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Benefits and Pensions MonitorThere's Safety In Them Thar Gold Standards No doubt, some Canadians may not welcome as vigorous an enforcement regime as our neighbour, but I suspect we’re also a little embarrassed to see another nation’s justice system bringing Canadian fraudsters to justice. We’re left wondering: ‘Where were our police, RCMP, securities regulators, and courts and when will they get the job done?’ Canada will eventually need to adopt a national securities regulator and, out of necessity, model it after the SEC. The newly-constituted organization should have teeth. If this doesn’t happen soon, the existing provincial and territorial securities commissions will need to ‘toughen up’ in their own right. Protect Investors This brings me to the second reason why firms should voluntarily get on board with GIPS, it helps protect investors. Becoming GIPS compliant and verified will provide a margin of safety to the investment management firm in this era of increasingly vigilant securities regulators. Investment management firms that adopt and comply with the GIPS standards are better positioned against the risk of compliance problems and litigation resulting from accusations of presenting false and misleading information to an investor at, or prior to, account opening. Adoption of the GIPS standards is a voluntary choice for investment managers. But firms claiming to be GIPS compliant can reasonably expect that claim to be scrutinized and challenged by regulators and savvy investors. This is where an independent verification can provide real comfort to the prudent investment management firm. Although our regulators will likely never insist the industry embrace GIPS, they are not indifferent to false claims of compliance and, increasingly, neither are savvy investors. Pension fund sponsors are now routinely asking questions about a firm’s GIPS status in RFPs. It has become a regular part of the due diligence process. So how do we weed out the bad actors in the investment management business? The answer is ‘Get everyone to recognize and play by the same set of rules on performance presentation.’ To do this, investors need to ask the following questions about the performance records presented to them:
Gatekeepers and pension plan sponsors, even more than individual investors, need to routinely ask the investment managers they contemplate hiring these same questions because the stakes are higher. Pension plan officers and their agents should always request a GIPS compliant presentation. They should be sure to compare non-compliant presentations (of performance) to the compliant presentations and probe on variances. There is much useful information in a compliant composite record. This is to be expected. A lot of fine minds within the global investment industry have spent many years arguing about, and finalizing, standards for what is required and recommended in a GIPS compliant performance presentation. Investment manager search organizations and their clients also need to embrace the standards. Again, it is in their best interests to do so. Firstly, they need to be looking at compliant performance data presented in accordance with a single global standard as part of their due diligence. Secondly, I think they need to let go of forcing each manager to transcribe their performance on each search firm’s template. Wouldn’t it be easier for everyone if all search firms accepted GIPS compliant performance presentations and managers only had to compile a GIPS compliant performance presentation, have their compliance verified, and then simply hand this presentation to all parties? Of course it would. Regulators in Canada need to clamp down on firms who play fast and loose with the rules through misleading marketing practices like those cited earlier. I think it would help if Canada had a single, no nonsense, national securities regulator similar to the SEC. In the meantime, the OSC and other regulators should try to embrace GIPS as the industry best practice for presenting an investment firm’s performance record. The securities commissions should also aggressively pursue those firms that falsely claim compliance with GIPS standards. In the long run, the investment counsel industry and investors will be better off for it. Substantial Commitment Becoming GIPS compliant is a substantial commitment for any firm. Having your firm’s compliance verified and individual composites subject to performance examination is a significant ethical and business decision. Why should truly GIPS compliant firms abide those who do not commit these resources and adhere to these best practices, yet claim that they do? It’s just as bad as the infamous town water inspectors saying they tested the water when they were really just swilling beer in the backyard at home. You may be wondering who has been left out in these dollops of ‘shoulds.’ The last group is the investment management industry. Ultimately, it is the investment counsel and investment management industry that needs to champion the cause for wider compliance with GIPS standards. Accountants, all over the world, are looking forward to more weekends off and shorter working hours once true international accounting standards are adopted. The time spent compiling U.S. and Canadian GAAP financial statements can then be used more effectively. The same holds true when there is wide compliance with GIPS. This will happen when more and more investors ask and probe on performance data that is presented to them. If investors, pension plan sponsors, and the search firms request GIPS compliant data that has been subject to verification and performance examination, they will receive valuable performance information about their candidate investment manager. If the information is audited, they can place more reliance and trust in what has been presented and make better investment choices. Certainly, it will require time and effort for the industry to meet the challenge, but the payback for adopting a single global standard could be enormous. Soon accountants will only have to prepare international GAAP financial statements and not the three they have been juggling so far. With GIPS, the investment management firm can cut out all the time consumed in compiling and maintaining numerous different presentations and dealing with ad hoc requests. Instead, they can prepare just one statement, one that’s full, fair, and representative of their track record. Canada needs to improve its productivity as a whole. Adoption of GIPS by the various stakeholders could be a step in that direction. It will help reduce risk for both investors and investment managers. It’s the smart, safe way to go.
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J. Michael Lowry is a chartered accountant specializing in GIPS consulting, verification, and performance examination services and managing director of Investors Choice Financial Management Ltd.