On 18 August 2016, the Board of the International Organisation of Securities Commissions (IOSCO) published a consultation report on good practices for the termination of investment funds, proposing a set of good practices (15 in total) for the voluntary termination of investment funds.

The aim of this consultation is to obtain feedback from stakeholders on the proposed good practices by 17 October 2016.

Scope

The report targets collective investment schemes (CIS) and other fund structures such as commodity, real estate and hedge funds whether they are closed-ended or open-ended. It also refers to both retail investment funds and funds sold to professional investors as some of the issues are also relevant to this latter category.

Purpose

IOSCO acknowledges the importance for investment funds to have termination procedures in place from an investor protection perspective. The decision to terminate an investment fund can have important impacts on investors regarding cost or their ability to redeem their holdings promptly during the termination process. Both retail and professional investors can be affected by the ultimate value of their investment in a fund at the time of termination.

Most regulatory regimes have certain criteria for the termination of investment funds in their jurisdiction, ranging from the overarching obligation to act in the best interests of investors, to prescriptive requirements for liquidating the portfolio and the payment of final distribution proceeds. However, in most jurisdictions, legislation at a national level addresses involuntary terminations (e.g. insolvency of an investment fund).

IOSCO’s work focuses on voluntary terminations with the objective to develop a set of good practices for the termination of investment funds that take into account investors’ interests. Voluntary terminations typically take place because an investment fund is no longer economically viable or can no longer serve its intended objectives, though still solvent. The responsible entity takes the decision to terminate in these cases. However, this decision may be relied on factors outside its direct control (e.g. in the case of resignation of the fund service provider).

In some jurisdictions, instead of liquidating its assets and repaying investors, an investment fund will seek to merge its assets with another investment fund managed by the same responsible entity. In this context, IOSCO is considering whether the issues arising from investment fund mergers would generally have a particular impact on the termination process.

Good practices

IOSCO consults on 15 proposed good practices on the voluntary termination of investment funds that are categorised under the following headings:

Disclosure at Time of Investment

• Good Practice 1: investors should be provided with information regarding the ability to terminate an investment fund and the processes for effecting such termination at the time of investment. Therefore, the fund documentation should outline the general termination circumstances, set out the extent to which investor approval or consent is required to effect the termination, indicate that a termination plan will be prepared by the responsible entity and finally provide a high-level overview of the key items that will be covered in the termination plan.
• Good Practice 2: The documentation of the investment fund should detail how the responsible entity will deal with investors who are not contactable at the time of termination.

Decision to Terminate

• Good Practice 3: When deciding on the termination of an investment fund, the responsible entity should take the best interest of investors into consideration.
• Good Practice 4: Upon deciding of the termination of an investment fund, a termination plan must be issued by the responsible entity setting out the steps to be taken during the termination process. The termination plan should take into account the best interests of investors. Some key items should also be included in the termination plan (e.g. the rationale for terminating the investment fund, details on the estimated costs of the termination, investor dealing arrangements).
• Good Practice 5: Suspending investor subscriptions and redemptions should be considered by the responsible entity during the termination process of an open-ended fund to protect the interests of investors.
• Good Practice 6: The responsible entity of the investment fund should approve the termination plan. In relevant circumstances, the termination plan should also be approved by the custodian.

Decision to Merge

• Good Practice 7: the decision to merge an investment fund with another investment fund should be clearly communicated to investors by the responsible entity.
• Good Practice 8: as far as possible, investment funds should be merged only when they have similar investment objectives, policies and risk profile.
• Good Practice 9: the right to redeem free of redemption or exit charges should be offered to investors before the merger takes place. The responsible entity should inform investors of the available alternatives sufficiently ahead of time.
• Good Practice 10: Where the decision to merge results from a commercial decision, all costs should be borne by the responsible entity, and if it decides not to do so, it should document this decision in the investor communication including a rationale for the decision.

During the Termination Process

• Good Practice 11: appropriate/adequate information about the termination process must be communicated to all investors concurrently and in an appropriate and timely manner. The responsible entity should keep investors up-to-date for any change.
• Good Practice 12: fair valuation of the assets should be ensured and arising conflicts of interest should be addressed during the termination process and in the context of valuing assets of the terminating fund.

Specific Types of Investment Funds

• Good Practice 13: the ability to redeem in specie may be offered to professional investors in a terminating investment fund upon obtaining the consent of the investor and ensuring that the other investors will not be harmed.
• Good Practice 14: side pockets may be used as part of the termination process when side pocketing is foreseen in the documentation of the fund.
• Good Practice 15: the procedures required to achieve an orderly wind-up of the fund should be taken into account before the anticipated termination date of the funds with a finite duration.

The consolidated list of consultation questions is presented in Appendix 1 to the consultation document.

The full IOSCO consultation is available at the following link: http://bit.ly/2c941jy