Views on improving the integrity of global capital markets
15 April 2013

GIPS Standards: Not All Verifiers Are Created Equal

At the Global Investment Performance Standards (GIPS®) Annual Conference in Boston in September 2012, Mr. Carlo di Florio, director of the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations, called on CFA Institute to look into GIPS verifier oversight.

The requirements to become a verifier are not overly stringent. It is important to preserve the integrity of the GIPS standards by assuring that verifiers are credible, knowledgeable about the GIPS standards, and possess (at a minimum) the requirements listed below. Substandard work by unqualified verifiers poses a strong reputational risk to the GIPS standards and ultimately could lead to investors relying on false or misleading performance presentations and firms being noncompliant.

According to the GIPS standards’ Guidance Statement on Verification, verification is a process by which a verifier assesses whether the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and that the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards.

Verifiers must meet the following requirements:

  • Verifiers must possess appropriate professional abilities and experience as well as a practical level of expertise regarding investment management practices, including performance calculation procedures and business processes.
  • Verifiers must be knowledgeable about the GIPS standards and understand all the requirements and recommendations of the GIPS standards — including any official updates, guidance statements, interpretations, Q&As, and clarifications published by CFA Institute and the GIPS Executive Committee. These are available on the GIPS standards website as well as in the GIPS Handbook.
  • Verifiers must be able to understand a firm’s policies and procedures for establishing and maintaining compliance with all applicable requirements and adopted recommendations of the GIPS standards.
  • Verifiers must be knowledgeable of applicable laws and regulations regarding the calculation and presentation of performance.
  • Verifiers must be independent of the investment management firm and must maintain fairness and independence at all times when performing procedures to evaluate a firm’s claim of compliance as well as in expressing their opinion in the verification report.

Benefits of Verification

Third-party verification brings additional credibility to the claim of compliance and supports the overall guiding principles of the GIPS standards — fair representation and full disclosure of a firm’s investment performance.

Verification may also provide an opportunity to increase the knowledge of the firm’s performance measurement team and to improve the consistency and quality of the firm’s compliant presentations. Additionally, verification may provide improved internal processes and procedures as well as marketing advantages to the firm.

These benefits are lost when firms rely on subpar verifiers; a firm’s compliance is put at risk when it is based on an unqualified verifier’s guidance and assistance.

More information on the benefits of verification can be found in our new pamphlet on The GIPS Standards and the Benefits of Verification.

Identifying the Issues

Should there be oversight of the verification industry? Do you feel verifier oversight is something that CFA Institute should explore? If so, should CFA Institute look to the financial services industry, regulators, accounting standard setters, and other professional organizations for best practices and organizational structure on how to control the quality of verification services (e.g., create a standard level for verifiers)?

Who is the appropriate body to provide verifier oversight? Should the oversight body be CFA Institute, a newly established organization, existing regulators, GIPS sponsors, another standard setter, industry volunteers, etc.? How could verifier oversight be enforced? Should all actions against an offending verifier be publicly available? Would a peer review type of evaluation, similar to what is done in the accounting industry, be an effective way to ensure the quality of verifiers?

Should there be additional requirements for verifiers? Should we require a code of ethics for verifiers? Should verifiers be required to register with CFA Institute, and should CFA Institute maintain a public listing? Should verifiers be required to possess a professional designation related to the GIPS standards, performance, financial analysis, or auditing (e.g., CIPM, CFA, CPA, CA)? If so, how many verifiers should hold a designation per verification firm or per verification engagement? Should CFA Institute create a voluntary verifier exam that would test whether an individual possesses the required level of knowledge of the GIPS standards?

How could verifier oversight impact verifiers and firms compliant with the GIPS standards? What would be the costs associated with verifier oversight, and who should bear these costs? Would all of these costs be passed on to the firm and, ultimately, to their clients?

CFA Institute invites you to join the discussion on verifier oversight. Please share your comments and feedback on these issues in the comments section of this blog, or e-mail us at [email protected].

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About the Author(s)
Robin Willis

Robin Willis is a program coordinator for the Global Investment Performance Standards.

3 thoughts on “GIPS Standards: Not All Verifiers Are Created Equal”

  1. Richard Chauvin, Jr. says:

    I believe the verifier assigned as a lead on an assignment should have the CIPM certification. I would have assumed this was already the case, but from the article, I can see it is not the case. I believe the CFA Insitute should develop a set of standards for verifiers and offer to post the names of verifers who pledge that they meet them. This is the process that is inplace for firms that meet the Ethics standards. This would be a resource for investment managers and would encourage an upgrade in the quality of the verifers.

  2. Robin Willis says:

    Thank you for your comments.

  3. I agree with Richard, the verifier should have the CIPM certification or CFA designation. There are too many rubber stamped verification reports circulating around that have negative impact on the value of GIPS Compliance and CFA Institute is not taking any actions against Firms that are falsely claiming Compliance with GIPS.

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