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.

b.

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.

Conclusion
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.

Introduction

Related Articles
  1. Small Business

    A Guide To Global Investment Performance Standards

    Is your investment management firm GIPS compliant? Learn more here.
  2. Financial Advisor

    Is Your Investment Manager Skilled Or Lucky?

    Being familiar with composite presentations will help you better assess the quality of an investment manager's performance.
  3. Investing

    How Does Sampling Work?

    Sampling is a term used in statistics that describes methods of selecting a pre-defined representative number of data from a larger data population.
  4. Managing Wealth

    Accounting Research Manager: Job Description & Average Salary

    Learn about the average salary of an accounting research manager as well as the necessary skills, experience and education, and licenses to hold this position.
  5. Investing

    Explaining Standard Error

    Standard error is a statistical term that measures the accuracy with which a sample represents a population.
  6. Financial Advisor

    Asset Manager Ethics: Risk Management and Compliance

    Managers should create a compliance and risk function that is integral to the investment function in order to plan for the increasingly more common market dislocations that occur in the global ...
  7. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  8. Financial Advisor

    How Much Control Should You Give Your Financial Advisor?

    Discretionary account or non-discretionary? How to tell which is best for you.
  9. Managing Wealth

    Asset Manager Ethics: Valuation Is A Tricky Business

    Asset managers must accurately represent all of a clients assets in the client portfolio. This can be tricky for unique and hard-to-value assets.
Frequently Asked Questions
  1. What's considered to be a good debt-to-income (DTI) ratio?

    Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and how to ...
  2. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ...
  3. What does a Chief Financial Officer (CFO) do?

    A CFO is responsible for accurate reporting of a company's financial information, investing the company's money and identifying ...
  4. How did George Soros break the Bank of England?

    George Soros pocketed $1 billion by betting against the British pound, cementing his reputation as the premier currency speculator ...
Trading Center