The Global Investment Performance Standards (GIPS^®), created and administered by CFA Institute, are broadly accepted, voluntary, global ethical standards for calculating and presenting investment performance. The Standards promote fair representation and full disclosure of investment performance.

The GIPS standards recommend that firms that claim compliance with the Standards 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 the composite construction requirements of the GIPS standards on a firm-wide basis, and whether the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards.

But what exactly is an “independent third party”? Defining the term “independence” is not a simple process. Crucial to the verification process is the assumption by all interested parties that the verifier performs its service in an unbiased manner.

Ensuring Independence

The GIPS Executive Committee has just released for public comment a proposed updated Guidance Statement on Verifier Independence. The proposed guidance aims to clarify as well as strengthen the existing guidance on independence that was adopted in 2005. For example, the proposed guidance would require the verifier to create and document its own policies and procedures that address independence at both the verification firm and the employee level. The verifier would also be required to provide a summary of its independence policies if requested by the firm it is verifying.

The verifier and the firm are each required to assess independence, and they both must be cognizant of actual as well as perceived independence issues. Both parties must also spend as much time as is reasonably necessary for them to, independently and jointly, satisfy themselves that none of the relationships between the two organizations will impair the independence of the verifier.

The assessment of independence is not a one-time event and must be an ongoing process. The proposal would require that the assessment be performed both prior to the start and at the conclusion of each verification engagement. If an independence issue cannot be adequately resolved, the verification firm must not perform the verification. A reassessment must also be made if any new information comes to light that could affect independence. Disclosure alone does not resolve an independence issue.

Proper Conduct for Verifiers

Verifiers must not step into a management role on behalf of the firm, undertake any management function or a decision-making role relative to the implementation of and compliance with the GIPS standards, or test their own work.

The proposed revised guidance provides examples of management functions, which includes such items as assigning portfolios to composites, creating composite criteria, calculating portfolio and composite-level returns, and preparing compliant presentations. The proposed guidance also offers examples of services that, if performed by the verifier, would create an independence issue as well as examples of services that are unlikely to create an independence issue.

The guidance statement serves as minimum guidance, and it is not meant to address every situation that could impair independence. Verifiers must adhere to any applicable professional independence guidance that they may be subject to. If any conflicts exist between the information in the GIPS guidance statement and the verifier’s professional independence guidance, the verifier must adhere to whichever guidance is more restrictive.

For additional information on verification, please visit the verification information page on the GIPS website. There you will find, among other items, a template entitled “Suggested Questions to ask prospective Verification Firms.” This popular document was created to assist GIPS-compliant firms in their selection of a verifier and includes suggested questions that may be helpful when considering prospective verification firms. Please note that CFA Institute does not certify, recommend, or endorse any firm or product.

The deadline to submit feedback is 26 October 2017. All comment letters will be considered carefully and are greatly appreciated.

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