CFA Level 1


Ethics and Standards - GIPS: Fundamentals Of Compliance And Conclusion

Compliance with GIPS Standards is tested by the verification procedure. These are its requirements:

1. Pre-verification procedures:

a. Knowledge of the Firm - The verifier may obtain selected samples of investment performance reports.

Knowledge of GIPS Standards - This includes all required and recommended components, and all updates and revisions.

c. Knowledge of Performance Standards - Any country-specific information that conflicts with the GIPS must be identified.

d. Knowledge of Firm Policies - Policies on all relevant issues would need to be addressed by the verifier, for example:
    • Investment discretion: guidelines for discretionary versus nondiscretionary.
    • Definition of composites, timing of inclusion of new accounts and exclusion of closed accounts on cash inflows/outflows.
    • Market valuation, accrual of interest/dividends
    • Use of leverage and other derivatives.

e. Knowledge of Valuation Basis for Performance Calculations - For example, the policy on classifying fund flows and on recognizing purchases and sales.

2. Verification Procedures:

a. Definition of the Firm, and whether it is appropriate.

b. Composite Construction - Has the firm defined and maintained composites according to reasonable guidelines? Are all of the firm's discretionary accounts in at least one composite? Has any account been inappropriately excluded? Has discretion been consistently applied?

c. Nondiscretionary Accounts - By sampling a discretionary and nondiscretionary account, the verifier determines whether consistent standards have been applied.

d. Sample Account Selection - Depending on the number of composites, the number of accounts and the nature of the composite, a sample of accounts is taken to review.

e. Account Review - For each account selected, whether the timing of inclusion in a composite is consistent with policies, whether the objectives set forth in the account agreement are consistent with the manager's composite definition, and that all accounts included in the same composite share the same guidelines.

f. Performance Measurement Calculation - Measure performance in a sample of accounts (using the same methodology as the firm) and verify that the results are consistent with what has been reported and with the composite averages.

g. Disclosures - Review the firm's performance presentations to ensure the appropriate and mandatory disclosures have been included.

h.Maintenance of Records - The verifier must maintain records that support the information summarized in the verification report.

Ethics tends to be one of the most challenging and thoroughly tested topics on the CFA exam. Ensure you know the material we have outlined here, as CFA Institute's questions tend to be quite comprehensive.

Congratulations on finishing this first section. Lets proceed onwards to Quantitative Methods.

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