On 25 August 2016, the Board of the International Organisation of Securities Commissions (IOSCO) published the final report on good practice for fees and expenses of collective investment schemes (CIS). The aim of this report is to identify common international examples of good practice that can be applied to CIS fees and expenses.

Scope

This report aims at CIS whose shares or units are permitted to be sold to retail investors. CIS intended for professional investors only, such as hedge funds using prime brokers or schemes investing in private equity and venture capital, are not in the scope of this report. The term CIS includes authorised or regulated open-ended funds and closed-ended funds whose shares or units are traded on regulated or organised markets.

Background and purpose

Regulators have long been concerned about CIS fees and expenses as they have a significant impact on the investment returns, and appropriate transparency is required to ensure that investors take an informed investment decision. Regulators also recognise that the transparency on the fees does not prevent that fee arrangements give rise to conflicts of interest that must be addressed by rules of conduct. High standards of transparency and conduct in this area should help encourage competition among CIS operators and lead to a more efficient market, thereby eventually benefitting investors.

A first IOSCO review was performed in 2004 on existing practices relating to CIS fees and expenses. These practices evolved over time as the natural evolution of the industry resulted in new product structures, investment strategies and distribution models. Therefore, taken into recent consideration developments in the member jurisdictions, a second review was carried out in 2015 reflecting a wider range of regulatory approaches towards markets at differing stages of maturity.

Good practice

The following 23 examples of good practice are presented in this report and reflect approaches to issues identified by regulators in some key areas:

Permitted and prohibited costs

Good practice 1: fees and expenses which cannot be deducted from the assets of a CIS may be decided or guided by regulators. The scope of fees and expenses which may or may not be deducted from the assets of a CIS should at least be indicated in documents disclosed to investors and then mandated by legislation/regulation.

Performance-related fees

Good practice 2: when allowing performance fees, a regulatory regime should set standards for the method of calculation, the information disclosed to investors and the disclosure medium. The principle of equitable treatment of investors should be respected in any case. The calculation methods should be designed by CIS operator allowing for the performance fee to reach a value that is proportionate to the CIS investment performance.

Good practice 3: a performance fee need to meet three different criteria to ensure that it is consistent with the investment objectives of the CIS and does not incentivise the CIS operator to take excessive risks in the hope of increasing its remuneration: a calculation based on unambiguously determined process, a yearly payment only of the amount to the operator, benchmarks used must be verifiable and provided by an independent party.

Good practice 4: a calculation of the performance fee based on the fulcrum fee must fluctuate proportionately to the investment performance of the CIS over a period; be calculated on the net assets net of costs. When the performance fee is not based on the fulcrum fee, the positive performance must be calculated net of costs.

Good practice 5: investors should be well informed of the existence of the performance fee and its potential impact on the return on their investment.

Sources of information about fees and expenses

Good practice 6: both prospective and current investors should dispose of information on the key elements of fees and expenses and on where and how they can obtain more detailed information to make informed investment decisions.

Making information accessible to investors

Good practice 7: the information on fees and charges must be presented in simple, concise and clear language, distinguishing between the direct and indirect costs. This information shall take the form of a standardised fee table disclosing the TER or an equivalent calculation (e.g., ongoing charges)

Good practice 8: the disclosure should include the cost structure of the CIS so that investors realise the impact fees and expenses have on the performance of the CIS.

Historical and forward-looking information

Good practice 9: the fees and expenses paid on an historical basis should be described, and such description be kept up-to-date. Historical information on the fees charged over a period shall be disclosed at least annually. Fees and expenses likely to be paid may also be described.

Good practice 10: disclosed fees and expenses should enable investors to compare the costs of different CIS.

Use of electronic media

Good practice 11: disclosure of CIS fees and expenses using electronic media is encouraged under certain conditions. Sufficient and accurate information provided to investors who use electronic distribution channels should be ensured before investors invest in CIS.

Transaction costs

Good practice 12: regulators could either define the meaning of transaction costs or specify the types of payment which should not be charged to the assets of the CIS as a transaction cost, or indicate the way the value and/or impact of transaction costs are determined.

Issues with transaction cost transparency

Good practice 13: the transaction costs of the CIS should be disclosed to investors before they invest. Enough detail on transaction costs should be provided in order not to mislead investors. The actual amount of transaction costs could also be disclosed to investors.

Hard and soft commissions on transactions

Good practice 14: conflicts of interest arising from soft commission should either be eliminated, or managed in the best interests of investors.

Good practice 15: transactions should always be executed according to the principles of best execution, be undertaken for the benefit of the CIS and its investors and not to generate an order flow or dealing commission. When hard commissions are permitted, they should be for the exclusive benefit of the CIS and should not be a criterion for a CIS operator to choose an intermediary to perform or arrange execution.

Good practice 16: when soft commission is permitted, they should not be the only criterion for a CIS operator to choose an intermediary to perform or arrange execution.

Managing and disclosing the conflicts of interest effectively

Good practice 17: rules, guidance or a regulatory code could help CIS operators identify the types of goods and services to be or not to be paid for with dealing commissions. Regulatory approaches taking the form of principles or a non-exhaustive list of examples will help reflect the specific arrangements that the CIS operator may face. In this context, operators should develop policies and procedures (e.g. record-keeping of arrangements and oversight the use of soft commission) to manage those arrangements in the interests of the CIS and its investors.

Disclosure of hard and soft commission arrangements

Good practice 18: hard or soft commission should be disclosed by a CIS operator to investors before they invest. The disclosure information should include at least the existence of such arrangements, the acquired types of goods and services through soft commission and the measures to manage the conflicts of interest on commission payments. Information should be periodically disclosed on the transactions executed and the related commissions paid.

CIS that invest in other vehicles

Good practice 19: information on fees and expenses should make investors aware of the impact to performance in case of a double fee structure. The management costs of the investing CIS and underlying CIS should be presented to investors if a CIS invests substantially in other vehicles.

Good practice 20: conflicts of interest arising from investment in other funds should be avoided or mitigated. Permitted fee-sharing agreements should exclusively benefit the investing CIS. The fact that the investing CIS invests in underlying funds managed by affiliated parties should be disclosed to investors, and any subscription/redemption fees charged by the underlying fund should be waived.

Multi-class CIS

Good practice 21: In the context of share classes, the principle of equal treatment of investors applies to those investing or having invested in the same share class.Those investors shall be charged the same fee, as disclosed in the prospectus and no waiver shall be applied to certain investors and not others. The prospectus must clearly indicate the different fees that are applicable. The different fees must be set based on objective criteria. A share class may not benefit from advantages that are to the detriment of another share class.

Changes to the fees and expenses of a CIS

Good practice 22: changes to the fee structure must be approved in advance by the regulatory authority. The regulator should require an amendment to the information disclosed to investors provided the change be material.

Good practice 23: existing investors should be made aware of changes to fees and expenses. When changes are significant, the CIS operator should allow a period between the notification to investors and the date the changes enter into force; or allow investors to redeem free of charge before the entry into force or allow investors to vote against such change.

Examples of disclosure fee tables and a summary table of good practices are presented in Annexes 2 and 3 to the report.

The final report of the IOSCO is available at the following web link: http://bit.ly/2coDoVs