GIPS^® Verification Basics

GIPS Verification Basics

Attendees at this fall’s Annual GIPS Standards Conference submitted questions about verification and CFA Institute notification. We’ve answered 5 of those questions below.

Why would a GIPS-compliant firm want to be verified?

More than 1,700 firms currently claim compliance with the GIPS standards. Over 80% of these firms choose to have a verification conducted even though it is not required. Verification adds to the assurance that the standards are fully implemented on a firm-wide basis. Experienced verifiers have worked with hundreds of different types of composites and have tested policy manuals at dozens of firms. They have first-hand knowledge of what works and how to make workflows better. A verifier can provide suggestions on how to enhance the firm’s policies and procedures as well as test that they have been implemented. They also keep firms updated on changes and new interpretations, so the firm isn’t learning that they have been incorrectly claiming GIPS Compliance during a regulatory examination.

Verifier Independence-what is it? What is the requirement?

For a verification opinion to be meaningful, it is important that the verification is conducted in an unbiased manner and that the verifier is not verifying his/her own work. The requirement for a firm to understand the verifier’s policies for maintaining independence from the firm being verified is not new to the GIPS Standards, but was elevated from a should to a must when the requirement was incorporated into the 2020 GIPS Standards from the October 2005 Guidance Statement on Verifier Independence. This requirement can be satisfied by requesting and reviewing your verifier’s independence policy, which should be done annually. The firm’s policies and procedure manual needs to include both the policy and the procedure (Compliance officer will request and review the verifier’s independence policy annually for any conflicts). For a full understanding of what to look for, read CFA Institute’s 7-page 2020 Guidance Statement on Verifier Independence, which includes detailed examples of a lack of verifier independence and common verifier consulting activities that would not necessarily compromise independence.

What is a Performance Examination?

A performance examination is an in-depth review of every statistic and required disclosure presented on the applicable GIPS Report. While many of the firm’s GIPS Reports are subject to sampling and may not be reviewed at all for a given year, a performance examination on a specific GIPS Report ensures that the calculation methodology is tested and is as described in the firm’s GIPS policy manual. If a firm is verified but the composite does not receive a performance examination, they cannot claim that the composite or pooled fund is “audited” or “examined”. A performance examination for a GIPS compliant firm can be added to a firmwide verification, but it cannot be completed in isolation.

The Verification Process – How does a firm become verified?

A verification tests that the firm’s policies and procedures for maintaining GIPS compliance are applied consistently on a firmwide basis. A firm can also elect to have the verifier conduct performance examinations along with the verification.
Technically, firms must be in compliance before they can become verified. In practice, many firms select an independent verifier for pre-verification consulting to provide guidance on the development of a GIPS Policy Manual and the pros and cons of composite construction procedures and calculation methodologies.

Once a firm has documented and implemented its policies for complying, the firm will need to provide the verifier with its GIPS Policy Manual, GIPS reports and other account and composite level data. CFA Institute has established comprehensive requirements that verifiers must test, and most verifiers have extract tools and portals to facilitate the testing process, available here. After analyzing initial data, the verifier will sample supporting documents, such as client contracts, custodial statements, transaction reports and portfolio appraisals, to confirm that the policies are applied correctly. . Depending on the type of assets the firm manages, there may be different items to request, such as pooled fund audit reports.
Once the verifier has confirmed the consistent application of the firm’s policies, they can then issue a verification report. How long it takes to complete a verification will vary based on complexities such as the number of accounts/composites, the types of investments and the time period being verified, the availability of supporting documents and management’s commitment to the verification process.

Reporting to the CFA Institute that our Firm claims compliance with the GIPS standards, is this a new process?

This is not a new process and has been required since January 1, 2015. It is easy to do with the CFA Institute’s form located here. Also, we created a video to walk you through the process.

Cascade Compliance has over 34 years of combined experience and its employees have worked with hundreds of firms. One of the best parts of working with clients is getting to provide our expertise and knowledge of what other firms in the industry do. Whether you are a client of ours or not, we are here to serve you and answer any questions you may have. Please contact us at team.cascade@cascadecompliance.com