FINRA IRR & How it Relates to the GIPS Standards

The Financial Industry Regulatory Authority (FINRA) released a regulatory notice allowing asset managers to present internal rates of return (IRR) in marketing materials, under certain circumstances. A key requirement for presenting IRR for an investment with ongoing operations is that the calculation must be consistent with the Global Investment Performance Standards (GIPS®), a set of standards for calculating and presenting performance in a fair and transparent manner.

IRR is a performance measure, typically used to market private placements in real estate, private equity, and venture capital. IRR is calculated as the discount rate that makes the net present value of all cash flows from an investment equal to zero. It shows the return earned by investors over a specific period, and the calculation is based on cash flows to and from investors.

IRR is a type of money-weighted return. The money-weighted return provisions of the GIPS standards should be followed when calculating IRRs. There is a series of input data and calculation requirements, according to the GIPS standards. Among other items these requirements include:

Input Data

  • The investment must be fair valued, and the fair value must include accrued income for fixed income investments
  • Trade date accounting must be used
  • Returns on cash must be included
  • Transaction costs for buying and selling assets must be deducted


  • Must be annualized since-inception IRR
    • If a fund is less than a year old, the since-inception IRR must not be annualized
  • Must reflect external cash flows
  • Must deduct transaction costs for gross returns
  • Must deduct all fees and expenses for net returns

The July 2021 edition of the GIPS Standards Newsletter includes a discussion about references to the GIPS standards when presenting an IRR following the new FINRA guidance. To meet the requirements, firms must present:

  • Since-inception internal rate of return (SI-IRR)
  • Since-inception paid in capital
  • Since-inception distributions
  • Cumulative committed capital
  • Total value to since-inception paid-in capital (investment multiple or TVPI)
  • Since-inception distributions to since-inception paid-in capital (realization multiple or DPI)
  • Since-inception paid-in capital to cumulative committed capital (PIC multiple)
  • Residual value to since-inception paid-in capital (unrealized multiple or RVPI)

Once a firm has calculated the appropriate metrics, the firm and their agents may use specific language about calculating the IRR consistent with the GIPS standards in retail communications concerning private placement offerings that are prepared in accordance with FINRA Regulatory Notice 20-21. The language varies depending on whether a firm does or does not claim compliance with the GIPS standards, and it may only be used in marketing pieces which are prepared in accordance with the FINRA notice, as long as the statements are true and all of the information required by the GIPS standards is included.

CFA Institute issued a memo with background on the FINRA notice and GIPS standards requirements, which can be especially helpful for firms not currently claiming compliance with the GIPS standards. More information regarding the requirements and a checklist and video for the calculations can be found on the GIPS standards website (

If your firm seeks to use FINRA IRR in its marketing, an auditor report is required to certify the calculation. Fairview Performance Services will complete an audit of the calculations in accordance with the GIPS standards and provide a report that can be shared with requesting broker-dealers. Contact us today for more information about our services.

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.

“FINRA” is a registered trademark of the Financial Industry Regulatory Authority, Inc. Fairview Performance Services, LLC is not affiliated with or approved by the Financial Industry Regulatory Authority, Inc.

By | 2022-07-28T11:30:39-04:00 Sep 17th, 2021|Compliance, GIPS®, News|

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