Navigating GIPS® Compliance when Local Laws Conflict

Achieving compliance with the Global Investment Performance Standards (GIPS®) is a powerful way to demonstrate commitment to transparency and best practices in investment performance reporting. But is it always easy? Recently, we’ve heard several institutions, particularly in regions with limited compliance, express concerns that adhering to the standards would be challenging due to conflicting local laws and regulations.

Although local regulations can sometimes differ from the GIPS standards, we have found that direct conflicts with the GIPS standards tend to be rare. The GIPS standards were designed with a global framework in mind, enabling prioritization of stricter local laws and management of potential conflicts transparently.

The GIPS Compliance Framework

To achieve GIPS compliance while adhering to local regulations, firms and asset owners must understand how the GIPS standards prioritizes regulatory alignment. The guidance stresses adherence to the stricter of the two standards:

• If local laws impose stricter rules than the GIPS standards, firms should follow local laws.
• If the GIPS standards are stricter than local regulations, firms must adhere to the GIPS standards.
• In situations where direct conflicts arise between local regulations and the GIPS standards, local law takes precedence.

Again, direct conflicts tend to be rare. Most often we see situations where the GIPS standards may be stricter than the local law or vise versa. We have provided some examples in the sections that follow to help demonstrate how you might handle either situation.

Managing Conflicts Between the GIPS Standards & Local Regulations

Key principle: GIPS compliance can be maintained while respecting local regulations. When differences or conflicts occur, firms can continue to claim GIPS compliance by carefully disclosing deviations required by local regulations. This ensures transparency and maintains the integrity of performance reporting.

The first step for institutions is to identify any inconsistencies between the GIPS standards and their local regulatory requirements. If local laws prevent compliance with certain provisions of the GIPS standards, firms should:

1. Follow the local laws and regulations.
2. Document and disclose any necessary deviations from the GIPS standards in their GIPS reports, including:
   • A clear description of the conflict.
   • Specific details on how compliance was adjusted to adhere to local regulations.

Direct conflicts with the GIPS standards must be disclosed transparently in GIPS reports to ensure stakeholders understand the nature and impact of modifications made to meet local requirements. This commitment to openness preserves the credibility of the firm’s compliance efforts.

Practical Example 1: Stricter SEC Requirements and GIPS Compliance

A relevant example where a local law is more strict includes the SEC’s marketing rule for firms registered in the United States. The SEC requires net-of-fee performance reporting, which is stricter than the GIPS standards allowance for either gross-of-fee or net-of-fee returns. For firms registered with the SEC, this means including net-of-fee returns in GIPS reports. Although additional disclosure in this case may not be required, it illustrates how firms can remain GIPS compliant by adhering to the GIPS standards and also the stricter local rule.

Practical Example 2: Conflicting Local Requirement & Disclosure

The GIPS Handbook (see page 256) provides an example of a conflict where the local law prohibits the presentation of returns for periods less than one year to prospective clients. In this scenario, the GIPS standards requires disclosure of the conflict and an explanation for the manner in which the local laws or regulations conflict with the GIPS standards. The following sample disclosure language is provided:

“Local laws do not allow the presentation of returns of less than one year to prospective clients, which is in conflict with the GIPS standards. Therefore, no performance is presented for this composite for the period from 1 July 2018 (the inception date of the composite) through 31 December 2018.”

Global Applicability of the GIPS Standards

The GIPS standards were developed with the flexibility needed for global adoption, enabling firms worldwide to achieve compliance while respecting local regulatory environments. By following all the requirements of the GIPS standards, identifying conflicts with local laws, and disclosing deviations where necessary, firms can ensure they uphold both local and global standards for performance reporting. This means that even for firms concerned about these conflicts, compliance with the standards is achievable.

Next Steps for Investment Managers

If you would like to be among the group of investment firms or asset owners claiming GIPS compliance and upholding the highest standard for investment performance reporting then please consider the following actions:

1. Conduct a thorough review of local regulations to identify any inconsistencies with the GIPS standards.
2. Document potential conflicts and stricter local requirements.
3. Develop clear disclosures for any necessary deviations to comply with local laws.
4. Ensure that GIPS reports transparently reflect adherence to both local laws and the GIPS standards.
5. Seek expert guidance to navigate complex regulatory intersections.
6. Regularly review and update compliance strategies as regulations evolve.

Achieving GIPS compliance is possible, even when local regulations do not perfectly align. With careful planning, transparent disclosure, and a commitment to upholding the highest standards, it is possible to comply with the GIPS standards no matter where you’re located. Reach out to Longs Peak if you would like help getting started.

GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.