The CFA Institute Issues Guidance Statement on Performance Examinations under the Global Investment Performance Standards (GIPS)
The CFA Institute recently issued a Guidance Statement on GIPS Performance Examinations (the “Guidance Statement”)1 to ensure consistency of the procedures followed when an investment management firm chooses to have a “performance examination” conducted on one or more of the firm’s composites. A performance examination is the detailed review of a specific composite by an independent, third-party “verifier”. The scope and purpose of a performance examination is to test whether an investment management firm has constructed and calculated the composite in compliance with GIPS standards, and whether the firm presents the composite in compliance with the GIPS standards. Currently, the GIPS standards do not require verification or performance examinations. However, an investment management firm that chooses to have a performance examination conducted will be required to follow the GIPS guidelines.
If a performance examination is conducted, an investment management firm must, either first or concurrently, have a verification conducted. If a verifier agrees to issue a performance examination report that covers a longer period than the verification (the “extended performance examination report”), this period should not be more than 12 months beyond the date of the verification report.
An extended performance examination report and composite presentation should clearly disclose: (a) the lack of verification for the extended period of time; and (b) that the extended performance examination report may only be distributed to a prospective client requesting the report. Both the Guidance Statement and the adopting release to the Guidance Statement imply that an extended performance examination report may only be distributed pursuant to a request for proposal or other client request.
VERIFICATION Verification is the review of a firm’s performance measurement processes and procedures by an independent third-party verifier. A performance examination differs from a verification, as a performance examination maintains a composite specific focus and a verification maintains a firm- wide focus. The purpose and scope of a verification is to confirm firm-wide compliance with the GIPS standards, in regards to composite construction and performance measurement processes and procedures. A performance examination is a further, more extensive, specifically focused examination of a specific composite and its presentation.
FORMAT An investment management firm may not claim that a composite has undergone a performance examination with respect to the GIPS standards, without first obtaining a performance examination report from a verifier.
This performance examination report prepared by a verifier is not required to follow a particular format. However, it generally includes the following:
the name of the composite examined;
the time period covered by the report;
the verifier’s opinion that the composite was constructed, calculated and presented in compliance with the GIPS standards; and
The Interpretations Subcommittee of the GIPS Executive Committee develops guidance statements to give additional interpretation and/or clarification on issues that are new, novel, or beyond the scope of the simple application of the GIPS standards.
Kirkpatrick & Lockhart Nicholson Graham LLP