The NASD Expense Ratio Reporting Requirement Change: How Does This Affect You?

The NASD Expense Ratio Reporting Requirement Change: How Does This Affect You?

To help provide more information and greater uniformity across the industry in how investment expense information is shown, NASD Rules 2210 and 2211 require materials that contain investment fund performance to show both a net and gross total expense ratio. In accordance with then-applicable regulations, generally fund informational materials provided by investment companies previously disclosed net total expense ratios only. This practice was common throughout the industry because net total expense ratios are the actual expenses that affect investment performance.

What is the difference between the net and gross expense ratio?

Net Expense Ratio
The net expense ratio is the expense ratio of the fund after applicable expense waivers or reimbursements. This is the actual expense ratio that investors paid during the fund’s most recent fiscal year.

Gross Expense Ratio
The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements.

Why are these fees waived?

In the case of funds with smaller assets, the gross total expense ratios may be much higher than net total expense ratios. This is true because certain fixed costs, such as legal and custodian fees, have a disproportionate impact on the expense ratio of a smaller fund in comparison to a larger fund. Mutual fund families also may choose to waiver fees to make the pricing of a fund more competitive.

What types of expenses are included in the gross and net expense ratios?

There is no difference in the types of expenses within a gross or net expense ratio. The net expense ratio is simply the gross expense ratio of a fund less any waivers or reimbursements.

What caused the need for reporting both the gross expense ratio? Were there abuses of some sort going on?

While there are no specific abuses of which we are aware, there is the potential that a fund family can discontinue a fee waiver without a shareholder vote. The NASD thought it was important that investors be aware of the potential gross expense ratio, in addition to the actual net expense ratio that investors paid.

What Does This Mean For Investors?

Ultimately this will not affect your investments or cause any reason for change. This is more or less a new reporting requirement that is put in place to provide as much objective information regarding a mutual fund as possible. You will still primarily be concerned with the net expense ratio since that is what will determine your real return, but you will begin to notice this additional number being reported on investment materials and online.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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