The GIPS Technical Committee is seeking comments on a newly proposed Guidance Statement. The purpose of the Guidance Statement is to address applying the GIPS Standards® to broadly-distributed pooled funds, as the existing standards do not directly address these funds.
Broadly distributed pooled funds (BDPFs) are funds which are unitized and broadly distributed, typically where there is no or minimal contact between the investment advisor of the pooled fund and the prospective pooled fund investors. Mutual funds are a good example of BDPFs, while private equity partnerships typically are not considered BDPFs.
What Led to the Proposed Guidance Statement
GIPS Standard 0.A.9 requires firms to make every reasonable effort to provide a compliant presentation to all prospective clients. This requirement, combined with the lack of direct guidance on how to handle BDPFs and the fact that many countries have different offering rules, led to this proposed guidance statement.
While it would seem easy to simply require firms to provide compliant presentations to all prospective BDPF clients, it’s not actually so easy or logical. In many cases, investment managers don’t have contact with BDPF clients (or prospective clients), as they are distributed by other institutions. Sometimes all the investment manager sees is an omnibus account.
Other potentially confusing factors:
- 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.
What the Guidance Statement is Proposing
The proposed Guidance Statement takes a minimalist approach, in that it requires the following items to be included in the offering document:
- Description of the investment strategy
- Indication of risk measures
- Return calculations that follow local rules, or if not mandated by local rules, that roughly follow the GIPS Advertising Guidelines, with the key difference being that net returns be presented that are net of all expenses.
What the Proposed Guidance Statement Does Not Require
The proposed Guidance Statement does not require including the GIPS claim of compliance nor disclosure of sales charges/loads, but notes that these are recommended.
Interestingly, the proposed Guidance Statement states that offering to provide investors with a GIPS compliant presentation is neither required nor recommended. Instead, Provision 0.A.9 would be deemed satisfied if the firm followed the list of required disclosures and calculation rules noted above.
Your Opinion Matters
Like all new GIPS pronouncements, the public is given an opportunity to weigh in with comments. If you firm manages mutual funds or similar funds that would fall under these new rules, we encourage you to provide feedback. The comment period is open until April 29, 2016. The draft of the guidance statement can be found here.
We will be happy to provide further information relating to this subject. For more information, contact Tom Peters, Director, Audit & Accounting at firstname.lastname@example.org.