Consultation paper: Draft guidance on disclosure of certain fees and returns by managed funds

First published 28 October 2015

We have prepared a draft guidance paper on topics which we think would help licensed managers, supervisors, and their professional advisers when they prepare their fund updates and product disclosure statements to meet obligations under the Financial Markets Conduct Act 2013.

This draft guidance paper highlights our thoughts on the:

1. calculation of returns applying a 0% prescribed investor rate (PIR)
2. classifying underlying fund charges
3. calculation and disclosure of performance-based fees in managed funds.

We are seeking feedback on this guidance.

Submissions closed on Friday 27 November 2015.  All comments should be submitted to [email protected] with the subject line: ‘Draft guidance on disclosure of certain fees and returns by managed funds: [Your entity name]’.  

Update

26 May 2016

Please see our response to submission on fee disclosure by managed funds which summarises our response to submissions made by the industry on key areas of this guidance note including:

• the approach to classifying an investment as an underlying fund
• concerns over the treatment of listed entities as underlying funds
• concerns over the proposed approach to managers’ basic fee disclosure

Update

29 February 2016

We received 27 submissions for this consultation. 

Key issues raised in the submissions

As a result, we have published two information sheets (see below). Both are designed to help managers, supervisors, and their professional advisers understand certain disclosure obligations under the Financial Markets Conduct Regulations 2014 (the Regulations). They are:

How to calculate 0% PIR returns 

This details the formula we expect managers of portfolio investment entity (PIE) funds to use when calculating a funds return with a 0% prescribed investor rate.

Submitters strongly supported the calculation formula. Many felt a standardised format would give managers a consistent approach, and improve investors’ ability to compare returns among schemes.

Some questions were raised on whether other items, such as formation losses, should be included within the list of permitted ‘tax credits’. The information sheet does not set out to provide an exhaustive list of what could be considered tax credits. However, it has been clarified that formation losses may be included.

How performance-based fees should be disclosed

This details expectations around the disclosures funds should make when they apply a performance-based fee that either does not include a high water mark, or is based on a market index different to the one used to measure performance in the fund update.

All submitters agreed that a PDS should declare to investors when the fund does not apply a high water mark to its performance-based fee. Some submissions further suggested a performance fee should not be charged in the absence of a high water mark.

As the Regulations do not limit the types of fees that managers may charge, we are unable to prescribe a high water mark obligation. However, we have made some alterations to the suggested wording to help investors understand the potential impact of a fund not having a high water mark.

Most of the submissions also agreed investors should be told when a fund’s hurdle rate was based on a market index different to the one the fund used for comparing its performance in the fund update.

A number of submitters were concerned over the use of the term ‘appropriate market index’. It was noted that although this is how the legislation is worded, suggesting that the use of another index was ‘inappropriate’ was likely to be prejudicial. Based on these submissions, we have slightly revised the suggested disclosure wording.

Disclosure of underlying fund fees

As part of the consultation process we also sought the industry’s feedback to determine:

• whether an investment asset is an underlying fund 
• what underlying fund fees should be included as part of the management and administration charges disclosure.

The industry also raised a number of potential issues on how to implement our guidance. We are considering parts of the guidance to ensure that any compliance costs are balanced with the benefits of our proposals. We may have a targeted consultation with the industry before finalising our guidance in this area.