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CurrentEffective: 1 July, 2021Categories: Disclosures, Pooled FundsSource: GIPS Standards Technical Committee
How do we determine which fee schedule and expense ratio should be disclosed for a specific pooled fund?
Firms must make every reasonable effort to provide a GIPS Report to all limited distribution pooled fund (LDPF) prospective investors when they initially become prospective investors. Firms are not required to provide a GIPS Report to broad distribution pooled fund (BDPF) prospective investors, but may do so. The GIPS Report may be either a GIPS Pooled Fund Report or a GIPS Composite Report. A GIPS Composite Report may be provided only if the pooled fund is included in the respective composite.
If the firm provides a GIPS Pooled Fund Report to a prospective investor, the firm must include the pooled fund’s fee schedule. If the firm provides a GIPS Composite Report to a prospective investor, the firm must include the pooled fund’s fee schedule rather than (or in addition to) the composite’s fee schedule.
If the pooled fund has multiple fee schedules, the firm may use the highest fee schedule as the appropriate fee that can be used for all prospective investors. The firm may also include multiple fee schedules in the GIPS Report. Including a range of fee schedules (e.g., management fees range from 0.50% to 0.95%) would not satisfy this requirement.
The fee schedule presented to a prospective investor is typically listed by asset level ranges and should be appropriate to the particular prospective investor. The fee schedule must be current. Although a current fee schedule may not assist a prospective investor when interpreting historical performance because the actual fees paid may differ from the fee schedule disclosed, it is the most relevant to the prospective investor. The actual fee that the prospective investor may pay (if it hires the firm) could also differ from the fee schedule disclosed in the GIPS Report. For example, a prospective investor may be able to negotiate a lower fee.
Firms must also present the total expense ratio that is applicable to prospective investors for the specific pooled fund. The pooled fund expense ratio is the ratio of total pooled fund expenses to average net assets. The expense ratio should not reflect transaction costs. The expense ratio gives prospective investors important insight into the total fees and expenses involved in an investment in the fund. For example, a pooled fund expense ratio of 2% indicates that an investor will pay $20 in expenses each year for every $1,000 invested, in addition to transaction costs. An expense ratio also helps investors compare expenses across funds, because even a small difference in fees can have a significant effect over time.
If the pooled fund has multiple share classes, the firm may present multiple expense ratios or may present only the expense ratio appropriate to the prospective investor. The firm may also use the highest expense ratio as the expense ratio that can be used for all prospective investors of the fund. Expense ratios must reflect any performance-based fees or carried interest, if accrued or charged to the pooled fund. Presenting a range of expense ratios (e.g., the expense ratio for all share classes ranges between 1.40% and 1.85%) would not satisfy this requirement.
Because expense ratios can change over time, firms must determine which expense ratio to present. A firm might choose to present the expense ratio as of the most recent annual period end, or the last known expense ratio. When the expense ratio has had a material change resulting from a change in assets or costs, the firm should present a more current expense ratio that reflects what a prospective investor is likely to pay at the current time.
Pooled fund expense ratios that are calculated for periods of less than one year must be annualized. For example, assume that a pooled fund starts on 1 April, and the firm calculates an expense ratio of 0.75% for the period from 1 April 2019 through 31 December 2019. The firm must present an annualized rate of 1.00%, representing a pooled fund expense ratio for the entire year, rather than the 0.75% that represents an expense ratio for only nine months. Presenting an annualized expense ratio facilitates the comparison of expense ratios across funds and firms. Firms may also present the non-annualized expense ratio but must clearly disclose or indicate that the expense ratio is not annualized.
These disclosure requirements are not satisfied if the firm does not include the fee schedule and expense ratio, if applicable, in the GIPS Report and instead makes reference to another document that includes the fee schedule or expense ratio, such as Form ADV, which is a US regulatory document, or a fund prospectus. The fee schedule and expense ratios may be an exhibit attached to the GIPS Report. The exhibit may be the pooled fund’s offering documents, if the offering documents include the appropriate fee schedule and expense ratio.
When a firm uses a single GIPS Composite Report for prospective investors for multiple pooled funds that are included in the composite, it must disclose fee schedules and expense ratios for each pooled fund. The firm may instead choose to tailor the GIPS Composite Report to include the fee schedule and expense ratio that are appropriate for the prospective investor.
See the 2020 GIPS Standards Handbook for Firms discussion of Provision 4.C.11 for sample disclosures of fee schedules when a composite includes a pooled fund.