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GIPS 2010: Major Changes to Global Standards Concern Investors

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GIPS® (Global Investment Performance Standards) are about to undergo their second major revision since they were introduced in 1999. Because the standards are widely accepted, it’s critical for investment professionals to familiarize themselves with the changes that are in the works.


GIPS are ethical principles that define how investment firms should present their historical performances to prospective clients. FAF (Financial Analysts Federation) first introduced the idea of standardizing performance presentations in the mid-1980s. In 1990, FAF merged with the Institute of Chartered Financial Analysts, creating AIMR (Association for Investment Management and Research), now called CFA Institute. AIMR assumed responsibility for the standards, which were renamed the AIMR-PPS® (AIMR Performance Presentation Standards). They went into effect in 1993 and soon gained tremendous support in both the manager and client communities. Almost immediately after the introduction of AIMR-PPS, other groups throughout the world decided to develop their own standards.

AIMR wanted to avoid a situation like that of the electric socket, in which many countries and regions have their own configurations, necessitating nonlocals’ use of converters. So in the mid-1990s AIMR embarked on a global initiative to develop a universal set of standards. GIPS were the result. Because many countries such as the US had already developed standards, AIMR initially permitted the creation of CVGs (country versions of GIPS), requiring the adoption of GIPS but allowing countries to incorporate additional requirements beyond GIPS. The AIMR-PPS became a CVG in 2001.

At that time, the IPC (Investment Performance Council) was directly responsible for GIPS. In the early 2000s, it began work on a major revision. “Gold GIPS” introduced many changes, including requirements for asset classes such as private equity and real estate. The IPC also converged the various CVGs into a single standard. The revised standards were published in 2005 and went into effect in 2006.

Responsibility for the standards has since passed to the GIPS EC (Executive Committee), which for the past several years has been developing a second set of revisions. The proposed changes, published this past January, are extensive and significant. “GIPS 2010” is scheduled to be published next year and to take effect in January 2011.


Under the revised standard, compliant firms are likely to have the option to undergo a “verification” by an independent, outside party. For several years the issue of whether to mandate verification has been the subject of contentious discussion. A compromise has now been reached, requiring compliant firms to state whether or not they have been verified. This statement will be appended to the standard claim of compliance, which reads: [Firm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards.

The appended statement of verification status can read in one of three ways. A firm that hasn’t been verified will state: [Firm] has not been independently verified. If a firm has been verified and its verification is “current,” it states: [Firm] has been independently verified for the periods [insert dates]. A copy of the verification report(s) is/are available upon request. Some firms, whose verification is deemed “stale” (this seems to mean that the verification occurred more than two years prior to the current claim of compliance), will state: [Firm] has been independently verified for the periods [insert dates]. The firm is not currently verified.


The definition of a prospective client has been expanded to cover those of a firm’s current clients who may be interested in expanding their relationship with the firm to include products beyond the offerings of which those clients already take advantage. That redefinition is reflected in the internal glossary, and is also emphasized throughout the standards themselves, as the firm’s “existing clients” are identified as parties to whom information is to be given. Prospects will now include any person or entity that qualifies to invest in a composite strategy and has expressed interest in one of the firm’s strategies.


The EC has proposed that firms distribute the appropriate GIPS presentations to their existing clients on an annual basis. That’s only a recommendation, but there are several arguments against it.

First of all, while recommendations are meant to be “best practices,” this reporting practice is not widely employed today. It saddles compliant firms with additional printing costs and administrative burdens. And the fact that the returns on compliant presentations are averages makes it very likely that roughly half the clients of a given firm will be above the average, while the other half will be under. Those falling in the latter half will almost certainly clamor to know why they’re below the line. In many cases, answering them will necessitate a great deal of research, entailing additional manpower and raising costs.

Of course, the argument in favor of such a recommendation is that a firm should be willing to keep its clients apprised of how well it is managing their accounts. Although firms already willingly respond to client requests for such information, the EC’s recommendation urges them to take on that role proactively. But—given that firms already typically provide clients with individual and benchmark returns—the push for additional levels of reporting that will make compliance more costly and challenging is unreasonable.


The proposed changes include the requirement that firms comply with all applicable laws and regulations regarding the calculation and reporting of returns. On the face of it, that’s wholly laudable. But how is it to be interpreted? What if a firm undergoes a Securities and Exchange Commission examination and discrepancies are discovered: does this invalidate the firm’s claim of compliance?


The current wording of the standards can be a bit confusing. We read, for example, that at least five years of performance must be shown, or a record for the period since the firm’s or composite’s inception.

But we also read that presentations are to have “annual returns for all periods.” What is a firm to do if either the composite or the firm was established midyear? Does it show the return for the partial period (i.e., since inception)? Or wait until it can have a full annual period?

The revision addresses this problem, making clear that firms are to report for the partial (“stub”) periods. Like the other provisions, this change is not retroactive; it would go into effect in January 2011.


The updated standards have embraced the term “fair value” over “market value,” and the EC has incorporated a good amount of detail to clarify its position on this subject.

For most investments, GIPS will consider a valid closing price fair value. If investments valued using subjective, unobservable inputs are material to the composite as of each annual period end, then firms must disclose this. They should also disclose the key assumptions used to value investments. Fair values should be obtained from a qualified independent external third party.


The current version of GIPS only requires including accounts that are actual (i.e., real accounts, not models), fee paying (i.e., pay an advisory fee), and discretionary (from both a broad legal perspective and a specifically GIPS-oriented perspective).

Under current GIPS, firms may also opt to include non-fee-paying accounts. That creates a risk that firms might cherry-pick which non-fee-paying accounts they include. The revised standards would require that all non-fee-paying accounts be included in composites.

However, the new standards would also require the inclusion of proprietary assets in composites. This means firms that want to test “seeded” strategies would have to provide fully compliant presentations with detailed descriptions of those strategies. That’s not just a minor administrative hassle—it means that firms must include the details even of abandoned tests on their lists and descriptions of composites, and must be prepared to provide detailed presentations on those tests for five years following termination. Firms should not have to divulge that kind of proprietary information, which could easily end up in the hands of their competitors.


Many firms are occasionally approached by individuals interested in their services but unprepared or unable to meet the firms’ minimums. Firms often accept these smaller clients on an exception basis, sometimes as a favor to existing clients or associates.

The current standards state that “firms should not market a composite to a prospective client who has assets less than the composite’s minimum asset level.” The proposed standards aim to convert this recommendation into a requirement. That sounds commendable: a firm should not market to prospects below its minimum.

The EC wants to go beyond marketing, though. The proposed change states that a compliant firm must not even show a composite with a minimum to a prospective client who has less money than the minimum. Showing and marketing aren’t the same thing. Someone prompted by a referral to walk into an office and inquire about services is not being marketed to. If firms can’t show these prospective clients a presentation, what can they provide? Model results? Representative accounts? If firms break the rules and give those prospects a presentation, what will happen to their status vis-à-vis the standards?

The standards’ very raison d’être is the provision of meaningful information to prospects. The EC could reasonably opt to include a statement such as: “Individuals with assets below the firm’s minimum may not be able to achieve these results because of the manager’s inability to fully implement their strategies.” But to prohibit the distribution of a presentation is inappropriate.


The 2005 edition of GIPS requires that a firm provide a description of the composite with its presentation. GIPS 2010 expands this, directing that the description cover all the key characteristics of the composite strategy, including risks. The specifics of implementing this new policy are hazy; so is the response a firm should take toward an irate customer who complains that the composite description was not sufficiently clear.

In addition, there’s a new requirement for the inclusion of a three-year annualized standard deviation. As with any discussion of risk, this one is controversial. The financial community cannot even define risk—is it potential loss, failure to meet a client’s objective, volatility, uncertainty, or something else? According to the Spaulding Group’s 2008 Performance Measurement Professional Survey, standard deviation, a measure of volatility, is the most common measurement of risk: it’s easy to calculate and people understand what it means. Still, many deem it insufficient. In the absence of a risk measure that is universally accepted, however, the EC may have done well to settle on standard deviation.


Firms are expected to have policies on error correction. And a firm that discovers a material error in a GIPS presentation is expected to correct the error and provide revised copies to clients and prospects.

Last June, the EC adopted revisions to the previous draft version of the Error and Correction Guidance Statement, adding a requirement, effective January 2010, that firms identify any material errors on their GIPS presentations for a period of at least one year. However, the guidance statement the EC issued to this effect should never have included such a requirement: guidance statements provide guidance on standards; they don’t introduce standards. What’s more, this requirement was added to the draft document that had been previously disseminated for public comment, and those affected by this change were unable to offer their opinions. Nevertheless, the proposed GIPS 2010 include the updated error correction provision.


The revised GIPS entail numerous additional proposed changes, such as the requirement for closed-end real estate funds to report both internal rates of return and the many statistics that are already required of private equity firms. They also call for expansion of the verification section, and introduce several new terms in the glossary.

Professionals who work with these standards must become conversant with the proposed changes. All references in this article to the current standards are based on the document “Global Investment Performance Standards (GIPS®),” which CFA Institute published in 2005. As for the proposal draft, the GIPS website offers two versions. One highlights some major changes; the other provides a detailed “redlined” version. In addition, the Spaulding Group has created a table summarizing these details, available as an Excel download.

–David Spaulding, CIPM, is an internationally recognized authority on investment performance measurement and president of the Spaulding Group, Inc. Based in Somerset, New Jersey, the Spaulding Group is a provider of investment performance products and services, including the Journal of Performance Measurement. Spaulding is the author, contributing author, and coeditor of several books on performance measurement.

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