment Performance Standards) came along with some unexpected scary stuff.

The topic was pooled funds, and the speakers (Annie Lo and Ann Putallaz) provided us with some insights into a guidance statement (GS) that is being drafted. The GS, while not yet finalized, will purportedly require compliant managers of pooled funds (including mutual funds) to provide all prospective shareholders with the composite presentation that the fund is in. In fact, it was suggested that since nowhere in the Standards do we find an exemption for shareholders, why would one not already be doing just this? That is, it is a belief of some that this is, in reality, a requirement today!

This, in and of itself, is scary enough. I will have a lot to say about it in this month's newsletter (unexpected fodder, I can assure you). To put this into some perspective, several folks came up to me afterwards, asking what I thought of it: no one seems eager to see this idea come to fruition. Some suggested that it would cost a great deal, and result in much added work and confusion, with no discernible benefit.

For me, the scariest moment was the response to one of the questions I submitted: if it is true that compliant firms are required to make these materials available, does it therefore also mean that they are out of compliance? The response: "technically, yes."

Imagine what this message means. If you are at the conference and manage mutual funds, and know that your firm does not make any effort to provide compliant materials to prospective shareholders, you are "technically" out of compliance. Do you (a) immediately contact your compliance officer to warn him/her, (b) return and assemble the key folks to tell them of this, (c) insist that the firm stop claiming compliance, or (d) ignore this for now? If you do anything but stop claiming compliance, are you putting your firm in the awkward position of committing fraud? That is, are you knowingly allowing your firm to continue to tell folks you're compliant, all the time knowing that you are "technically" out of compliance? This is serious stuff.

But calmer heads prevailed ... at least, for now.

Jonathan Boersma, who moderated this panel, suggested that if the firm considers the prospect to be the fund, and provides its board with compliant materials, then they are in compliance.

Hear, hear! Bravo! Yes; I agree!

And of course, this therefore requires us to ponder why is anyone suggesting otherwise? In the IPC (Investment Performance Council; the predecessor group to the GIPS Executive Committee) days, I recall brief discussions on this topic; that is, who is the client? We seemed to be in agreement, though failed to write it down, that for pooled accounts, the broad account was the client. Why would we ever think that the shareholders are, for GIPS purposes? Why would we think it necessary or prudent or worthwhile to provide prospective shareholders with presentations?

Again, I will have more to say on this in our newsletters.


  1. Our lega/compliance departments have directed us to NOT provide composite returns to prospective mutual fund investors because composite returns are considered "related performance" (I believe that is the term) which is not acceptable according to the SEC. So we have a complex system of classifying prospects as either fund or "strategy" prospects, and provide them return information accordingly. In my own view composite performance is a more accurate depiction of our track record for that mandate but this is what we've decided to do as a firm.

  2. Miles, excellent point. Of course, a response might be that you are not obligated to do something that would conflict with local laws, thus exempting you but not others; but this is still great. PLEASE comment when the draft is introduced.


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