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CFA Drafts Global Guidelines for SMAs

The CFA Centre for Financial Market Integrity of Charlottesville, Va., has issued new guidelines for Global Investment Performance Standards (GIPS), a universal and completely voluntary set of standards intended for separately managed account managers to calculate and present investment performance fairly. The new guidelines, effective Jan. 1, should also give prospective clients full disclosure of a firm's historical performance.

The GIPS wrap fee/SMA provisions and guidelines delineate how separately managed accounts are to be included in a firm's performance calculations and presentations. CFA Institute Board approved these measures to help investors understand the impact of wrap fees on performance, evaluate costs and compare global investment options.

"Fair representation and full disclosure are essential in helping investors evaluate investment alternatives," said Jeff Diermeier, CFA president and CIO.

Seeing Clearly Now

"The enhancements the CFA Institute Board approved for the GIPS standards will enable prospective investors worldwide to see more clearly the impact of fees charged by separately managed accounts on total returns and, second, to more easily compare investment products before making portfolio decisions," Diermeier added.

The standards were created to replace the predecessor standards from AIMR, the AIMR Performance Presentation Standards (AIMR-PPS). Most firms in the U.S. and Canada are currently under the AIMR-PPS standard that was first introduced in 1995. Firms currently under AIMR-PPS should have only a few changes as a result of the transition.

"It may take time and resources for firms that have until now only considered GIPS compliance to gather the appropriate information necessary to satisfy the standards' requirements," said Alecia Licata, director of investment performance standards at the CFA Centre.

Reminiscent of the 90s

"However, this process is not dissimilar to the industry transformation of the early 1990s when the AIMR-PPS standards were introduced. And, the CFA Centre stands ready to help firms through this transition," Licata said.

The new guidelines were created as a result of the need for a global standard to calculate and present results of potential investment products, and to better inform clients on the best possible investment decisions.

As per Licata, the wrap fee/SMA Performance Presentation and Reporting requirements are as follows:

First, when presentations include periods prior to the composite containing an actual wrap fee/SMA portfolio, the firm must disclose, for each period presented, that the composite does not contain actual wrap fee/SMA portfolios.

Second, the firm is expected to include the performance records of actual wrap fee SMA portfolios in appropriate composites in accordance with the firm's established portfolio inclusion policies.

Third, once composites are established, they must be used in the firm's presentation to prospective clients.

Fourth, the firm is expected to present the performance of all appropriate, actual wrap fee/SMA portfolios managed with similar investment approaches.

Fifth, performance must be shown net of fees, because this enables clients to see more clearly the impact of wrap fees on total returns.

Sixth, when presenting an existing wrap fee/SMA sponsor, the firm must give the name of the sponsor-specific composite.

Seventh, if the sponsor-specific composite presentation is meant for generating wrap-free business and does not include performance net of the entire wrap fee, the presentation must disclose the named sponsor-specific presentation is only for the use of the named wrap fee/SMA sponsor.

The client return is not required by GIPS, but may be presented as additional information that may be helpful in persuading a potential client.

Officials at Money Management Institute, the Washington trade association for the SMA industry, have been arguing that the plan put forth by the CFA Institute is too restraining for investment managers and gives them little time to assemble their resources (see MME 7/25/05).

The CFA Centre sees the picture quite differently.

"After two public comment periods and many rounds of discussions," Licata said, "we believe that we have fairly addressed the complexities raised about applying the GIPS standards to these products without compromising the need for transparency that is in the investor's best interests.

She then added that the Centre received input from the Money Management Institute, the Investment Advisor Association of Washington, as well as from more than 75 investment management firms.

At present, the CFA Institute is working to convert the AIMR-PPS to the GIPS standards, so that performance reports that contain data for the periods after January 2006 will include the GIPS compliance statement, rather than the AIMR-PPS statement.

Asset manager firms, regulators, pension funds, plan sponsors, investment counselors and compliance officers from all over the globe will be affected by the GIPS standards.

Investment management firms and investing clients are the two main groups that benefit from GIPS. By choosing to act in accordance with GIPS, investment manager firms can assure clients and prospective clients that they have presented a historical track record that is complete, consistent and honest. As a result, potential clients can rest assured that the performance presentations given by any firm in compliance with GIPS are truthful.

The bottom line is that it will afford separately managed account investors an easier method of evaluation in order to finally chose the firm they feel has the best practice records.

Since compliance with the GIPS is voluntary, refusing to comply does not violate any laws or regulations. If a firm, however, makes a false claim of compliance, this does violate law and can lead to legal action.

As of today, more than 25 countries adhere to the GIPS standards, and these countries are on the move to convert their local version of GIPS to one strong, global standard.

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