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News November 13, 2006 Issue

New Guidance on GIPS Performance Exams

The CFA Instituteís Investment Policy Committee has released a new Guidance Statement on performance examinations.

A performance examination is quite different from a regular GIPS verification. In contrast to a verification, which is a firm-wide review to confirm that a firm has constructed its composites in accordance with GIPS and adopted adequate procedures, a performance exam digs in and looks at a specific composite. During a performance exam, the composite will be tested to confirm that it has been constructed, calculated, and presented in compliance with the GIPS standards. Performance exams are neither required nor recommended under the GIPS standards. However, as the Guidance Statement acknowledged, some types of clients ask for them.

The statement confirms that advisers do not need to use the same third-party verifier to conduct the both the verification and the performance exam. However, it is necessary to have obtained a verification covering the same time period as the performance exam will cover, either prior to the performance exam or simultaneously. In "unusual and infrequent situations," said the statement, a performance exam can cover a period of time beyond that covered by the firmís verification, such as when a client requests a performance exam of a specific period and a full-scale verification cannot be lined up in time. The results of such a performance exam may only be provided to the prospective client that made the request, and must disclose the lack of underlying verification for the specified time period.

The guidance statement was adopted October 30, 2006, and is effective December 31, 2006, although early adoption is encouraged. Firms that choose to have a performance examination of a composite that covers performance results for periods ended December 31, 2006 or later must apply the new guidance. Retroactive application is not required for composite presentations that reported performance results prior to December 31, 2006.