Thursday, May 27, 2010

Non-marketed need not apply

I recently conducted a "mini verification" for a client wanted us to do a high level check on a manager who both claimed compliance with the Global Investment Performance Standards (GIPS(R)) and had been verified.

As I always do, I asked to see all their composite presentations. While they could provide most, they couldn't for the "non-marketed" ones. And while they "knew" they are supposed to have them, their verifier never asks for them so they hadn't bothered to prepare them.

Their verifier never asks for them?

Well, I'm not surprised as there are some verifiers who believe that verification only deals with "marketed composites," and that the firm has no obligation to do anything with the "non-marketed" ones. To me, this is shameful. Verification is a "firm wide" exercise, not limited to only the "marketed composites."

I've addressed this point with this particular verifier on multiple occasions but clearly they have their own rules which they live by (GIPS rules be damned). To me, they're doing a disservice to their clients. First, they are claiming to conduct a "verification," but are actually doing only part of the job. This expeditious approach may have appeal, but it puts the client at risk. What if I were the SEC asking for these presentations? Might the firm's claim of compliance be questionable, posing the possibility of a sanction?

To this verifier and others who argue in favor of only worrying about the marketed composites I ask a simple question: what page in the standards do the words "marketed composites" appear? I have yet to find it.

p.s., As an aside, to make up for not verifying all the composites the verifier was able to talk this firm into examining ALL of the marketed composites: you know what I have to say about examinations.


  1. A presentation can be completed in a couple of minutes very easily - especially with the right software (but software outside of MS Word is far from necessary). I don't agree with the aggression you are taking out on this verification firm because they don't ask to see presentations for non-marketed composites. Should they ask for them? Maybe. Is it something to fume about? Absolutely not. Show me what page in the Standards it requires a non-marketed composite be given to a verification firm (I've only read that verification assesses whether the firm has complied with composite construction requirements on a firm-wide basis and that there are policies and procedures are in place designed to comply with the GIPS).

    I do have a problem with this firm not being able to provide a compliant presentation, however. The Standards do say that a presentation MUST be given to a prospect upon request. That means that they should be able to prepare one when asked.

    I guess you could make the claim that their policies and procedures were inadequate because they were unable to provide a compliant presentation when requested.

    P.S. I'm 100% in agreement with you on performance exams.

  2. David - so I just looked and I think you could also make the claim that IV.B.2.f would require a verification firm to take a look at non-marketed composites.

    However, all a verification firm must do is determine that all information is there. That's easily done from looking at a template, no? Why require a firm to keep up presentations on composites that they are never going to give to anyone?

  3. Thanks for your comments.

    The standards make no distinction between "marketed" and "non-marketed." And, I can see a verification firm focusing more on the "marketed" than "non-marketed" composites during a verification, when there are loads of composites and they must do some sampling. But, they should still ensure that the firm has all presentations.

    In this particular case, there were roughly ten composites; two of which were non-marketed. Our posture with such a sized firm would be to look at ALL composites to at least some extent, in addition to ensuring that they have presentations for all of them. If a verification firm, however, has a reputation of totally ignoring "non-marketed," to the extent that they make it clear that they have no interest in seeing them, then their clients see little need to worry about them. That's a problem for me. Knowing that the firm is required to have the presentations available, the verifier should, at a minimum, look at the presentations.

    In response to your question, "why require a firm to keep up presentations on composites that they are never going to give anyone," the answer is a simple one: because the standards require it. If you feel that this isn't a necessity, then you should voice your opinion to the GIPS Executive Committee. I've reviewed virtually every comment letter to both the 2005 and 2010 edition of the standards and, to my recollection, not once did I see anyone make such a case. The standards drive what firms are supposed to do. Again, if you feel that "non-marketed" shouldn't have to be worried about, then make the case!

    I would vote against this: why? Because it's possible that there are accounts that are in the non-marketed that actually belong in the marketed! What if a firm wants to hide the non-performing accounts by putting them there, when they rightly belong elsewhere?

    We, as well as most verification firms, we believe, conduct a "firm-wide" verification, not just a "marketed portion of a firm" verification.


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