Understanding GIPS Verification

 

GIPS Verification Benefits

The GIPS standards are the recognized standard for calculating and presenting investment performance around the world. Compliance with the GIPS standards has become a firm’s “passport” to market investment management services globally.

GIPS compliance is seen as a factor that can make or break an institutional investment firm’s marketing efforts in terms of winning new mandates and maintaining clients. Initially institutional firms saw claiming GIPS compliance as just a differentiator from one firm to another. But now while joining over a list of 1700+ firms that are also GIPS compliant, it has become a disadvantage to not adhere to the GIPS standards.

The GIPS standards are not only a marketing tool, but they also provides other benefits to firms in the Operational realm. With making the operational changes necessary for compliance, a firm will need to streamline operations and keep all of its portfolio accounting data accurate. Initially, this is a huge undertaking, but, it pays off in the long run.

GIPS Definitions

GIPS Verification

Verification is the process by which an independent third-party verification firm (Verifier) conducts testing in accordance with the required verification procedures of the GIPS standards. This is sometimes referred to as the ‘GIPS Audit’. Verification provides assurance on whether the entire firm’s GIPS policies and procedures have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis.

GIPS Examination

An Examination is the process to determine whether or not the firm has constucted and calculated the composite (IE GIPS composite) in compliance with the GIPS Standards. Firm-wide Verification is first, and then an Examination is intended for only a specific GIPS composite track record.

GIPS Representation Letter

At the conclusion of the GIPS Verification engagement and prior to issuing the Verification report, the verifier must obtain written representations signed by the firm’s management who the verifier believes are responsible for and knowledgeable about the matters covered in the representations.

GIPS Verification Report

The Verification report must opine that, for the period(s) for which the GIPS Verification has been performed, the firm’s GIPS policies and procedures for complying with the GIPS standards related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been, in all material respects designed in compliance with the GIPS standards; and Implemented on a firm-wide basis.

GIPS Recommendation Letter

After the Verification is complete, the verifier should issue a recommendation letter to the firm describing specific findings, recommendations, and other areas for improvement arising from the GIPS Verification.

GIPS Requirements

GIPS Requirement 1.A.39 - GIPS Verifiers

If the firm chooses to be verified, it must gain an understanding of the GIPS verifier’s policies for maintaining independence and must consider the verifier’s assessment of independence. A firm should be Verified, but it is not a requirement.

Note: Verifications and Examinations are not currently mandatory, and the GIPS Executive Committee firmly believes that the GIPS Standards are ethical standards designed to promote 'self-regulation'. Forcing regulation does not promote the intended spirit of the guidelines.

GIPS Verification Explanation

A Verification is where the ENTIRE firm must comply with the composite construction requirements of the GIPS standards and the firm’s processes and procedures must be designed to calculate performance in compliance with the GIPS standards on a firm-wide basis.

  • A GIPS Verification includes the ENTIRE firm, which means, all marketed and NON-marketed composites. The Verification must occur FIRST, prior to the examination of your individual composites.

  • Verification MUST be performed by a qualified, independent third party.

  • Verification cannot be carried out on a COMPOSITE or a Pooled Fund and, accordingly, does not provide assurance about the performance of any specific GIPS COMPOSITE or GIPS Report.

  • The initial minimum period for which Verification can be performed is one year (or from FIRM inception date through period end if less than one year) of a FIRM’S presented performance.

  • The FIRM MUST NOT state that it has been verified unless a GIPS Verification REPORT has been issued.

GIPS Examination Explanation

The purpose is to test, for a specific composite, whether the firm has constructed and calculated the composite in compliance with the GIPS standards, and whether the firm presents the composite in compliance with the GIPS standards.

  • GIPS Composite examinations are not needed nor required, they just give a sense of comfort to the firm AND it helps provide validity to a firm's marketing efforts.

  • Composites examined can be specifically chosen, NOT ALL composites need to be examined. A GIPS performance examination report is issued only with respect to a single composite examined by a verifier and does not attest to the accuracy of a performance presentation for any other composite.

  • Without the performance examination report from the verifier, the firm cannot state that the composite has been examined with respect to the GIPS standards.

Choosing a GIPS Verifier

  • The GIPS verifier must be independent from the firm or asset owner. To be independent, there must be no independence issues between the verifier and the firm or asset owner. The verifier must perform its service in an unbiased manner and must not be testing its own work.

  • The verifier must be qualified. To be qualified, a verifier must have certain attributes, including having appropriate professional abilities and experience as well as a practical level of expertise regarding audit methodology and investment management practices. Download the GIPS Guidance on Suggested Questions to ask a Potential Verifier.

  • The verifier must also be knowledgeable about the GIPS standards as well as applicable laws and regulations regarding the calculation and presentation of performance.

  • When conducting a GIPS Verification, the verifier must accumulate sufficient evidence and perform sufficient procedures such that the risk of not detecting errors during the Verification is mitigated to an acceptably low level. Testing by inquiry on its own is insufficient to satisfy the required Verification procedures when other testing procedures could reasonably be performed. Verifiers must review sufficient and appropriate supporting documentation when conducting Verification procedures.

  • A Verifier must conduct the verification in accordance with the required verification procedures of the GIPS standards. These are the minimum procedures that the verifier must perform when conducting a verification or examination.

  • After completing the Verification procedures, the verifier may conclude that the firm is not in compliance with the GIPS standards or that the firm’s records cannot support a Verification. In such situations, the verifier must inform the firm why a Verification report could not be issued.

GIPS Engagement Letter

Prior to commencing the engagement, the verifier must agree on the terms of the Verification with the firm. The agreed terms must be specified in an engagement letter or other suitable form of written agreement. The engagement letter should include the following:

  • The objective and scope of the engagement, including the period(s) being verified

  • The verifier’s responsibilities

  • The firm’s responsibilities

  • A statement about the inherent limitations of a Verification

  • A statement that the GIPS standards are the evaluation criteria for the engagement

  • A statement that the Verification does not provide assurance on the operating effectiveness of the firm’s controls or policies and procedures for complying with the GIPS standards

  • A statement that the firm agrees to provide the verifier with a representation letter at the conclusion of the Verification

Verifier Independence

Performance Measurement Solutions does not provide Verification services.   Because of this, we are able to maintain our Independence and Objectivity and can take a 'hands on' approach during your GIPS compliance process.  We agree strongly in these GIPS guidelines surrounding this separation of duties regarding Verifier Independence.

There has been much consolidation in the industry, with Firms offering BOTH Verification and GIPS Consulting Services. We do not believe in this ‘bundled’ service offering, and maintain being an independent GIPS compliance consultant.

Our motto is that someone cannot ‘build a house, and inspect it at the same time’. Therefore, your Firm should keep the abvoe guidelines in mind when choosing your GIPS Compliance Consultant.

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