Final Report On Elements Of International Regulatory Standards On Fees And Expenses Of Investment Funds

FINAL REPORT ON ELEMENTS OF INTERNATIONAL REGULATORY STANDARDS ON FEES AND EXPENSES OF INVESTMENT FUNDS THE TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS NOVEMBER 2004 FINAL REPORT ON ELEMENTS OF INTERNATIONAL REGULATORY STANDARDS ON FEES AND EXPENSES OF INVESTMENT FUNDS Background 1. The Technical Committee Standing Committee on Investment Management (‘SC5’) has completed a review of existing practices with respect to fees and expenses in investment funds.1 Fees and expenses have long been a concern for regulators, and many jurisdictions are in the process of revising their approaches to these issues. 2. The review acknowledges the importance of fees and expenses in investment funds:2 - the investor should not rely solely on past performance to make an investment decision and that he or she should take fees and expenses into account when making such a decision. The bear markets experienced in recent years have increased the focus of both investors and regulators in this area; - ensuring transparency in this area encourages competition among fund operators. Competition leads to a more efficient market from which investors eventually benefit. 3. Yet identifying what fees and expenses are charged to funds and how these impact performance is not straightforward: high fees and expenses may simply reflect higher operating costs that lead to better performance. 4. Fees arrangements can also give rise to conflicts of interest and to breaches of the fiduciary duty of the investment fund operator. Some of these issues have to be dealt with by rules of conduct rather than with disclosure requirements. 5. Given the above remarks, all regulators consider that it is both appropriate and necessary to take regulatory steps in the area of fees and expenses. As a general rule, regulators do not dictate the level of fees and expenses; the focus of regulatory approaches has been to promote a competitive and informed market, which will then ensure that fees and expenses are understood in the context of the type and quality of services provided. Regulatory steps rely on a combination of general principles, disclosure requirements, prohibited practices and precise rules. This combination varies among regulators depending on their regulatory framework and on their assessment of the issues raised by fees and expenses. 1 In September 2003, IOSCO’s Technical Committee published a paper entitled ‘Fees and Commissions within the Collective Investment Schemes and Asset Management Sector: Summary of Answers to Questionnaire,’ available on the IOSCO website. That review represents a summary of regulatory approaches at a particular point of time (July 2002). 2 In May 2002, IOSCO’s Technical Committee also published a report entitled “Performance Presentation Standards for Collective Investment Schemes,” available on the IOSCO website. In February 2003, it published a consultation paper entitled “Performance Presentation Standards in Collective Investment Schemes: Best Practice Standards.” The first paper also acknowledges that fees and expenses may have a significant impact on the actual returns that are experienced by investment fund’s investors and notes that fund’s Performance Presentation Standards, which address whether fund’s performance calculations must reflect the impact of fees and expenses, promote comparability between funds. The best practice standards presented by the second paper deal, along with other issues, with the issue of fees and expenses in performance presentations. 2 Purposes of the paper 6. This paper aims at identifying common international best practices standards in the area of fees and expenses in investment funds through the identification of the goals that regulators should seek to achieve when dealing with some of the issues raised by fees and expenses. These best practices will evolve over time as regulators may take into account those stated in this document by adapting their approach. 7. These best practice standards deal with issues that were identified at this stage as key issues and where regulatory best practices were agreed upon, namely those raised by: - disclosure of fees and expenses to the investor - conditions of remuneration of the fund operator - performance fees - transaction costs - hard and soft commissions on transactions - fees associated with funds that invest in other funds (including funds of funds) - fee differentiation in multiclass funds - fees and changes in fund’s operating conditions 8. These standards are not intended to serve as comprehensive requirements for the regulation of