Performance Perspectives Blog

Be mindful of the costs before setting new rules

by | Dec 27, 2013

In yesterday’s Wall Street Journal there was an article regarding the impact of the so-called “Volker Rules” on small banks (“Banks Play Small Ball Vs. Volker,” by Andrew B. Johnson and Andrew Ackerman). In it we find the following: “In a legal filing with the U.S. Court of Appeals for the District of Columbia, the trade group said U.S. regulators showed ‘utter disregard’ for the costs the provision would impose on numerous small banks.” [emphasis added]

I was immediately reminded of some of the provisions that have been proposed over the years for those who comply with the Global Investment Performance Standards (GIPS(R)). I mentioned before the response from one individual to the costs that would be realized by firms to provide compliant presentations to existing clients (“well, isn’t that just too bad”).

At the most recent GIPS conference in Boston we learned that consideration was being given to require compliant firms to provide copies of presentations to all mutual fund shareholder prospects. The costs have been estimated by some to exceed $1 million a year for some firms. Having sat in many meetings of groups involved with the Standards, I know that cost is rarely, if ever, a topic of discussion. But it needs to be. What are the benefits of such a requirement versus the costs that would be incurred? As I’ve  noted in the past, this idea about mutual fund shareholders brings up the bigger question: who is the prospect/client for a GIPS compliant firm? In my (and many others’) view, the fund itself is the client/prospect, not the shareholders, as they are being marketed to by the fund itself.

While I would not characterize the attitude of those who oversee the Standards as showing “utter disregard” for the costs, I do hope they will be mindful to the impact of new ideas on the purse strings of those who have chosen to comply. The idea, long a hallmark of the Standards, of a “level playing field,” may be a thing of the past if costs make it no longer feasible for firms to comply.

Taking costs into consideration should be a required step for those who set rules that others are required to follow!

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