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Saturday, July 2, 2022

New SEC rules on Expense Ratio, Incentive Fee Calculations Takes Effect

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Sequel to the publication of new Rules relating Collective Investment Schemes in December 2019, the Nigerian Securities and Exchange Commission (SEC) has issued the following clarifications to facilitate effective compliance with the new CIS Rules.

1. All Fund Managers of Collective Investment Schemes are required to comply with the provisions of the new Rules and file evidence of compliance on or before September 30 2020;

2. The application of the new total expense ratio and incentive fee computation takes effect from the beginning of Q3,2020, i.e. July 2020;

3. Incentive fees should not be factored into total expense ratio computation and shall be assessable and payable on an annual basis;

4. The Fund Managers Association of Nigeria (FMAN) shall submit acceptable benchmarks for Money Market Funds, Balanced Funds and Ethical Funds at the beginning of each year commencing Q3. 2020;

Details of the SEC Nigeria Regulation on Incentive Fees are listed below:

(a) all unit trust schemes shall be benchmarked to an appropriate index.

(b) a fund manager may charge incentive fee where a Fund has outperformed its stated benchmark.

The incentive fee shall be chargeable on the total annualized returns above the benchmark and up to 20% of the excess returns; Provided that:

(i) a Fund’s stated benchmark shall be reflective of the nature of the Fund and its underlying instruments;

(ii) only actively managed Funds may charge incentive fee;

(iii) where a Fund underperforms its benchmark, the management fee charged shall decrease by the same percentage by which the Fund underperformed;

(iv) the fund performance must have reached a high-water mark. A high-water mark is reached when the fund’s value (per unit basis) exceeds its highest historical record.

(c) the provisions of this Rule shall also apply to open-ended investment companies, real estate investment schemes and other relevant schemes.

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