Views on improving the integrity of global capital markets
01 September 2011

GIPS Standards – Enhancing Verification Guidance

The GIPS standards were created and sponsored by CFA Institute in collaboration with the global investment community. They are broadly accepted, voluntary global ethical standards for calculating and presenting investment performance. The standards promote fair representation and full disclosure of investment performance.

Investment management firms that claim compliance with the GIPS standards can voluntarily undergo an outside review known as a verification. During the verification process, an independent third-party verifier assesses whether the firm has complied with all of the composite construction requirements of the GIPS standards on a firmwide basis, and whether the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. A verification does not confirm the accuracy of performance results presented in any specific composite presentation. To accomplish that objective, a firm may also choose to have a specifically focused performance examination of a particular composite’s compliant presentation. A performance examination is not required for a firm to be verified.

The GIPS Executive Committee continues to strongly encourage firms to be verified, but does not consider it appropriate to require verification in order to claim compliance with the Standards. Issuance of the 2010 edition of the GIPS Standards  elevated the issue of verification. To that end, firms that claim compliance with the GIPS standards must now indicate in the GIPS compliance statement whether or not they have been verified. As prospective clients and investment consultants evaluate investment managers, it is hoped that this additional disclosure will prompt them to not only question when an investment management firm is not GIPS compliant, but also to ask why the firm has chosen not to undergo verification.

Over the years, some investment management firms and other interested parties have been critical of the quality of some verifiers as well as the consistency of the procedures performed by different verification firms, sometimes even within the same verification firm. While we can’t be there to stop every bad verification, the GIPS Verification/Practitioner Subcommittee  has felt it important that the verification guidance within the Standards meets the needs of the marketplace while not being overly prescriptive. This effort started as part of the recent update to the GIPS standards when significant enhancements were made to the verification section (Chapter IV) of the GIPS standards such that the scope and purpose of verification as well as the required verification procedures were revised in order to increase the understanding and consistency of verification.

Through the assistance of many of our volunteers and feedback received during the public comment process, we have been working to update as necessary all of the authoritative guidance that constitutes the GIPS standards. With respect to verification, this work primarily consists of updating the verification-related guidance statements and Q&As. We need to ensure that our provisions and guidance, including the specific wording used, is consistent across all verification-related materials, easily understood, and not misinterpreted.

An updated guidance statement on verification was released for public comment during the summer of 2010 with the final release in late 2010 to coincide with the effective date of the 2010 edition of the GIPS standards (1 January 2011). A number of significant enhancements and clarifications were made, including clearly delineating those items that must be included in the verifier’s (opinion) report.

Last Call

With work completed on the verification guidance statement, the Verification/Practitioner Subcommittee turned its attention to the guidance statement on performance examinations. An updated version was released for public comment in late May. Although the official comment period ended 31 August, comments will be accepted through 2 September. This updated guidance includes enhancements to guidance on sampling, required performance examination procedures, the representation letter from management, and the performance examination report.

Benefits of Verification

Verification does not certify or guarantee that the firm complies with the GIPS standards. However, verification brings additional credibility to the firm’s claim of compliance and supports the overall guiding principles of fair representation and full disclosure of a firm’s investment performance.

Look for an updated version of the GIPS guidance statement on verifier independence by the end of this year. We expect that the changes proposed will be significant enough that this revised document will go out for public comment, with a final release planned for the first half of 2012. We also hope to release by the end of this year a number of new verification-related Q&As as well as updates to the currently existing Q&As to reflect both the 2010 edition of the Standards and the latest view of technical matters by the Verification/Practitioner Subcommittee.

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For more on the GIPS standards, read a related post: GIPS Compliance and Hedge Funds: Yes, It Is Possible and Necessary.



About the Author(s)
Ken Robinson, CFA, CIPM

Ken Robinson, CFA, CIPM, is a director of investment performance standards at CFA Institute. He helps maintain the GIPS standards by managing the interpretations process and developing guidance for new technical areas.

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