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Proposal on Disclosures for Investment Funds Dropped

April 8, 2014

After hearing negative feedback on a document that was slated for public release early this year, a majority of the FASB agreed to scrap a proposal that would have required new disclosures from investment companies that invest in other investment funds. The disclosures were designed to offer insight into the risks and expenses of these investments, but critics said they did not go far enough to warrant the extra work involved in compiling the information.

After taking several steps to scale back its original plan, the FASB on April 4, 2014, voted to scrap a proposal that would have required investment companies to provide information detailing the stake they have in other investment funds and the risks of those investments.

A 4-3 majority of the FASB decided to nix the proposal—which was supposed to be released for public comment early this year—after external reviewers of the draft said the disclosures did not give enough information about assets, liabilities, or leverage of an investee fund, and that they would prefer to see ratios of returns and expenses.

“Yes, I am interested in total assets, I am interested in the total short, I am interested in a lot of things. But the thing I’m most interested in is, are you deviating from your strategy?” said FASB member Harold Schroeder, a former investor. “This doesn’t help me get any of that information. I need to get deeper.”

FASB member Daryl Buck concurred, saying the board had to balance the usefulness of the proposed requirements versus the work involved to compile it. Critics had told the board that by the time investment companies disclosed the information, it would be stale, anyway, board members said.

“It seemed like it has become, in my mind, less and less useful information for the level of effort that would be expended to get it,” Buck said. “I’m to a point on my thinking that I would probably agree to drop it.”

While a majority of the board agreed to eliminate the project, other members tried to advocate for the FASB to do something to offer better transparency about the risks the funds incur and the value of their investment assets.

“I have to agree with the staff that we need some effective way to get some information,” FASB member Lawrence Smith said, referring to the FASB’s research staff recommendation, which was to tweak the disclosure rules as opposed to eliminate them.

FASB member Thomas Linsmeier offered a more skeptical assessment of the situation. He said the FASB had responded too easily to criticism about the original project that it watered down the proposal to the point of making it useless.

The board had first toyed with requiring investment companies to consolidate, or report on their balance sheets, the investments they held in other investment funds, but companies balked, saying it would gross up their balance sheets. The board also briefly discussed requiring some types of investment companies to attach to their financial statements the financial statements of the funds in which they invest, but companies said they sometimes invest in several funds, and this would require many extra pages in their filings.

“As typical in our process, once they get their way on recognition and measurement, and we move to disclosure, then the disclosures are impossible,” Linsmeier said. “So I’m a little, again, frustrated by the normal path of win one thing, go to another, and argue that’s what you should be able to provide, and argue that you can’t provide even that.”

The FASB’s proposal would have required information about a company’s share of management fees and incentive fees, or the percentage amounts of such fees, as well as the fair value of its share of income and loss from its investment in investee funds. For cases where the investment company owns more than 20 percent of an investee fund, the company would have had to disclose whether its ownership share was between 20 percent to 50 percent of the net assets or whether its ownership stake was greater than 50 percent of the net assets.

The FASB had scaled back some of the disclosure requirements in October and planned to release a proposal for public comment early this year.

The disclosure package was a leftover from the board’s broader effort to define an investment company. The FASB in June 2013 published Proposed Accounting Standards Update ASU No. 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, which clarified how a business can determine if it is an investment company and can account for its holdings at fair value.

That standard did not tackle disclosures about investments in other funds because the FASB received mostly negative feedback on an earlier plan to require a holder of more than 5 percent of a fund to describe the fund, disclose the percentage of the net assets invested, the fund’s total assets, total debt, net assets, and expense ratio.

Companies and asset managers balked. They said that although the information might be available, it wouldn’t be available in a timely manner. Moreover, the reporting investment company could be restricted by confidentiality agreements.

FASB Chairman Russell Golden said at the end of the meeting that the board would decide later on whether it should require a feeder fund to attach the master fund’s financial statements with its own financials. The board also would weigh whether all investment companies should disclose each investment owned by an investee fund that exceeds 5 percent of the reporting investment company’s net assets.

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