CFA Institute pushes for harmonized performance standards

(November 17, 2004) Investment firms should be required to report their performance results based on a single, global standard. That’s the goal of the CFA Institute, which held a conference recently in Vancouver to discuss the convergence of investment performance standards.

The CFA Institute (formerly known as AIMR), began working on standards for U.S. and Canadian firms back in 1987, says Alecia Licata, the institute’s senior director of investment performance standards. Those standards (AIMR-PPS) were formally adopted in 1991.

“They help firms prospecting to new clients prepare and present their performance in a way that’s comparable and meets ethical principles of fair representation and full disclosure,” she said in an interview following the conference.

In the past, some investment firms used misleading practices in reporting performance, such as “cherry picking” a top-performing portfolio to represent overall performance and presenting a performance history that excluded accounts whose poor performance was so weak that the firm was terminated.

In 1999, AIMR approved a global version of the performance standards (GIPS) and since then has been working to bring both sets of standards closer together, with the ultimate goal of one standard.

“When we talk about the notion of one industry standard, the majority of firms are supportive,” says Licata. “It becomes more difficult when you get into some of the detailed discussions on how that happens.”

About 35 different countries are involved in the discussions, but not all have yet adopted the global standards, Licata says. Although most developed countries are on board, emerging markets, such as Egypt, Turkey and India, are just starting to come to the table.

China, the world’s biggest emerging market, has not expressed much interest in the standards to date, Licata concedes. “But people are starting to pay attention and ask questions. Firms in those countries want to be competitive, so there’s a huge benefit to being compliant.”

Although the standards are voluntary, surveys suggest that the majority of investment firms that have adopted AIMR-PPS or GIPS are either compliant, or working towards that goal.

Critics have suggested that voluntary standards may not be enough, given the current spotlight on abuses in the financial services industry. But Licata says the CFA Institute has no interest in becoming a self-regulator. “We take the position that we are not a self-regulatory organization; we are a standards-setter.”

Still, she notes that regulators in the U.S. and Canada have become interested in the institute’s standards, especially when firms claim compliance. “We’ve seen cases where firms have been cited for enforcement action for falsely claiming compliance,” she says. “Regulators are encouraging us to set the standards but they also want to make sure the industry is doing an efficient job of regulating itself.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com