Tag Archive for: GIPS Compliance

Verifier Independence

Verifier Independence drew dozens of attendee inquiries and comments at the 25th Annual GIPS Standards conference this year.  The growth of virtual service offerings during the pandemic, more automation, and M&A activity in the compliance and verification provider space all require a fresh look at verifier independence.

Overview

The 2020 GIPS Standards, for both Firms and Asset Owners, added to the Fundamental requirements that recipients of a verification must gain an understanding of the verifier’s policies for maintaining independence and consider the verifier’s assessments of independence. What does this mean?

Verifiers are required to conduct their work independent of their clients in an unbiased manner, because the verification opinion is relied on by potential investors and other market participants and stakeholders.  Verifiers cannot examine their own work, function in decision making roles, serve in an advocacy role or have mutual or conflicting roles with clients, and the GIPS Standards require verifiers to document their policies on independence at both the firm and employee level. Requesting and reviewing your verifier’s policies on independence is a way to determine if any potential independence issues exist.

Determining Independence

To determine if an independence issue exists, firms/asset owners should consider other services provided by the verifier. If the verifier does not offer any other services or you do not and will not engage in other services, then you need to consider if the verifier is involved in compliance decisions to the extent they are verifying their own work.

Many verifiers provide pre-verification consulting services where they provide templates and consult with verification clients on how to document policies or comply with the GIPS Standards.  Verifiers can provide useful insight on considerations for the creation of meaningful composites and education on industry practices for including GIPS Reports with prospective client communications. In these cases, whether or not verifier independence issues exist would depend on the verifier’s level of involvement.

Frequently Asked Verifier Independence Questions, 2021 GIPS Standards Conference

  1. What does testing their own work mean?

A verifier would be testing their own work if, for example, they compile your account data in a composite calculation spreadsheet or create your firm’s GIPS standards policy manual, and then verify your firm. Any documents that the verifier directly creates on behalf of the firm would fall into this category of testing their own work if the same verifier was engaged for verification services. However, if your verifier provides templates that your firm populates and the verifier reviews, this is not considered testing their own work.

  1. Most, if not all, verifiers provide spreadsheets to their clients if they need a tool to calculate composite performance. They then turn around and verify that calculation. Isn’t this “testing their own work”?

CFA Institute provides examples of services that are unlikely to create an independence issue. These examples include, formulas and calculation examples, example policy language and GIPS compliance checklists. If the verifier provides a tool that your firm uses to calculate performance but does not actually input the values on behalf of the firm, there is likely no independence issue.  See more examples of services a verifier can provide without violating independence here.

  1. We hired a consultant to start our GIPS compliance program. They wrote our P&Ps, drafted our GIPS Reports, and created/maintain our composites based off initial & ongoing feedback from our SMEs. This was signed off on by the CCO. Can they now Verify us since we made the mgt decisions? Is there an independence issue, and if so, how much time must pass before the verifier is considered independent?

This situation would be considered a violation of verifier independence if the same consultant was used to verify the firm. The consultant would be testing their own work based on the information provided above.  See more examples of situations where other services lead to an independence issue here.

There is no set amount of time that must pass before the verifier is considered independent again. This was answered during the 2021 GIPS Conference and the panelists agreed that if an independence issue such as this exists, it will exist indefinitely. This is because the consultant set up the firm’s policy manual and created the firm’s composites.  The firm should consider other verification firms if pursuing verification.

  1. Our verifier has a division that offers composite software. It is a completely different business line from the verification business. If our firm utilized their composite software, can the verifier still be considered independent?

This was also answered at the 2021 GIPS Conference, and the panelists agreed that if the verifier has another division that offers composite software, there would be an independence issue if the firm chose to use the verification division for GIPS verification.  When firms are considering hiring a verification firm, they should be considering the options that are above reproach.  If there is doubt about whether the verifier is independent due to engaging other services, then it might be best to look to another provider. 

At Cascade, we provide our policies on independence to each client upon signing a contract and provide an updated copy annually.

Access our Verifier Independence Checklist

Cascade Compliance’s checklist is a starting point when considering the independence of a verification firm.  We also recommend reviewing the Guidance Statement in its entirety.

Navigating Actual vs. Model Net-of-Fee Performance

One of the more common questions we get asked by firms is whether they should use model or actual fees to calculate net-of-fee composite returns.  With the soon-to-be-implemented SEC Marketing Rule requirements for net-of-fee composite performance calculations, many firms will need to reconsider their current calculation methodology to make the best decision going forward.

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2020 GIPS® Standards Q&As

This is a comprehensive list of Q&A’s released as part of the GIPS standards Newsletter, organized by subject matter.  As CFA Institute continues to add Q&As through the GIPS Standards Newsletter, we will continue to update this page.

GIPS 2010 Transition to GIPS 2020

Pooled Funds

Composite Management/Policies

Input Data and Portfolio Calculation

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Fundamentals of Compliance

2020 GIPS® Standards – Bridging the Fund vs. Composite Divide

Key Conceptfor Fund Managers

Firms managing only commingled funds often question the relevance of creating GIPS-compliant composites for pooled funds that are essentially already of asset-weighted, strategy specific “composites.” The 2020 GIPS standards added options that make GIPS compliance much more meaningful for managers of pooled funds, especially for firms with dozens of mutual funds and alternative investment strategies delivered in commingled fund vehicles.

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