Why Wall Street Wants to Escape the SEC’s Performance Standards

By Christopher B. Tobe, CFA, CAIA

One of the most important conversations I have had in years was my recent interview with Jeffrey Snyder on the Broadcast Retirement Network.  Watch the full interview at  https://www.msn.com/en-us/money/investment/sec-mutual-funds-the-performance-standard-you-can-actually-trust/vi-AA28AAji 

https://broadcastretirementnetwork.com/

https://youtu.be/5Z-6eHZUnLw

We did not discuss stock picking, interest rates, or the latest hot investment strategy. Instead, we discussed something far more fundamental:

Can investors even trust the performance numbers they are being shown?

That question should be at the center of every fiduciary discussion in America.

For decades, the investment industry has quietly relied on one enormous advantage that most investors never think about.

SEC-registered mutual funds operate under real performance standards.

Most alternative investments do not.

As I explained during the interview, performance measurement is not simply calculating a percentage return. Performance depends upon accounting standards, valuation standards, fee disclosure standards, and regulatory enforcement. Those are exactly the areas where private equity, private credit, insurance products, and many state regulated Collective Investment Trusts (CITs) begin to diverge sharply from SEC-regulated mutual funds.

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Mutual Funds Have Something Wall Street Hates

The SEC spent decades building an ecosystem where investment performance is tied to verifiable market values and sound accounting principles.

Mutual funds generally own securities that trade every day.  Stocks trade. Treasuries trade. Corporate bonds trade. Market prices exist.

Independent custodians verify assets.  Auditors verify financial statements.

Returns are calculated under established rules.

The system is not perfect. But investors know the numbers come from actual market prices—not from managers deciding what they think their investments are worth.

That is why SEC mutual funds have become the gold standard for investment performance.

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Private Equity Begins With a Different Assumption

Private equity starts with an entirely different premise.

Most portfolio companies do not trade.

No daily market exists.

Managers determine valuations using internal models.

Consultants and plans blindly accept those valuations.

Auditors verify only whether the methodology was followed—not whether the valuation reflects what an outside buyer would actually pay.

Those internally generated values then become the foundation for:

• reported returns
• IRRs
• manager rankings
• consultant recommendations
• executive bonuses
• performance fees

The entire chain depends on valuations that often cannot be independently observed.

That does not mean every valuation is fraudulent. But it does mean the reported performance is much more dependent on judgment than the performance of publicly traded securities.

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Oxford Is Asking the Same Questions

Oxford Professor Ludovic Phalippou has spent years examining private equity performance reporting.

His recent work argues that many headline returns substantially overstate the economic returns ultimately received by investors. Using different but economically grounded measures, he concludes that some of the industry’s largest firms produced returns roughly half of widely promoted figures.   https://ludovicphalippou.substack.com/p/big-boys-returns

When changing the measurement system can cut reported returns in half, fiduciaries should ask whether they fully understand what those numbers represent.   

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SEC Mutual Funds Prevent Many of These Problems

There is a reason the SEC generally does not permit traditional private equity funds inside ordinary registered mutual funds.

The regulatory framework for registered funds emphasizes liquidity, valuation, disclosure, diversification, and pricing requirements that are difficult for many traditional private-market investments to satisfy.

The practical effect is simple.

Most retirement investors holding mutual funds receive performance based largely on observable market prices.

Once fiduciaries move into private markets, valuations increasingly depend upon manager estimates.

That difference matters.

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Why the Industry Is Moving Toward State CITs

Federal regulation, like the SEC and the OCC regulated CITs tend to have solid rules and staff with some knowledge of the rules.  Private Equity has gone the route of Annuities pick the weakest state regulator of 50.  These then become state banking commissioners instead of state insurance commissioners.    https://commonsense401kproject.com/2026/07/21/annuities-cherry-pick-the-weakest-state-regulator/    But the same principles apply little or no rules and a small unknowledgeable staff who do not know or care what type of assets go into their CITs much less understand performance or valuation issues.

Collective Investment Trusts (CITs) have become the preferred delivery mechanism for investments that would be difficult—or impossible—to package inside a traditional mutual fund.

Less public disclosure. Less standardized reporting. Greater flexibility. Reduced transparency. https://commonsense401kproject.com/2026/05/04/the-cit-black-box-bloomberg-gets-it-right-but-the-real-risk-is-even-bigger/

When combined with private equity, private credit, insurance contracts, and other difficult-to-value assets, the result is a retirement marketplace where participants receive far less information than they would receive in a comparable SEC mutual fund.

In my view, this migration deserves much greater scrutiny because it reduces transparency precisely where independent verification is most difficult.

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Ohio STRS Shows Why Standards Matter

The Ohio STRS controversy demonstrates why performance methodology matters.

As I discussed previously, the system reportedly maintained multiple performance calculations and used the more favorable measure when determining staff incentive compensation.   https://commonsense401kproject.com/2026/07/13/new-academic-paper-ohio-strs-had-two-performance-numbers-and-used-the-better-one-to-pay-bonuses/

State Pensions are not covered by Federal Pension Standards ERISA, so the state essentially makes it up its own rules so very difficult to prove any violations of law.

Performance standards influence real money.

Bonuses.

Manager selection.

Consultant evaluations.

Public confidence.

If performance calculations can materially change outcomes, fiduciaries should understand precisely how those calculations are produced.

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GIPS Is Helpful—but Not Enough

Many plans and consultants point to CFA Institute’s Global Investment Performance Standards (GIPS).

GIPS has unquestionably improved consistency in performance reporting.

But GIPS is fundamentally a reporting framework.

It does not itself verify private valuations or enforce compliance in the way a regulator does.

As I noted in my interview, GIPS works best where underlying assets already have reliable pricing. It becomes much more challenging when applied to illiquid assets whose values depend heavily on assumptions and internal models.    Plans like Ohio STRS have manipulated GIPS https://commonsense401kproject.com/2025/08/25/misleading-claims-of-gips-compliance-at-ohio-strs/

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Performance Fraud Begins With Accounting

Wall Street often talks about alpha.

Diversification.

Illiquidity premiums.

Alternative investments.

Almost nobody talks about accounting.

Yet accounting determines performance.   https://commonsense401kproject.com/2025/08/12/4-sets-of-books-how-trumps-401k-push-opens-the-door-to-accounting-chaos/

Performance determines bonuses.

Bonuses determine incentives.

If valuation assumptions become increasingly subjective, performance itself becomes increasingly difficult to verify.

That is why fiduciaries cannot stop at reported returns.

They must ask:

• Who determined these values?
• Were they independently observable?
• Could another evaluator reasonably reach a different answer?
• How sensitive are returns to valuation assumptions?
• What would these assets sell for today in an actual market?

Those questions matter every bit as much as superficial reported IRRs and other numbers.

Wall Streets answer is to litigation is to block transparency in court.  https://commonsense401kproject.com/2026/01/17/the-supreme-courts-intel-case-is-about-secrecy-fake-benchmarks-and-fiduciary-illusions/

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The Bottom Line

The investment industry increasingly portrays SEC mutual funds as outdated while marketing private equity, private credit, insurance products, and opaque Collective Investment Trusts as the future of retirement investing.

I see it differently. The greatest strength of SEC mutual funds is not simply low cost. It is trust.

Their performance is built on transparent accounting, market pricing, standardized disclosure, and decades of regulatory oversight.

When retirement assets migrate into vehicles where valuations become increasingly subjective, fiduciaries should recognize that they are also leaving behind the strongest performance framework investors have ever had.

Performance is only meaningful if investors can trust how it was measured.

And that may be the biggest investment issue almost nobody is discussing today.

This article expands on themes discussed in my recent interview with Jeffrey Snyder of the Broadcast Retirement Network regarding SEC mutual fund standards, private-market performance measurement, and fiduciary responsibility. The interview emphasized the importance of looking “under the hood” of reported investment returns rather than relying solely on headline performance figures.   Full transcript of interview at https://www.thestreet.com/retirement/sec-mutual-funds-the-performance-standard-you-can-actually-trust

Links to video at

https://www.msn.com/en-us/money/investment/sec-mutual-funds-the-performance-standard-you-can-actually-trust/vi-AA28AAji    https://finance.yahoo.com/video/sec-mutual-funds-performance-standard-093334852.html

Appendix: Why Traditional Private Equity Performance Measures Overstate Skill

A CFA Framework for Understanding the Performance Illusion

One of the recurring defenses offered by the private equity industry is that its performance has been “proven” by decades of academic research using Public Market Equivalent (PME), IRR, TVPI, and similar metrics.

Unfortunately, those measures are far less objective than they appear.

Many of the industry’s favorite performance statistics systematically overstate manager skill because they fail to properly adjust for risk.

The issue is remarkably similar to evaluating a hedge fund using Treasury bills as the benchmark. If the benchmark understates the risk being taken, ordinary leverage begins to masquerade as investment genius.

The Hidden Assumption Inside PME

Most institutional investors have heard of Kaplan-Schoar PME.

It has become one of the industry’s standard methods for comparing private equity against public markets.

What relatively few trustees understand is that the methodology effectively assumes a market beta of approximately 1.0.

Buyout funds, however, generally operate with substantially more leverage than ordinary public companies.

Story demonstrates that once buyout leverage is properly recognized, the effective beta is closer to 1.2–1.4 rather than 1.0.

That seemingly small difference has enormous consequences.

If the benchmark assumes too little risk, then leverage itself is incorrectly recorded as manager skill.

Leverage Is Not Alpha

Imagine two investors.

One buys a diversified public equity portfolio.

The other borrows heavily and buys essentially the same companies.

If both produce higher returns because one employed leverage, few would call that investment genius.

Yet that is effectively what happens in many traditional private equity performance comparisons.

The leverage premium becomes “alpha.”

Once benchmarks are adjusted for comparable leverage and style exposure, most of the apparent excess return disappears.

The Benchmark Matters

Another weakness is benchmark selection.

Many studies compare buyout funds against broad indices such as the S&P 500.

But buyout targets tend to resemble smaller, value-oriented companies.

A more appropriate benchmark is therefore a leveraged small-cap value portfolio rather than a large-cap index.

Once that comparison is made, the excess performance largely vanishes.

This finding is consistent with work by Ludovic Phalippou, Erik Stafford, L’Her and others, who conclude that much of buyout performance can be replicated using inexpensive public securities combined with leverage.

Direct Alpha Tells a Different Story

Traditional presentations often emphasize IRRs and multiples because they look impressive.

Data shows that Direct Alpha—a metric designed to compare private equity against a properly risk-matched benchmark—often produces dramatically different conclusions.

His worked example is revealing:

• Compared with the S&P 500:
  • Direct Alpha = +0.96%
• Compared with a style-matched benchmark:
  • Direct Alpha ≈ 0.10%
• Compared with a properly risk-adjusted leveraged benchmark:
  • Direct Alpha = –0.34%

Nothing about the fund changed.

Only the benchmark changed.

The apparent “alpha” disappeared.

Why This Matters for Public Pension Bonuses

This has enormous implications for public pension systems.

Many pension staffs receive bonuses for outperforming benchmark portfolios.

But if the benchmark fails to recognize the additional leverage and systematic risk embedded in private equity, then employees may be rewarded simply for taking more risk—not for producing genuine investment skill.

That is exactly the concern raised repeatedly in this article.

The accounting methodology itself can manufacture alpha where none actually exists.

ERISA Should Demand Better

For ERISA fiduciaries, the implications are even more significant.

ERISA has never rewarded managers merely for increasing risk.

The prudent fiduciary standard has always required evaluating returns relative to the risks undertaken.

If private equity benchmarks ignore leverage, ignore style effects, or otherwise understate risk, then fiduciaries may be relying on performance measures that systematically exaggerate investment success.

A prudent fiduciary should insist on:

• Risk-adjusted benchmarks.
• Transparent leverage assumptions.
• Comparable public-market alternatives.
• Direct Alpha or equivalent risk-adjusted measures.
• Independent verification rather than marketing presentations.

The Bigger Picture

This article has argued that much of private equity’s reported superiority rests on accounting conventions rather than economic reality.

This technical framework reaches much the same conclusion through an entirely different route.

His work does not argue that every private equity investment underperforms.

Rather, it demonstrates that once leverage, size, value, and systematic risk are properly priced, the industry’s long-claimed “persistent alpha” becomes difficult to find.

That is precisely why pension trustees, ERISA fiduciaries, auditors, and regulators should stop asking whether private equity beat the S&P 500.

They should instead ask the much harder—and much more important—question:

Did it beat a public portfolio carrying the same risks?

If the answer is no, then billions of dollars of performance fees, carried interest, staff bonuses, and public narratives about private equity “outperformance” deserve to be reconsidered.