Editor’s Letter – Issue 95

June 2014

Originally published in the June 2014 issue

For the first time the SEC has formally sanctioned a firm solely for misrepresenting compliance with the Global Investment Performance Standards (GIPS). Max E. Zavanelli was reportedly fined $250,000, his firm ZPR Investment Management Inc. another $660,000, and the CCO has been barred. Says CFA Institute’s Global GIPS Director, Jonathan Boersma, who I interviewed, “This is the first time a case has been based almost exclusively on GIPS – in the past the SEC has cited issues related to GIPS but only as part of a broader case with other charges being brought against a firm.”

GIPS have no legal or regulatory status – so the SEC only complains about false claims of compliance, and not about non-compliance per se. The CFA Institute is independent of lawmakers and regulators and the GIPS are voluntary, ethical standards. The SEC brought its case under the general umbrella of misrepresentation. But Boersma points out that the “CFA Institute promotes ethics and integrity for firms, investors and markets, with GIPS an important part of that aim.” That regulators scrutinise GIPS compliance when they examine firms shows some shared objectives.

Boersma is anxious that the fine should not deter firms, including hedge funds, from claiming GIPS compliance. The 2012 changes to the GIPS were designed to address hedge fund-specific issues including master/feeder structures and side pockets. But Boersma stresses that the standards are dynamic, and remains very open-minded that “new or expanded guidance may be developed as issues present themselves.”

Those who are unfamiliar with the GIPS may fear that compliance could be too onerous or expensive, and might involve arcane or esoteric calculations. Boersma insists that “nothing within the GIPS requires more than a basic spreadsheet,” although he admits that some dedicated performance systems may simplify some of the calculations. The real costs are those of people and resources. While third-party verification of compliance is not compulsory, its costs are thought to range from tens to hundreds of thousands, depending on complexity and the number of composites.

The CFA Institute thinks adoption of GIPS is “trending positively” amongst hedge funds, but does not yet have precise data on numbers of firms claiming compliance. That could be about to change, if the CFA Institute’s proposal that firms notify it of compliance allows for the creation of a centralised database. Such a public display of compliance could make it easier for you to see if your closest competitors are GIPS-compliant.

Just as important are your target investors. At least two sovereign wealth funds and a number of pension funds have adopted GIPS as part of their own good governance and reporting standards. Furthermore, compliance is preferred or required by some investment consultants, who are often perceived as the “gatekeepers” of those big, sticky institutional tickets.