Provision 0.A.9 of the GIPS Standards requires that firms make every reasonable effort to provide a compliant presentation to all prospective clients. A prospective client is defined as any person or entity that has expressed interest in one of the firm’s composite strategies and qualifies to invest in the composite strategy.
For stand-alone accounts, meeting the requirements of provision 0.A.9 is relatively straightforward. The question, which led to the development of this guidance statement, is – how does a firm satisfy this requirement for broadly distributed pooled funds (BDPFs)? BDPFs are funds where there is typically no contact between the investment advisor of the pooled fund and the prospective pooled fund investors. Mutual funds are examples of BDPFs.
To answer the question, a team was established to develop a guidance statement for BDPFs. Early discussions involved the consideration of requiring firms to provide compliant presentations to all prospective BDPF clients. This concept was eventually scrapped because of the difficulty and potential confusion this could cause. Factors weighing into this decision included the following:
- Many investment managers have a separate firm set up to handle management of BDPFs. The name of this firm is often not the same name as the firm claiming GIPS compliance.
- Composites can be single fund composites or can contain other accounts. Multi-account composites might not be appropriate to present to BDPF investors.
- Under GIPS, firms can choose (in many, but not all, circumstances) to present gross or net returns. Many countries require that funds’ returns be shown net. For GIPS purposes, net returns reflect the deduction of trading and investment management fees, but generally not the deduction of administrative expenses (such as custodial, legal, audit, and other similar fees). Many countries’ rules (such as those of the SEC in the U.S.) require fund returns to be net of everything.
The final version of this guidance statement has some differences from the exposure draft, which was issued in the first quarter of 2016. The final version of the guidance statement, which is effective starting on January 1, 2018, includes the following key provisions:
The Guidance Statement on Broadly Distributed Pooled Funds applies to publicly available pooled investment vehicles that meet the following three criteria:
- The pooled fund is broadly distributed.
- There is no or minimal contact between the firm marketing the pooled fund and prospective pooled fund investors.
- The firm has the ability to influence the pooled fund’s official documents or marketing materials.
Note: This definition was enhanced from the exposure draft in response to comment letters requesting greater clarity.
Four Required Disclosures:
The following items are required to be included in a document that will reach prospective pooled fund investors prior to or concurrent with their purchase of the fund. That document may be either an official pooled fund document required by local regulators, or fund specific marketing material prepared by the firm. The guidance statement notes that applicable law and regulations must be met, even if they differ from the requirements of the guidance statement.
- Description of the pooled fund’s investment strategy
- Indication of the pooled fund’s risk – can be qualitative or quantitative
- Pooled fund returns – calculated and presented as required by local laws. If local laws do not prescribe a calculation/presentation methodology, then firms must calculate net returns (net of all fund expenses), and follow presentation guidelines proscribed by the Guidance Statement that are similar to the GIPS Advertising Guidelines.
- Currency used to express performance
Note: The ability to make these disclosures in a fund-specific marketing document was not provided in the original Exposure Draft. This is a welcome change as some countries have rigid rules on what can and cannot be in the official offering document.
The Guidance Statement recommends, but does not require, that the following items be disclosed:
- Benchmark returns and a description of the benchmark
- Disclosure of sales charges and loads, and whether they have been deducted from the presented pooled fund returns
- The GIPS Pooled Fund Claim of Compliance as follows:
“XXX, the firm managing this pooled fund, claims compliance with the Global Investment Standards (GIPS®). For more information about the GIPS standards, please visit www.gipsstandards.org.”
Safe Harbor Provision:
This is a major change from the Exposure Draft, which did not contain such a provision. The Guidance Statement indicates that certain legal and/or regulatory regimes may require firms to provide prospective pooled fund investors with materials that include the four required items of this Guidance Statement. The CFA Institute will review these and determine if they qualify for inclusion under the safe harbor provision. If this is the case, then firms that fall under these legal and/or regulatory regimes will be considered to have met the requirements of Provision 0.A.9 and this Guidance Statement. The CFA Institute will maintain a list of legal and/or regulatory regimes that qualify for safe harbor treatment.
Although the safe harbor list has not been published yet, one would expect it to include the Securities and Exchange Commission rules for ‘40 Act funds.
Summing it Up
The Guidance Statement provides clarification on how firms can meet the requirements for Provision 0.A.9 for BDPFs. The final Guidance Statement can be found on the GIPS website.
In addition, a summary of the key differences between the Exposure Draft and the Final Guidance Statement can be found here.
Firms that claim compliance with the GIPS Standards and that manage funds should:
- Determine if their funds are BDPFs.
- For identified BDPFs:
- Check if the fund is offered under a jurisdiction that is on the safe harbor list.
- For funds not offered under safe harbor, make sure the offering document or fund-specific materials contain the four required disclosures.
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