The latest outputs from IOSCO’s Investment Management Committee cover good practice for fees and expenses of Collective Investment Schemes (CIS) and a new consultation on good practice for the termination of CIS.
In both areas of work on CIS, IOSCO is seeking to build on existing national and regional requirements, with a focus on improving investor protection. Although IOSCO states that the good practices are not intended to impose obligations on regulators, its outputs are increasingly being read as defining the bright line between basic investor protection safeguards and inadequate operational behaviors. Regulators may find themselves having to justify to stakeholders and market commentators why they do not impose on their domestic industry requirements that are on the right side of the line.
IOSCO’s good practices for CIS cover both regulated open-ended funds and closed-ended funds whose shares are traded on a regulated market. The 22 good practices on fees and expenses cover both fees paid directly by the investors to the CIS operator or its agent or associate, and any fees or expenses paid out of fund assets. IOSCO describes the latter as falling into four broad categories: remuneration of the manager (including the method of calculation of performance fees); distribution costs; other fund operating expenses (such as custody, fund accounting or administration costs for shareholder service providers); and transaction costs associated with purchases and sales of portfolio assets (including securities lending and repo / reverse repo transactions). The report makes no observations on regulatory or other expenses that may be paid out of fund assets.
Many of the good practices focus on disclosure to investors. Information should be disclosed to both prospective and current investors in a way that allows them to make informed decisions about whether they wish to invest in a CIS and thereby accept a particular level of costs. Key elements of fees and expenses should be summarized and their impact on the performance of the fund explained. Disclosure of ongoing charges is specifically mentioned.
The report includes a dedicated section on the calculation and disclosure of transaction costs. In particular, IOSCO notes there seems to be a consensus that explicit transaction costs can be determined accurately after the event; there is less agreement on whether implicit costs can be measured retrospectively. Estimating transaction costs in advance is even more prone to variation. There is a risk that predictions of costs could turn out to be so inaccurate as to be misleading and illegal in some jurisdictions.
These statements are in sharp contrast to the draft European rules for the PRIIP KID proposals on the calculation of future transaction costs for funds.
IOSCO’s consultation on good practices for voluntary fund terminations evidences its continued focus on investor protection and on facilitating knowledge-sharing by regulators around the globe. Reading between the lines, there seems also to be a desire to encourage convergence of regulatory requirements and industry practices.
Most of the draft good practices are concerned with the process of termination – that it is done in the interests of investors, that investors are properly informed throughout, and that, where possible, they are offered options for the treatment of existing share holdings. In contrast, the first good practice sets out information to be provided to investors at the time of investment. In a European context, this cuts across regulatory endeavors to ensure that potential investors receive minimal and digestible key information upfront and are advised where further information can be found (e.g. in a fund’s prospectus). The UCITS KIID and the new PRIIP KID could not accommodate such text because of size constraints and the focus on key information.