Performance Presentation Standards: Which Rules Apply When?

The U.S. SEC, the Commodity Futures Trading Commission, and AIMR have each established financial reporting requirements for the market participants within their regulatory scope. The performance presentation standards promulgated by these three bodies are compared in this presentation. Particular attention is paid to the issue of which standards are most applicable to hedge funds. Also considered are whether different regulatory target markets justify different performance standards. The financial disclosure standards in the U.S. investment management industry lack uniformity. The U.S. SEC, the Commodity Futures Trading Commission (CFTC), and AIMR have each established performance-reporting requirements for their regulatory constituents. The SEC regulates the reporting requirements for mutual funds and their portfolio managers under the Investment Company Act of 1940. The CFTC regulates the reporting requirements for commodity trading advisors and commodity pool operators under the 1974 Commodity Exchange Act. AIMR regulates the reporting requirements for investment managers claiming compliance with the AIMR Performance Presentation Standards™ (AIMR-PPS™) or with the Global Investment Performance Standards™ (GIPS™).The similarities and differences in performance presentation standards promulgated by these three regulatory bodies are presented and discussed in this article. The six categories of standards are performance history, relative performance, leverage, risk management, fees, and derivatives. The disclosures required in these six categories vary considerably among the three regulatory authorities. For example, the CFTC has no disclosure requirements for derivative use because the firms it regulates use derivatives as primary investment vehicles. The SEC focuses on disclosure of investment strategy rather than a listing of derivative instruments used, and the AIMR-PPS and GIPS standards require disclosure of the use, frequency, and characteristics of derivatives.The article addresses specifically which performance-reporting requirements are most applicable to hedge funds. Hedge funds are difficult to classify because they generally operate outside the regulatory boundaries of the SEC, CFTC, and AIMR. Nonetheless, I conclude that the performance-reporting standards promulgated by the CFTC are the standards most applicable to hedge funds. This conclusion is based on the similarities between hedge fund investment programs and the programs of commodity trading advisors and commodity pool operators.Finally, this article addresses the question of whether different regulatory targets justify different performance-reporting requirements. I argue that reporting requirements should be synchronized to enhance transparency and to reduce informational barriers between different investment markets.