We would like to thank you for the opportunity to make comment to The Addition of Fees Provisions and Guidance to the GIPS Standards.

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Linda Fletcher
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1 Association for Investment Management and Research Professional Standards and Advocacy P.O Box 3668 Charlottesville, Virginia Re: Proposed Fee Provisions for GIPS Fax: Oslo, 21 May 2002 INVITATION TO COMMENT: Global Investment Performance Standards (GIPS ) The Addition of Fees Provisions and Guidance to the GIPS Standards Dear Sir or Madame, We would like to thank you for the opportunity to make comment to The Addition of Fees Provisions and Guidance to the GIPS Standards. The Norwegian Society of Financial Analyst (Norske Finansanalytikeres Forening, hereafter-named NFF), is the sponsor for GIPS in Norway. Norsk GIPS as a Translation of GIPS was endorsed by IPC at the September meeting Our comments are as follows: IPC: Do you support AIMR s effort to develop global fee provisions to be added to the GIPS standards? We welcome AIMR s effort to add the fee provisions to the GIPS standards. A comprehensive job has been done by IPC to elaborate and clarify topics related to fees. A common understanding of how to treat fees will make performance numbers more transparent and reliable, and promote cross border competition. To GIPS fees will not only effect the achieved return. It will also determine which portfolios to be mandatory included in composites. GIPS 3.A.1 requires all fee-paying discretionary portfolios to be included in at least one composite. Non fee-paying portfolios can be included in composites, but this is voluntary to the firm, GIPS 4.A.12. As long as the firm has options when to include portfolios in composites, due to fee-paying status, we recommend IPC to consider a definition or recommendation of when a portfolio is to be considered fee-paying. 1

2 -Is it necessary with arm lengths prices? -Is it sufficient with a fee based on actual cost? IPCs argument to not charge custody fee per transaction against performance is that the selection of the custodian bank is outside the control of the firm. A modern custodian bank will often provide the firm with security lending programs. Such lending programs can sometimes offset the entire costs related to the safekeeping of the portfolio assets. If one where to mirror IPC argument such incomes should not be included in the portfolio return, since they are outside the control of the firm. We believe some firms may add such income to their performance. We support a parallel treatment of income and expenses from custodian banks in the GIPS standards. If all expenses and income from custodian banks are treated as administrative income / expenses, and not charged against performance, problems related to the selection of the custodian bank still remain. The manager can determine the amount on the cash account at the custodian bank, but not the terms on the account. This is outside the control of the manager, since the selection is done by the client (owner of the portfolio). The cash account will be included in the performance calculations. One solution to the problems could be to delete the level administrative fee, and instead use the expression asset based and transaction based fees. All items defined as transaction based, should be charged against (or added to) the performance. We also suggest making an addition in the part covering verification. As long as a definition of the treatment of fees is included in the standards, it should also be included in the verification procedures. Under Pre-verification Procedures it should be included: - Policy with regard to the treatment of fees. When calculating gross and net-of fees returns the manager can either use accrual accounting or cash accounting for fees. We would welcome a recommendation or requirement regarding which principle to use when accounting for fees, in the part covering Input Data. Will fees have be accrued in order to have portfolios at market value at least monthly (daily), GIPS 1.A.3? The proposed effective date for the fee additions to GIPS is 1 January IPC closed the period to receive comments on the additions of real estate to the GIPS standards IPC requested comments whether the additions of real estate should be included in the GIPS standards as soon as possible after , or not until

3 If real estate is included in the GIPS standards from 2005, or earlier, we would welcome inclusion of fees and expenses related to real estate in the final version of the additions of fees in the GIPS standards. IPC: Do you agree with upgrading the requirement for firms to present Gross-of-fees returns? So far gross-of-fees has been regarded as best practice when presenting performance numbers to prospective clients. We welcome the new 5.A.1 g since it will remove any confusion left whether firms are allowed to present gross-of-fees returns. Performance numbers gross-of-fees will also emphasis GIPS focus on prospective clients. If only gross-of-fees return is mandatory according to GIPS, most mutual funds will face problems when trying to achieve compliance to the standards. We believe that not only Norwegian mutual funds practice deduction of investment management fee from the performance statistics Following this important Additions covering Fees, we would welcome a Guidance Statement covering problems related to mutual funds. Such a statement could include an algorithm to transform net-of-fees to gross-offees for mutual funds, like the algorithm in DVFA-standards (Germany). The new 2.A.6 states that estimated trading expenses are not permitted. We welcome this modification. So far, and not limited to Norway, some mutual management firms transfer a part of the subscription fee charged from the client to the fund (portfolio). The intention of the transfer of the subscription fee is to offset the trading expenses due to the subscription. With the transfer from the subscription fee to the fund, existing clients will not suffer any losses due to the entry of new money to the fund. The transfer of the subscription fee to the fund (portfolio) raises several problems; 1) The transfer may be in conflict with 2.A.6 since the intention behind the subscription fee is to offset, or net, the trading expenses. 2) The transfer may be in conflict with 2.A.2 since it is a cash flow to the portfolio that is not adjusted for, when calculating the net asset value. The transferred amount will be included in the portfolio profit and loss account. The performance will increase, since it always is a cash inflow. We know verifiers handle the possible conflict with 2.A.2 differently. Some accept to net the trading expenses, while others demand adjustments for the cash flow, when calculating GIPS compliant performance. We do not know how the possible conflict with 2.A.6 can 3

4 be solved, except trough a separate Guidance Statement covering mutual fund. IPC: Should firms be required to present both Gross-of-fees and Net-offees returns? GIPS main focus is on prospective clients. Net-of-fees returns can be relevant information to new clients. As long as the net-of-fees returns is dependent upon the scale of the portfolios in the composite and the existing clients bargain power, we believe it should be a recommendation and not a requirement. GIPS allows non fee paying portfolios and portfolios with fees not negotiated at arm length prices to be included in composites, GIPS 4.A.12. As long as GIPS does not require only portfolios with fees negotiated at arm length prices to be included in composites, we find net-of fees returns not relevant to prospective clients. Many asset managers are subsidiaries of insurance companies and bank corporations. Large portions of the asset manager s composite may therefore include portfolios where the fees are not negotiated at arm length prices. Only gross-of fees returns can ensure the prospective client a relevant composite performance. IPC: Should firms be allowed to deduct the highest fee when calculating Net-of-fee returns? The purpose with presenting net-of-fees returns should be to give the prospective client a relevant return after deduction of management fees. We agree that using the highest fee can be a reasonable solution, but see problems related to performance-based fees. The net-of-fees return can be distorted if only one portfolio with performance based fee outperforms. The net-of-fees return would in such a situation not be a relevant number, to most prospective clients. An alternative or a supplement to the highest fee could be to use the fee on the smallest portfolio, since management fees normally is related to scale. IPC: Do you support requiring the disclosure of the firm s Fee Schedule? Yes, we agree with the implementation date. 4

5 IPC: Do you agree with the proposed method for treating Bundled Fees? We think IPC has found a reasonable solution on a very difficult topic. IPC: Do you agree with the proposed Effective Data of 1 January 2005? Yes we agree with the implementation date. We are uncertain how added provisions in 2005 should be treated retroactively according to 5.A.1. If they are to be treated retroactively back to 2000, we think this should be stated explicitly, so firms can take necessary steps to adjust their portfolio accounting systems as soon as possible. We thank you for giving us the opportunity to comment on the proposed additions to GIPS and we hope that our comments will be taken into consideration. Best regards, The Norwegian Society of Financial Analysts Gunnar Winther Secretary General All inquiries or comments related to GIPS should be sent to the chairman of the NFF Committee on Performance Measurement Mr. Jorn Kleven, AFA, CEFA, jorn.kleven@c2i.net 5

Guidance Statement on Fees

Adoption Date: 28 September 2010 Effective Date: 1 January 2011 Retroactive Application: Not Required www.gipsstandards.org 2010 CFA Institute GIPS Guidance Statement on Fees The purpose of the GIPS standards