GIPS Reports – Managing Distribution Requirements
Does your firm manage segregated accounts and pooled funds? Are you writing 2020 policies to provide a composite report with the fee schedule and expense ratio for the fund in the disclosures? Do you have policies requiring you provide a pooled fund report? Are there ways to avoid having two different composite reports, one for prospective clients and one for prospective investors?
Many firms don’t know in advance of initial meetings whether a prospect is going to be a prospective investor (in a pooled fund product) or a prospective client (in a segregated account). So what if you provide a GIPS Composite Report—without your fund’s expense ratio or fee schedule—and the prospective client turns into a prospective investor?
Firms are allowed to have a prepared addendum ready that has the additional required fund fee and expense information available, or you can use the fund’s offering documents. See CFA Institute’s Q&A on this below. Your account representative would simply hand the information to your now prospective investor and fulfill the requirement. The addendum could include multiple fund share class fees and expense ratios, or you could provide the prospective investor an addendum with the share class information that is specific to them.
Keep in mind, following up with an addendum/offering documents is a compliant process only if the firm thought this was a prospective client and the prospective client turned into a prospective investor. Alternatively, your firm’s policy could be to attach the addendum to the GIPS Composite Report in advance for prospective investors or likely prospective investors.
The benefit of using the GIPS Composite Report: If a prospective investor becomes a prospective client for the same strategy and you provided the prospective investor with a GIPS Composite Report that includes the composite fee schedule, you do not have to provide anything further, and you have met the requirements of providing the information to the now prospective client. However, if you provided them a GIPS Pooled Fund Report you will need to provide them with the GIPS Composite Report.
Figures 1 and 2 provide clarification on when you should provide which report or an addendum. Figure 1 assumes that the firm is meeting with a prospective client and Figure 2 assumes the firm is meeting with a prospective investor where the fund is included in a composite:
Interested in more Pros/Cons of using Pooled Fund or Composite Reports? Read our previous article on “2020 GIPS standards – Bridging the Commingled Fund vs Composite Divide.”
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CFA Institute has been publishing clarifying questions to the 2020 GIPS Standards in their GIPS Newsletter each month since the 2020 GIPS standards were released (sign up here to receive them). There have been many questions regarding pooled funds and the new requirements. The question below published by CFA Institute in March 2020 is key in establishing consistent GIPS Report distribution policies.
Question: Our firm met with a prospect that we believed was interested in a segregated account for one of our composite strategies (i.e., the prospect is a prospective client), and we provided the prospect with the appropriate GIPS Composite Report. The GIPS Composite Report included the fee schedule for a segregated account. Subsequently we determined that the prospect is interested in a pooled fund that is included in the composite (i.e., the prospect is a prospective investor). In this case, to meet the requirement to provide a prospective investor that is interested in a pooled fund with the pooled fund’s fee schedule and expense ratio, can we provide the fund’s offering documents that contain this information?
Answer: Firms must make every reasonable effort to provide a GIPS Report to all limited distribution pooled fund prospective investors. (A limited distribution pooled fund is any pooled fund that is not a broad distribution pooled fund. A broad distribution pooled fund is a pooled fund that is regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares and it is not exclusively offered in one-on-one presentations.) The GIPS Report must include the fee schedule and expense ratio for the limited distribution pooled fund that the prospective investor is interested in. This is true whether the firm is providing a GIPS Pooled Fund Report for the respective fund or a GIPS Composite Report for the composite that includes the fund. At times a firm may believe that a prospect is interested in a segregated account, and so the firm will provide a GIPS Composite Report to what is believed to be a prospective client. If the prospective client subsequently is interested in a pooled fund that is in the composite, the firm must provide the fee schedule and expense ratio for the pooled fund, if this information was not included in the GIPS Composite Report that was previously provided. The firm may provide this information as an addendum to the GIPS Composite Report and could use the fund’s offering documents as the addendum.