FINRA, the IRR, the Global Investment Performance Standards (GIPS®), and How We Can Help

FINRA Regulatory Notice 20-21

The Financial Industry Regulatory Authority (FINRA) released Regulatory Notice (“RN”) 20-21 on July 1, 2020, which provides guidance on retail communications concerning private placement offerings to help member firms comply with FINRA Rule 2210.

This guidance allows for the inclusion of the internal rates of return (IRR) under certain circumstances if calculated in a manner that is consistent with the requirements of the GIPS standards and includes additional metrics such as since inception paid-in capital, committed capital, and certain multiples that are required under the GIPS standards.

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IRR is a performance measure used to evaluate the potential profitability of an investment. It is the rate at which the net present value (NPV) of cash flows from an investment equals zero.

In simpler terms, IRR is the rate at which an investment’s cash inflows equal its cash outflows. It is often expressed as a percentage and can be used to compare investments with different timeframes, costs, and expected returns.

The GIPS standards

The GIPS standards are a set of guidelines created to help firms calculate and report investment performance to their clients. Compliance with GIPS standards is voluntary but is considered a best practice for firms looking to differentiate themselves and provide transparency to their clients.

GIPS compliance is all-or-nothing as the entire firm is required to meet all of the applicable requirements under the GIPS standards. Pooled funds cannot claim compliance with the GIPS standards. And a firm cannot be partially compliant and make statements or other indication that it complies with only certain parts of the GIPS standards.

However, in this situation, an exception has been made. Firms do not have to comply with the GIPS standards to meet the requirements in the FINRA RN 20-21. And while firms are not required to mention the GIPS standards in in retail communications concerning a private placement offering, they are allowed to use specific language provided by CFA Institute. This language would be used in retail communications concerning private placement offerings prepared in accordance with FINRA RN 20-21.

Depending on whether the firm claims compliance with the GIPS standards or not, there are two options the firm may use in marketing pieces prepared in accordance with FINRA RN 20-21. These two statements are only allowed in these communications, only if true, and only if all of the required information is included. Firms cannot make any claim of GIPS compliance if they are only following this portion of the guidance for IRR and metrics calculation.

Finally, firms need to be able to prove their IRR and metrics calculations are in accordance with the GIPS standards.

How We Can Help?

TSG has the tools, resources, and insights to help firms comply with FINRA RN 20-21 with respect to the IRR and metrics requirements. Please contact us to find out about our consulting and performance certification services.

And if you’re interested in your firm becoming compliant with the GIPS standards, we invite you to reach out to our team for more information.

FINRA, the IRR, the Global Investment Performance Standards (GIPS®), and How We Can Help

Please answer the questions below, and we will provide you with a detailed proposal for performance verification services.   Or, if you need immediate assistance, please call 732-873-5700.

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