Yesterday’s WSJ carried an interesting op-ed piece (“SEC Smackdown”) regarding the U.S. Securities & Exchange Commission’s attempt to alter the way committees are voted on, an idea that was called “unutterably mindless” by the D.C. (District of Columbia) Circuit Court of Appeals. The panel sided unanimously with plaintiffs (who challenged the new rules) because “the SEC didn’t ‘determine the likely economic consequences’ of the rule and its effect on ‘efficiency, competition and capital formation.’” The SEC is required to do this by law, and the piece mentioned that this was the “fourth time in recent years that the court rejected SEC rules on similar grounds.” And so, what does this have to do with the Global Investment Performance Standards (GIPS(R)) and the Executive Committee (EC)?, you might ask.
Consider the current proposed changes to the Performance Examination Guidance Statement, which is open for comments until August 31. Included are suggestions that verifiers should not rely upon external records (e.g., custodial statements) provided by their client, but rather go directly to “independent external parties” for these records. We discussed this in a prior post, our July newsletter, and yesterday’s monthly webinar. I am opposed to these suggested changes because of the added cost and complexity they would bring.
Leading up to the release of GIPS 2010, I chaired a meeting where we discussed some of the changes. During the session I voiced strong opposition to the then proposed (since adopted) recommendation that compliant firms provide their existing clients with copies of the composite presentation(s) they’re in on an annual basis. My objections were based on the anticipated excessive complexity and added cost that would result, since roughly half of a firm’s clients have returns below the composite’s average, who therefore might be inclined to require their manager to explain why. One individual who attended, who isn’t affiliated with any asset manager, responded “well, isn’t that just too bad.” I’ll admit that such a response was far from expected and wasn’t well received by many of the others in the room.
I believe that just as with the SEC, the GIPS Executive Committee should determine the likely economic consequences of changes to the standards, as well as their effect on the efficiency of compliance. In my years of involvement with the standards I am unaware of anyone voicing these concerns (as I’ve shown above) as loudly as I have, and perhaps my concerns are thought of by others as being a nuisance, or perhaps “just too bad,” but the standards were never intended to be overly burdensome on a compliant firm’s budget.
Perhaps the GIPS EC could learn from the recent Court of Appeals ruling and consider taking these points into consideration with future changes. Perhaps make them a formal part of their own rules for introducing change. It would be nice to see some sensitivity in this regard.
By all means, if you feel differently (or, perhaps agree), please chime in; thanks!