## **Learning Outcomes**

This article explains the GIPS standards for firms and pooled funds with a focus on verification, performance examinations, and advertising compliance, enabling you to concentrate on the concepts most frequently tested in CFA Level 3. It clarifies the purpose, scope, and minimum requirements for firm-wide GIPS verification, including the role of the independent verifier and the need for robust policies and procedures. It distinguishes verification from a performance examination, highlighting how each applies to firms, composites, and pooled funds, and what level of assurance each provides about reported performance. It specifies who may claim GIPS compliance, who may claim verification, and how those claims must be worded in compliant marketing or disclosure materials. It details what verification does not do—such as “verifying” a single composite or fund—so that you can identify misleading or prohibited statements in exam questions. It also reviews the content and limitations of GIPS-compliant advertisements, including references to verified status and performance examinations, helping you quickly eliminate incorrect response options that misuse GIPS terminology.

## **CFA Level 3 Syllabus**

For the CFA Level 3 exam, you are expected to understand the processes and requirements for firms and pooled funds claiming compliance with the Global Investment Performance Standards (GIPS), with a focus on the following syllabus points:

- The difference between GIPS verification and performance examinations
- The purpose, scope, and requirements for GIPS verification
- The role, content, and requirements of GIPS-compliant advertising
- Who may claim GIPS compliance and who may claim verification
- The limitations and benefits of verification and performance examination reports

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Can a firm claim GIPS compliance in marketing materials without being verified by an independent third party?
2. What is the primary difference between a GIPS verification and a performance examination?
3. Is a GIPS-compliant advertisement permitted to include references to non-GIPS-compliant products?
4. What is a performance examination in the context of GIPS?

## **Introduction**

The Global Investment Performance Standards (GIPS) are ethical standards for presenting investment performance. They aim to ensure full, fair, and comparable reporting for prospective clients and pooled fund investors. Verification and performance examination by an independent third party offer additional assurance of compliance but serve different purposes. Understanding the requirements for verification, performance examination, and advertising is essential for firms claiming GIPS compliance, pooled fund managers, and candidates for the CFA exam.

## GIPS Verification

GIPS verification is a process performed by an independent third party, assessing whether the firm's policies and procedures are designed to comply with all GIPS standards and have been implemented on a firm-wide basis over the relevant period.

> **Key Term: GIPS verification**
> An independent assessment of whether a firm has designed and implemented policies and procedures for GIPS compliance on a firm-wide basis.
>
> **Key Term: performance examination**
> An independent review of a specific composite or pooled fund to determine if its performance presentation complies with GIPS and is fairly presented.

### Purpose of Verification

Verification aims to increase confidence in a firm's claim of GIPS compliance. It ensures that the firm’s systems for performance calculation, composite construction, and general procedures meet all the GIPS requirements.

### Requirements for Verification

- Performed by a qualified, independent verifier (cannot be the firm’s employees or management)
- Covers adherence to all applicable GIPS requirements on a firm-wide basis, over no fewer than the most recent 12 months
- Examination of firm’s policies, procedures, and implementation for GIPS compliance

### Effects and Limitations

- Verification provides assurance about the firm as a whole, not about specific composites or pooled funds.
- Verification does not confirm that any individual portfolio, composite, or pooled fund performance is GIPS compliant, unless a separate performance examination is conducted.

### Distinction: Verification vs. Performance Examination

While verification is broad and covers the firm, a performance examination focuses on a particular composite or fund’s report. Performance examinations provide users additional assurance that a specific GIPS report is fairly presented and complies with all GIPS requirements for that composite or fund.

### Who May Claim Verification

Only an entire firm (not a composite, pooled fund, or third party) can claim it has been verified for GIPS. The verification report language is strictly prescribed by GIPS and must not be altered.

#### Exam Warning

It is a common exam mistake to confuse GIPS verification with performance examination or to believe that a composite can be “verified.” Only the firm as a whole can claim GIPS verification.

### Performance Examination

Performance examination is an optional, separate process in which a GIPS verifier checks whether a particular composite or pooled fund’s performance presentation is in compliance and is fairly presented.

- May be conducted alongside, or separately from, firm-wide verification
- Can be performed for one or more composites or pooled funds

## GIPS and Pooled Funds

All GIPS requirements apply equally to pooled funds as they do to firms managing portfolios for clients. Pooled fund managers can claim GIPS compliance for their offerings and may undergo verification on a firm-wide basis. Both retail and institutional pooled funds may be included in GIPS composites, and performance examinations can be conducted for pooled funds as well.

## Advertising GIPS Compliance

GIPS has specific requirements for advertising. Firms and pooled funds that claim GIPS compliance must comply with a strict set of rules when using the GIPS compliance statement or related disclosures in public communications.

> **Key Term: compliant advertisement**
> Any advertisement that includes a claim of GIPS compliance and meets all GIPS advertising requirements.

### Advertising Requirements and Restrictions

- Only the firm—not a single composite or pooled fund—may state that it is “GIPS verified.”
- Firms may only use the GIPS compliance statement exactly as prescribed; no modifications are allowed.
- All GIPS-compliant advertisements must meet the minimum content and disclosure rules (including disclosure of verification, if applicable).
- Although a firm may reference its verification status in advertising, it cannot claim that any single composite or pooled fund is “verified”; it may refer to a performance examination if such an examination has been performed.
- Advertisements must not be misleading or reference non-GIPS-compliant data as if it were compliant.

### Allowed Use of the GIPS Compliance Statement

- To use the GIPS compliance statement or related wording in marketing or advertising, the firm must meet all relevant (either full or minimum) GIPS requirements for the type of advertising used.
- If a GIPS advertisement refers to a specific composite or pooled fund, it must specify whether a performance examination has occurred for that composite or fund.

### Verification and GIPS Statement Use

- GIPS verification is not required for a firm or pooled fund to claim GIPS compliance.
- Verification is optional, but advertising the verification (if conducted) is allowed under certain circumstances.

### **Worked Example 1.1**

**A global asset manager has implemented all GIPS policies and procedures and obtains verification by an independent third party. The firm includes an advertisement stating, “Firm X’s Equity Composite has been GIPS verified for the last three years.” Is this statement allowed under GIPS?**

> **Answer:**  
> No. Only the firm as a whole can be described as “GIPS verified.” The correct wording would be, “Firm X has been verified for the last three years.” You cannot say that a single composite, pooled fund, or product has been GIPS verified.

### **Worked Example 1.2**

**An asset manager prepares a marketing brochure for a pooled fund. The advertisement says, “Performance results are GIPS compliant. The Fund is GIPS verified.” Is this permissible?**

> **Answer:**  
> No. While the performance results of the fund may be presented as GIPS compliant (if they meet the requirements), only the firm can be described as “GIPS verified”—not a specific fund.

## **Summary**

- GIPS verification is an optional, independent review confirming a firm’s GIPS compliance policies and procedures.
- Verification covers only the firm as a whole—not particular composites or funds.
- Performance examinations give added assurance for individual composites or pooled funds.
- Advertising GIPS compliance is subject to strict requirements and firms must use prescribed statements only.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- GIPS verification assesses firm-wide GIPS compliance, not individual composites or funds.
- Only a firm can claim GIPS verification; composites or funds cannot be described as “verified.”
- A performance examination evaluates a specific composite or fund’s compliance.
- Advertising GIPS compliance must use prescribed statements and follow GIPS rules on disclosure and verification.
- Verification is not mandatory for a firm or pooled fund to claim GIPS compliance.
- Only a compliant firm can refer to GIPS compliance or verification in advertising.

## **Key Terms and Concepts**

- GIPS verification
- performance examination
- compliant advertisement

GIPS standards for firms and pooled funds - Verification performance examinations and advertising