I stumbled upon an asset manager’s website this week, which served as a good example of some of the problems that exist within the world of firms claiming compliance with GIPS(R) (Global Investment Performance Standards).

This firm apparently has undergone a recent verification; granted, not by a firm that many have heard of, but nevertheless, one that holds itself out as being capable and qualified to conduct verifications. Very quickly I identified three problems:

1. This was an SEC-registered firm, meaning that it must comply with the SEC’s advertising rules. The SEC requires that net-of-fee be of equal or greater prominence to the gross-of-fee returns. They only reported gross-of-fee results. (Strike one)
2. Their website page announcing compliance failed to contain the GIPS required advertising disclosures. Granted, compliant firms aren’t obligated to adhere to these guidelines unless they reference GIPS; but since this firm did, it was required to include them. It was missing virtually all of them. (Strike two)
3. Their site includes a composite presentation. This presentation was missing at least one required disclosure, and had other items which looked suspect. (Strike three).

Of these three items, the verifier is technically only responsible to look into the third; their apparent failure to catch the missing disclosure(s) is a problem. The verifier should also provide their client guidance on advertising (from both a GIPS as well as SEC perspective); this was clearly not done here. The verifier should educate their client so as to avoid actions which might put them at risk or negate their compliance. Bottom line: this firm is not compliant and part of the blame belongs with the verifier.

Nearly 20 years ago I encountered similar problems, and requested a mechanism to verify the verifiers (I believe I coined the phrase). This has been an ongoing theme for nearly two decades. I suspect that nothing will ever be done.

We all make mistakes; as the saying goes, “no one is perfect.” But the gravity of these errors is of such a magnitude that their existence reflects serious problems. I am confident that this asset manager had no intention of being out of compliance. They are most likely quite proud that they “achieved compliance.” It appears to me that they picked an unqualified verifier.

The requirements to be a verifier today are the same as they were roughly 20 years ago: call yourself a verifier. Technically, we and the standards would expect a lot more, but since there is no test, no oversight group, no verifier of verifiers, anyone wishing to can become a verifier in a matter of minutes. I think there’s room for improvement.