Center for the Study of Ethics in the Professions at IIT

As amended and restated September 13, 1996

1. REQUIREMENTS

To be in compliance with the AIMR Performance Presentation Standards, a firm's presentation of its investment performance must comply with the following requirements on a firmwide basis:

A. Creation and Maintenance of Composites

1. General

a. All actual fee-paying discretionary portfolios must be included in at least one composite defined according to similar strategy or investment objective.

b. Composites must include new portfolios at the start of the next performance measurement period (at least quarterly) after the portfolio comes under management or according to reasonable and consistently applied firm guidelines.

c. Composites must exclude terminated portfolios after the last full performance measurement period the portfolios were under management, but composites must continue to include terminated portfolios for all periods prior to termination.

d. Portfolios must not be switched from one composite to another unless documented changes in client guidelines make switching appropriate.

e. Convertible and other hybrid securities must be treated consistently across and within composites.

f. Asset-only returns must not be mix with asset-plus-cash returns.

2. International

Subsectors or carve-outs of larger international composites may be used to create stand-alone composites only if the subsectors are actually managed as separate entities with their own cash allocations and currency management.

3. Venture and Private Placements

All discretionary pooled funds of funds and separately managed portfolios must be included in composites defined by vintage year (i.e., the year of fund formation and first takedown of capital).

B. Calculation of Returns

1. General

a. Total return, including realized and unrealized gains plus income, must be used when calculating investment performance.

b. Time-weighted rates of return must be used.

c. Accrual accounting must be used for fixed-income and all other securities that accrue income. Accrued income must be included in the market value calculation of the denominator and the numerator.

d. Composites must be asset weighted using beginning-of-period weightings.

e. Returns from cash and cash equivalents held in portfolios must be included in return calculations, and the cash and cash equivalents must be included in the portfolio amount (total assets) on which the return is calculated.

f. Portfolios must be valued at least quarterly, and periodic returns must be geometrically linked.

g. Performance must be calculated after the deduction-of trading expenses (e.g., broker commissions and SEC fees), if any.

h. When portfolios use leverage to purchase securities, return results must be calculated on both an actual basis and a restated, "all cash" basis. For a composite that consists of externally leveraged and unleveraged accounts (for example, securities on margin), the leveraged accounts must be restated to all cash when the return of the composite is computed.

i. All documents must be maintained that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return of all managed accounts that the advisor includes in a composite (current and historical performance results).

2. International

The benchmark for any currency overlay portfolio must be calculated in accordance with the mandate of the portfolio unless the benchmark is actually the currency return on a published benchmark.

3. Taxable Clients

a. Taxes must be recognized in the same period as when the taxable event occurred.

b. Taxes on income and realized capital gains must be subtracted from results regardless of whether taxes, are paid from assets outside the account or from account assets.

c. The maximum federal income tax rates appropriate to the portfolios must be assumed.

d. The return for after-tax composites that hold both taxable and tax-exempt securities must be adjusted to an after-tax basis rather than being "grossed up" to a taxable equivalent.

e. Calculation of after-tax returns for tax-exempt bonds must include amortization and accretion of premiums and discounts.

f. Taxes on income are to be recognized on an accrual basis.

4. Real Estate
a. Real estate must be valued through an independent appraisal at least once every three years unless client agreements state otherwise.

b. Real estate valuations must be reviewed at least quarterly.

c. Component returns for participating or convertible mortgages must be allocated as follows:
-basic cash interest to income return,
-contingent interest (current able) to income return,
-basic accrued interest (defer income return,
-additional contingent interest deferred; payable at maturity, prepayment or sale) to appreciation
-return that is currently payable from operations to income and
-all other sources of income that are deferred or realizable in the to the appreciation component.

5. Venture and Private Placements

a. General partners
-Cumulative internal rate of return (IRR) must be presented since inception of the fund and be net of fees, expenses, and carry to the limited partner.

- IRR must be calculated based on cash-on-cash returns plus residual value.

b. Intermediaries and investment advisors
-For separately managed accounts and commingled fund-of-funds structures, cumulative IRR must be presented since inception of the fund and be net of fees, expenses, and carry to the limited partners but gross of investment advisory fees unless net of fees is required to meet applicable regulatory requirements.

-Calculation of IRR must be based on an aggregation of all the appropriate partnership cash flows into one IRR calculation-as if from one investment.

C. Presentation of Results

1. General

a. A 10-year performance record (or a record for the period since firm inception if inception is less than 10 years) must be presented.

b. Annual returns for all years must be presented. Performance for periods of less than one year must not be annualized.

c. Composite results may not be restated following changes in a firm's organization.

d. Composites must include only assets under management and may not link simulated or model portfolios with actual performance.

e. For composites containing portfolios that use leverage:

-If the use of leverage is discretionary, the performance presented must include the effects of the leverage Performance on a restated, all cash basis (i.e., removing the effect of the leverage from the return) must also be provided.

-If the use of leverage is nondiscretionary (i.e., mandated by the client), performance must be presented on an all-cash basis.


f. Performance results of a past firm or affiliation must not be used to represent the historical record of a new affiliation or a new firm entity.

2. International

If a stand-alone composite is formed using subsectors from multiple composites, its return must be presented with:

-a list of the underlying composites from which the subsector was drawn and

-the percentage of each composite the subsector represents.

3. Real Estate

Returns from income and capital appreciation must be presented in addition to total return.

4. Venture and Private Placements

a. General partners

-Cumulative IRR must be presented since inception of the fund.

-Presentation of return information must be in a vintage-year format.

b. Intermediaries and investment advisors

-For separately managed accounts and commingled fund-of-funds structures, cumulative IRR must be presented since inception.

-The inclusion of all discretionary pooled fund-of-funds and separately managed portfolios in composites must be defined by vintage year.

-For calculating composite returns, the IRR must be based on an aggregation of all the appropriate partnership cash flows into one IRR calculation-as if from one investment.


5. Wrap-Fee Accounts

Wrap-fee performance must be shown net of all fees charged directly or indirectly to the account (unless transaction expenses can be determined and deducted).

D. Disclosures

To be in compliance with the AIMR-PPS standards, a firm's presentation of its investment performance must disclose the following information:

1. General

For all composites, a performance presentation must disclose:

-the availability of a complete list and description of the firm's composites,

-the number of portfolios and amount of assets in a composite and the percentage of the firm's total assets the composite represents,

-the definition of "firm" used to determine the firm's total assets and firmwide compliance,

-whether balanced portfolio segments are included in single-asset composites and an explanation of how cash has been allocated among asset segments,

-whether performance results are calculated gross or net of investment management fees, what the firm's fee schedule is, and for net results, the average weighted management fee,

-the existence of a minimum asset size below which portfolios are excluded from a composite,

-a measure of the dispersion of individual component portfolio returns around the aggregate composite return,

-whether settlement-date valuation is used rather than trade-date valuation,

-the inclusion of any non-fee-paying portfolios in composites and included in the definition of total firm assets,

-the use and extent of leverage, including a description of the use, frequency, and characteristics of any derivatives used,

-a material change in personnel responsible for investment management,

-the effective date of firm compliance, and

-for historical performance records prior to the applicable effective date,

• the performance that is not in compliance with the requirements of the AMIR-PPS standards and

• a description of how noncompliance periods are out of compliance and the effects of noncompliance on returns.

2. International

The performance presentation must disclose:

-whether composites and benchmarks are presented gross or net of withholding taxes on dividends interest, and capital gains; if net, the assumed tax rate for both the composite and the benchmark,

-whether the composite is a subsector of a larger portfolio and, if so, the percentage of the larger portfolio the subsector represents,

-whether representative portfolios are used in the returns of subsectors shown as supplemental information,

-for composites managed against specific benchmarks, the percentage of the composites invested in countries or regions not included in the benchmark, and

-for returns that exclude the effect of currency, whether the returns are presented in local currency and, if so, a statement that the local currency return does not account for interest rate differentials in forward currency exchange rates.

3. Taxable Clients
The performance presentation must disclose:

-for composites of taxable portfolios, the composite assets as a percentage of total assets in taxable portfolios (including nondiscretionary assets) managed according to the same strategy for the same type of client.

-the tax rate assumptions if performance results are presented after taxes, and

-both client average and manager average performance if adjustments are made for nondiscretionary cash withdrawals.

4. Real Estate
The performance presentation must disclose:

-the absence of independent appraisals,

-the source of the valuation and the valuation policy,

-total fee structure and its relation, ship to asset valuation,

-the return formula and accounting policies for such items as capital expenditures, tenant improvements, and leasing commissions,

-the cash distribution and retention policy,

-whether the returns

-are based on audited operating results,

-exclude any investment expense that may be paid by the investors, or

-include interest income from short-term cash investments or other related investments, and

-the cash distribution and retention policies with regard to income earned at the investment level.

5. Venture and Private Placements

a. For general partners, the performance presentation must disclose:

-changes in the general partner since inception of fund,

-type of investment, and

-investment strategy.

b. For intermediaries and investment advisors, the performance presentation must disclose:


the number of portfolios and funds included in the vintage-year composite,

composite assets,

composite assets in each vintage year as a percentage of total firm assets (discretionary and nondiscretionary committed capital), and

composite assets in each vintage year as a percentage of total private equity assets.

6. Wrap-Fee Accounts

a. When a firm presents portfolios included in a wrap-fee composite that do not meet the wrap-fee definition, the firm must disclose for each year presented:

• the dollar amount of assets repre sented and

• the fee deducted.

b.When wrap-fee composite returns are presented before fees (acceptable only in presentations to non-wrap-fee prospective clients), the performance presentation must disclose:

-fees,

-investment style, and

-the information that "pure" gross-of-fees return does not include transaction costs.

II. RECOMMENDATIONS

AIMR strongly encourages firms to comply with the following recommendations in addition to the requirements. For a particular firm to adhere fully to the spirit and intent of the AIMR PPS standards (namely, fair representation and full disclosure in performance presentation), adherence to these recommended Standards could very well be necessary. In situations of doubt, firms should fully disclose any assumptions and apply these recommendations in addition to the requirements as necessary.

A. Creation and Maintenance of Composites

1. General

a. Balanced portfolios should be grouped by allowable range of asset mix.

b. Accounts with significant cash flows (into or out of portfolios) should treat these cash flows as temporary "new" accounts.

2. International

For international composites, separate composites should be created for:

-portfolios that allow currency hedging (versus those that prohibit currency hedging) unless the use of hedging is judged to be immaterial and

-portfolios that are managed against hedged benchmarks (versus those that are managed against unhedged benchmarks).

3. Wrap-Fee Accounts

Wrap-fee portfolios should be grouped in
separate composites from d
composites.

4. Taxable Clients

a. Portfolios should be grouped by tax rate.

b. Portfolios may be grouped by vintage year, or similar proxy, to group portfolios with similar amounts of unrealized capital gains.

B. Calculation of Returns

1. General

a. Equal-weighted composites should be calculated in addition to, but not instead of, asset-weighted composites.

b. Accrual accounting for dividends (as of the ex-dividend date) is recommended.

c. Accrual accounting for fixed-income securities, although required only after the applicable implementation date, is strongly recommended for all performance periods.

d. Accrued interest should be included in market value calculations in both the numerator and denominator for all periods, although the inclusion is required only after the applicable implementation date.

e. Portfolios should be valued on a daily basis or, if not daily, whenever cash flows and market action combine to materially distort performance.

f. Trade-date accounting should be used.

2. International

a. A consistent source of exchange rates should be used.

b. Returns should be calculated net withholding taxes on dividends, est, and capital gains.

c. Whenever the currency overlay manager is notified of changes in the under lying currency exposures as a result a shift in the underlying assets, the currency overlay portfolios should valued (e.g., for attribution purposes

3. Taxable Clients

a. Cash-basis accounting is to be used if required by applicable law.

b. Calculations should be adjusted for nondiscretionary capital gains.

c. Benchmark returns should be calculated using the actual turnover in the benchmark index, if available; otherwise, an approximation is acceptable.

d . If returns are presented before taxes, a total rate of return for the composite should be presented without adjustment for tax-exempt income to a pretax basis.

4. Real Estate

Income earned at the investment level should be included in the computation of income return regardless of the investor's accounting policies for recognizing income from real estate investments.

5. Venture and Private Placement

a. General partners

-National Venture Capital Association valuation guidelines should be used for valuation of venture capital investments,

-valuation should be either cost or discount to comparables in the public market for buyout, mezzanine, distressed, or special situation investments, and

-IRR should be calculated net of fees, expenses, and carry without public stocks discounted and assuming stock distributions were held.

b. Net cumulative IRR (after deduction of advisory fees and any other administrative expenses or carried interest) should be calculated for separately managed accounts, managed accounts, and commingled fund-of-funds structures.

C. Presentation of Results

1. General

a. Composite performance should be presented gross of investment management fees and before taxes (except for international withholding taxes).

b. Equal-weighted composite results should be presented as supplemental information.

c. Supplemental information the firm deems valuable should be presented.

2. International

For presentations of returns excluding currency (e.g., for attribution purposes), local currency returns should be calculated using spot rates and hedged returns should be calculated using forward rates.

3. Taxable Clients

If returns are presented after taxes, client specific tax rates may be used for each portfolio (but composite performance should be based on the same tax rate for all clients in the composite). The following presentations should be made for composites:

-beginning and ending market values,

-contributions and withdrawals,

-beginning and ending unrealized capital gains,

-realized short-term and long-term capital gains,

-taxable income and tax-exempt income,

-the accounting convention used for the treatment of realized capital gains (e.g., highest cost, average cost, lowest cost, FIFO, LIFO), and

-the method or source for computing after-tax benchmark return (if a benchmark is shown).

4. Real Estate


a. Equity ownership investment strategies should be presented separately.

b. When presenting the components of total return, recognition of income at the investment level, rather than at the operating level, is preferred.

5. Wrap-Fee Accounts

Pure gross-of-fees performance should be reported (in addition to the required net-of-fees performance), but gross-of-fees performance should be presented only to prospective wrap-fee clients.

D. Disclosures

Following are the recommended additional disclosures to fully meet the spirit and intent of fair representation and full disclosure in compliance with the AIMR-PPS standards:

1. General

For all composites, a performance presentation should disclose:

a. volatility of the aggregate composite return,

b. benchmarks that parallel the risk or investment style the composite is expected to track,

c. differences in portfolio structure relative to the designated benchmarks,

d. cumulative composite returns for all periods, and

e. portfolio size range for each composite (unless portfolios are five or few( the percentage of total assets managed in the same asset class as represented by the composite.

2. International

a. For composites, performance presentation should disclose:

-the range or the average country weights of a composite that is managed against a specific benchmark and

-inconsistencies among portfolios within a composite in the treatment of exchange rates.

b. For presentations of returns excluding the effect of currency (e.g., for attribution purposes), whether the return the hedged return (using forward rates) or the local return (using spot rates) should be specified. Local turns should be accompanied by statement that the local return is in local currency and does not account for interest rate differentials in forward currency exchange rates.

3. Venture and Private Placements

a. For general partners, the following should be disclosed:

-gross IRR (before fees, expenses, and carry), which should be used at the fund and the portfolio level, as supplemental information,

-the multiple on committed capital net of fees and carry to the limited partners,

-the multiple on invested capital gross of fees and carry,

-the distribution multiple on paid-in capital net of fees to the limited partners, and

-the residual multiple on paid-in capital net of fees and carry to the limited partners.

b. Intermediaries and investment advisors

The number and size should be expressed in terms of committed capital of discretionary and nondiscretionary consulting clients.

E. Verification

The AIMR-PPS standards recommend that firms verify their claims that performance is in compliance with the Standards. If a firm undertakes verification, the verification must be performed by an independent third party. Verification consists of two levels: Level I verification applies to all firm composites; Level II verification applies to specific composites and requires a Level I verification at least on the specific composites being verified at Level 11.

When a verification statement is issued, the verifier must include in the attestation statement whether a Level I or Level II verification was performed. This statement must be made either in the text of the report or in a footnote. Without such a statement from the verifier, the firm cannot claim that its investment performance has been verified.

1. Level I Verification

This level requires:

-independent attestation that the requirements of the AIMR-PPS standards have been met on a firmwide basis,

-that each of the firm's discretionary fee-paying portfolios is included in at least one composite and that the firm's procedures for assigning portfolios to composites are reasonable and have been consistently applied over time, and

-examination of the firm's procedures for calculating total time weighted returns, taking into account lost accounts, making appropriate disclosures, and presenting results.

2. Level II Verification

This level requires that:

-Level I verification has been performed (at least) on the specific composites being verified at Level II,

-performance results of specific composites have been calculated according to the AIMR-PPS standards, and

-composites include only appropriate, actual discretionary fee-paying portfolios and do not exclude any other portfolios meeting the same criteria representing a similar strategy or investment objective.