Invitation to Comment - Verifier Independence GS FINAL
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Invitation to Comment - Verifier Independence GS FINAL

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INVESTMENT PERFORMANCE COUNCIL (IPC) INVITATION TO COMMENT: Guidance Statement on Verifier Independence The Investment Performance Council (IPC) and CFA Institute seek comment on the proposed Guidance Statement addressing Verifier Independence set forth below. For information on the ent process, please see http://www.cfainstitute.org/standards/pps/process.html. Comments must be submitted in writing and be received by CFA Institute no later than 28 February 2005. All comments and replies will be put on the public record unless specifically requested. It is preferable that comments be submitted in electronic form with settings that do not restrict the ability to ‘cut-and-paste’ text from the comment letter. Comments are also accepted in hardcopy and should be addressed to: CFA Institute CFA Centre for Financial Market Integrity Reference: Guidance Statement on Verifier Independence P.O. Box 3668 Charlottesville, Virginia 22903 Fax: 434-951-5320 E-mail: standardsetting@cfainstitute.org Effective Date This guidance statement will apply to all firms from the Effective Date forward. The proposed Adoption Date for this Guidance Statement is 1 September 2005 and the proposed Effective Date for this Guidance Statement is 1 January 2006. Executive Summary This Guidance Statement provides clarification on verifier independence. A verification of an investment firm’s claim of compliance with GIPS provides substantial benefit not only to ...

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INVESTMENT PERFORMANCE COUNCIL (IPC)
INVITATION TO COMMENT:
Guidance Statement on Verifier Independence
The Investment Performance Council (IPC) and CFA Institute seek comment on the proposed
Guidance Statement addressing Verifier Independence set forth below. For information on the
Guidance Statement process, please see
http://www.cfainstitute.org/standards/pps/process.html.
Comments must be submitted in writing and be received by CFA Institute no later than 28
February 2005.
All comments and replies will be put on the public record unless specifically
requested.
It is preferable that comments be submitted in electronic form with settings that do
not restrict the ability to ‘cut-and-paste’ text from the comment letter.
Comments are also
accepted in hardcopy and should be addressed to:
CFA Institute
CFA Centre for Financial Market Integrity
Reference: Guidance Statement on Verifier Independence
P.O. Box 3668
Charlottesville, Virginia 22903
Fax: 434-951-5320
E-mail:
standardsetting@cfainstitute.org
Effective Date
This guidance statement will apply to all firms from the Effective Date forward. The proposed
Adoption Date for this Guidance Statement is 1 September 2005 and the proposed Effective Date
for this Guidance Statement is 1 January 2006.
Executive Summary
This Guidance Statement provides clarification on verifier independence.
A verification of an
investment firm’s claim of compliance with GIPS provides substantial benefit not only to the
investment management firm that has its policies and processes examined, but also to the
prospective investor relying on the performance information.
Crucial to the verification process
is the assumption by all interested parties that the verification firm performs its service in an
unbiased manner.
Although most verification firms provide additional products and services that
an investment management firm may utilize, a verification firm must strive to create its own
policies and procedures that maintain its independence within the parent organization and, more
importantly, manage the potential conflicts of interest and disclose them to all prospective
verification clients.
Additionally, this guidance is not intended to replace or supercede any
applicable independence guidance for a verification firm that is subject to professional
independence guidance.
Comment Requested
CFA Institute seeks public input on the proposals set forth in this document.
Issues to consider
in conjunction with this proposal include:
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1.
Do you agree with the principles established in the Guidance Statement?
2.
Are there other elements involved in verifier independence that are not included?
3.
Do you agree with the proposed Effective Date?
If commentators suggest other proposals, CFA Institute requests that they explain the rationale
behind their proposal.
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Proposed Adoption Date:
1 September 2005
Proposed Effective Date:
1 January 2006
Retroactive Application:
No
Proposed Public Comment Period:
Oct 2004 - Feb 2005
INVESTMENT PERFORMANCE COUNCIL (IPC)
Guidance Statement on Verifier Independence
Introduction:
Through the Verification Subcommittee, the Investment Performance Council will provide
interpretations regarding the GIPS standards on the verification process.
A verification provides
substantial benefit not only to the investment management firm that has its policies and processes
examined, but also to the prospective investor relying on the performance information.
Crucial
to the verification process is the assumption by all interested parties that the verification firm
performs its service in an unbiased manner.
Although most verification firms provide additional
products and services that an investment management firm may utilize, a verification firm must
strive to create its own policies and procedures that maintain its independence within the parent
organization and, more importantly, manage the potential conflicts of interest and disclose them
to all prospective verification clients.
Additionally, this guidance is not intended to replace or
supercede any applicable independence guidance for a verification firm that is subject to
professional independence guidance.
Defining the term “independent” is not a simple process.
The Verification Subcommittee
recognizes that many verification firms do not only provide verifications, but also provide a
range of other services.
It would be impossible to address every potential service offered by a
verifier.
We suggest that both verification and investment management firms view independence
as a continuum. At one extreme is a verifier who provides no other service to their verification
client.
At the other extreme is a verifier who provides a wide range of other services which
might be perceived as creating a conflict of interest with regard to verification services.
A
verifier’s self-examination of their independence status with regard to a verification client should
always consider:
If a prospective client of an investment management firm places reliance on a
verification report, would the prospective client’s perception of the value of the verification
report be changed if they knew about other services that the verifier provides to the investment
management firm?
The verification firm, in discussion and agreement with their investment
management client, may determine that answer.
If a verifier provides other services to the verification client, the verifier should discuss with the
verification client whether the verification client should include a disclosure in GIPS-compliant
presentations which describes the other services performed by the verifier, and/or offers to
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provide additional information about those services to its clients or prospective clients, upon
request.
Guiding Principles
The verification firm must consider any independence guidance for their profession, if
applicable;
To the best of their ability, the verification firm must consider the entire relationship with the
prospective verification client when considering independence issues;
The verification firm has an obligation to discuss with the prospective verification client their
conclusions on their consideration of independence issues; and
The verification firm should come to an agreement with the client concerning the verification
firm’s independence, and whether any additional disclosure should be made by the
verification client in compliant presentations.
The assessment of Verifier Independence can be divided into four major topics:
A verification firm may provide a multitude of additional services and products in addition to its
core verification service.
Some of these services and products may result in the appearance of a
conflict of interest while others do not.
The objective of the four topics below is to assist a
verification firm to more precisely define the types of practices that might result in a potential
conflict of interest.
1.
Can a verifier provide business advisory services (consulting) to a verification client prior to
performing the verification?
2.
Can a verifier provide other non-performance-related services to a verification client?
3.
Can a verifier provide other performance-related services to a verification client?
4.
Are there other issues a verifier should consider when determining their status with regard to
independence?
1. Can a verifier provide business advisory services (consulting) to a verification client
prior to performing the verification?
Yes, a verifier can provide consulting services to a verification client prior to performing a
verification.
However, during the conduct of these consulting services, a verifier who intends to
later perform the verification must not step into a management role or undertake any
management function, and must not perform any services which would result in the verifier
reporting on their own work product or decisions made by them.
Examples follow.
Consulting services that might not create an independence issue include:
Participating as an advisor to the compliance project management team;
Participating in the identification of issues that hinder an investment management firm’s
compliance; and
Educating investment management firm personnel about the Standards and compliance
process.
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Consulting services that might create an independence issue include:
Functioning as a member of the investment management firm’s compliance project
management team, with responsibility for performing management tasks (e.g.,
compositing portfolios, defining policies, etc.);
Acting as the project manager for the investment management firm’s compliance project
management team, with management decision authority;
Making decisions about compliance issues for the investment management firm.
(The
verifier should only offer suggestions and present options which the investment
management firm may consider when making their decisions);
Creating source data for the calculation of performance returns; and
Providing templates and systems for performance calculation.
2. Can a verifier provide other non-performance-related services to a verification client?
Yes, a verifier can provide other services not related to performance to a verification client.
Other services performed by the verifier must not result in the verifier calling his own work into
question during the verification.
Often in larger firms that provide verification services, it may prove difficult for the verification
unit to identify other services (especially highly sensitive or confidential services) provided by
other parts of the organization without input/notification from the client.
A verification firm
must disclose the known services that other units of the verification firm may be providing to the
client, and the client should then be responsible for deciding whether an “unknown” service
(unknown to the verifier) provided by the verification firm results in a conflict.
3. Can a verifier provide other performance-related services to a verification client?
A verifier should exercise extreme caution when providing other performance-related services to
a verification client, in order to avoid an independence conflict. First and foremost, a verifier
must not be responsible for any management functions or duties. While certain tasks may be
outsourced to external service providers, responsibility for the fair presentation and full
disclosure of the performance presentation in compliance with the GIPS standards remains with
the investment management firm.
Performance-related services that might not create an independence issue include:
Providing advice on compliance issues as they arise as long as the advice does not
include making decisions for the investment management firm.
Providing training on performance-related topics; and
Reviewing results of performance-system conversion testing;
Certain performance-related services might create an independence conflict if the verifier
performs these functions and makes decisions on behalf of management.
Examples of these
functions include:
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Assigning accounts to composites;
Collating or creating the underlying data required to calculate account-level returns;
Calculating account-level returns;
Calculating composite-level returns;
Preparing compliant presentations;
Establishing policies and procedures; and
Functioning as a data warehouse for the performance data on behalf of the investment
management firm.
The verifier can maintain data duplicate for its own purposes but this
data must not serve as the investment management firm's primary data source.
4. Are there other issues a verifier should consider when determining their status with
regard to independence?
Other issues that are not directly related to verification services might impact a verifier’s
independence.
A verifier should consider their personal and financial relationships with their
clients and consider whether they are, in fact, independent or could be influenced by such
relationships.
Disclosure of a personal or financial relationship does not “cure” this type of
independence conflict.
Applications:
1.
How much time and effort must I exhaust in order to make sure that my firm does not
have other relationships with my verification client?
Both the verifier and the verification client need to expend such time as is reasonable for
them to, independently and jointly, satisfy themselves that none of the known relationships
between the two organizations will impair the independence of the verifier.
This is a
continuing joint obligation and does not just apply on the first appointment of the verifier.
From a practical point of view the inclusion of the word "known" (start 2
nd
line) is an
essential qualifier as both the verifier and verification client may have a business relationship
which is confidential to all but a selected few ... an obvious example is an advisory role in a
corporate acquisition/sale .... which would not be disclosed under any circumstances to the
people in either organization dealing with verification appointment.
2.
As defined in the Verifier Independence Guidance Statement, what are ‘management
functions”?
In the context of this Guidance Statement, “management functions” are tasks and
responsibilities that are directly related to the GIPS-compliance process.
Management
functions include, but are not limited to:
Identifying all portfolios of the firm;
Assigning accounts to composites;
Determining firm definition;
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Determining discretion status;
Creating composite criteria;
Calculating account-level returns; including reconciling to supporting records;
Establishing policies and procedures;
Calculating composite-level returns; and
Preparing compliant composite presentations.
3.
Is there a formal process or report for reporting conflicts of interest?
No, there is no formal process or report for reporting conflicts of interest.
If a verifier
determines that a conflict of interest prevents them from continuing to provide verification
services to a client, they should inform the client immediately of such conflict.
The verifier
and the client should also discuss whether the newly discovered conflict extends to historic
periods and whether previously issued verification reports, if any, should be recalled.
4.
If we provide a spreadsheet template to our client to help them calculate asset-weighted
standard deviations for inclusion in a composite presentation, does that create an
independence conflict?
Providing a spreadsheet template to a client that includes calculation examples does not
automatically create an independence conflict, as long as the client assumes full
responsibility for the calculation methodology.
5.
Can a verification firm participate in the process for selecting a new performance
measurement system?
Yes, as long as the verification firm’s assistance is limited to making recommendations and
suggestions with the final decision being made by management.
The verification firm must
not receive any monetary or non-monetary compensation from the systems providers for their
review or recommendation.
6.
Can a verification firm participate in the process of implementing a new performance
measurement system?
Yes, a verification firm may participate in the process of implementing a new performance
measurement system, but must be careful to not undertake management functions.
The
verifier must not have final responsibility for data conversion and reconciliation functions.
7.
In addition to obtaining firmwide verification, our verifier also performs a performance
examination on one composite.
The Performance Examination report includes a
compliant presentation for the one examined composite.
Can the verifier produce the
compliant presentation for this composite?
The verification firm may produce the compliant presentation for the examined composite if
this preparation is limited to accumulating the information from information you provide to
them.
Your firm is responsible for calculating the returns and other disclosures that must be
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included in a compliant presentation.
Simply performing word processing and duplication
functions do not impact the verifier’s independence.