There is often confusion surrounding broadly distributed pooled funds for firms that comply with the Global Investment Performance Standards (GIPS® Standards). Accordingly the CFA Institute, while they continue to work on globally revamping GIPS® Standards via the GIPS 2020 project, recently approved the final Guidance Statement on Broadly Distributed Pooled Funds (the Statement), effective January 1, 2018. The Statement clarifies the content and distribution of information to prospective pooled fund investors and bridges the gap between the 2010 edition of the GIPS® Standards and GIPS® 2020.
 
The Statement is applicable to publicly available pooled investment vehicles: 

• That are broadly distributed,
• That typically have no contact or minimal contact between the firm marketing the pooled fund and prospective pooled funds, and
• In which the firm marketing the pooled fund has the ability to influence the fund’s official documents or marketing materials. 

Since current GIPS® Standards do not address broadly distributed pooled funds, the treatment of pooled fund assets is generally inconsistent. Specific areas of confusion include: 

• Whether to include or exclude pooled fund assets in a composite, or if they should be in their own composite or commingled with other similar accounts managed by the same strategy.
• Whether the requirement to provide compliant presentations to all prospective clients also requires a presentation to prospective fund investors.
• With respect to marketing material, local laws and regulations govern what information can and should be included for purposes of marketing to prospective pooled fund investors; however, those materials may be prohibited for purposes of inclusion in a compliant presentation.
• How local laws and regulations also may govern the calculation methodology of net asset value for the pooled fund, which would include certain expenses that would extend beyond what is required for purposes of presentation in a compliant presentation. 

This Guidance Statement outlines both required and recommended items that need to be included in at least one document that would be intended to reach a prospective pooled fund investor, prior to or concurrent to purchase into the pooled fund. The document may either be an official pooled fund document required by local laws and regulations or other fund-specific marketing material.
 
It is important to note that many of the required items noted in this Guidance Statement are already required by local laws and regulations within current official pooled fund documents (such as a Key Investor Information Document, a Mutual Fund Prospectus and a Product Disclosure Statement). So the new Statement may not require many changes, if any, to current official pooled fund documents or fund-specific marketing material.
 
The required and recommended items include the following: 

Required:

• The description of the pooled fund’s investment mandate, objective or strategy.
• An indication of the pooled fund’s risk (either qualitative or quantitative) as mandated by local regulators. If there is no specific risk measure mandated by local regulators, the firm may choose an appropriate risk measure to present.
• The pooled fund returns calculated according to the methodology and for the time periods required by local regulators. If local laws or regulations do not mandate the methodology for calculating pooled fund returns, a pooled fund net return must be calculated and presented (a pooled fund net return is a time-weighted return that is net of all fees charged against the fund). If specific time periods are not mandated by local laws and regulations, the Guidance Statement outlines three options from which to choose to calculate the pooled fund return.
• The currency used to express performance. 

Recommended:

• Benchmark total returns and benchmark description
• Sales charges and loads
• GIPS® pooled fund claim of compliance 

Per Provision 0.A.9 of the GIPS® Standards, firms are required to make every reasonable effort to provide a compliant presentation to all prospective clients. Under this Guidance Statement, assuming all required items are met as noted above, firms managing broadly distributed pooled funds will have met the requirements under Provision 0.A.9 of the GIPS® Standards. However, firms are still required to provide a compliant presentation to a prospective pooled fund investor for a composite that includes the pooled fund, if requested.  
 
While this Statement will bridge the gap from the 2010 edition of GIPS® Standards to GIPS® 2020 with respect to distribution of compliant presentations to investors who invest in broadly distributed pooled funds, there will be much anticipation as the industry waits to see what GIPS® 2020 has in store for all.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.