Handling NAV Discrepancies and Equalization
Hi all,
For fund managers tackling NAV discrepancies and equalization, here’s a streamlined approach to stay compliant with your fund’s policies and GAAP, based on common challenges:
Stick to Your Governing Documents: If your fund prohibits fractional shares (like ours), reject any suggestions to use them. Instead, issue whole shares for significant adjustments and pay cash for amounts above a threshold (e.g., $50). This keeps things clear and avoids governance conflicts.
Handle NAV Discrepancies:
For amounts above your threshold, pay cash directly to investors.
For smaller discrepancies, book them as liabilities to settle later (e.g., on redemption).
Example: A $1,500 discrepancy could be settled with cash, while a $5,000 adjustment might involve whole shares plus cash for the remainder.
Manage Equalization:
Use whole shares to adjust performance fees, ensuring fairness across investors with different entry points.
For negative equalization, book it as a liability rather than charging the fund directly to avoid GAAP issues (ASC 250) and investor disputes.
Example: Issue one share for a positive $2,000 adjustment; record a $3,000 negative adjustment as a payable.
Accounting Entries:
Debit adjustment expenses and credit cash or equity for positive adjustments.
For negative adjustments, debit equity and credit accounts payable to reflect liabilities.
Ensure entries align with fairness principles to avoid regulatory scrutiny (e.g., SEC Rule 10b-5).
Dealing with Third-Party Proposals:
If a vendor suggests fractional shares or direct charges, refer them to your fund’s policies.
Share prior guidance to reinforce your framework and avoid missteps.
This approach minimizes complexity, upholds investor fairness, and keeps you compliant. If you’re facing pushback from third parties, double-check your documentation and communicate clearly to align everyone.
Hope this helps—happy to discuss further!