Good practice for CIS should help encourage competition

High standards of transparency and good practice for Collective Investment Schemes (CIS) operators in the area of fees and expenses should help encourage competition among them, according to the board of the International Organisation of Securities Commission (IOSCO).

As regulators internationally have been concerned about the potential impact of CIS fees and expenses on investors and their decision-making processes, IOSCO decided to carry out its second review of the existing practices with respect to CIS fees and expenses, taking into account recent developments from across a number different jurisdictions.

In its report, IOSCO identified over 20 examples of good practices across a number of the areas. This included the definitions of permitted and prohibited costs, including the regulators' right to give guidance on fees and expenses that could not be deducted from the assets of a CIS, ways of remunerating CIS operators, and guidance on performance-related fees.

The set of good practice rules in the report also discussed the methods of calculation of performance fees, including the information the CIS operator would be obliged to disclose to investors in those regimes which allowed such fees. Under those regimes, CIS operators should also not be encouraged to take excessive risks in the hope of increasing its own remuneration.

Additionally, investors should be adequately informed of the existence of the performance fee and its potential impact on returns that they would receive on their investments.

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As far as the sources of information about fees and expense were concerned, regulators should be encouraged to facilitate access for investors to properly disclose information enabling them to make informed decisions about whether they wished to invest in a given CIS, accepting a particular level of costs.

According to the report, investors should also needed to be educated to understand whet fees and expenses were charged for and the impact of those fees on the performance of the CIS.

Information should also describe the fees and expenses actually paid on an historical basis, as well as the fees and expenses likely to be paid on an anticipated basis. Investors should have an opportunity to compare costs of different CIS.

When it comes to transaction costs, the regulators should be able to define the term, and it should be fully disclosed that CIS may incur certain transaction costs.

The report also emphasised the role of soft commission arrangements and how they might create conflicts of interests for CIS operators, following by methods of managing or eliminating them in the best interests of investors.

Transactions should be entered for the benefit of the CIS and its investors and not to generate an order flow and/or dealing commission.

IOSCO also paid attention in its report on how to manage and disclose conflicts of interest effectively between the interests of CIS operators and those of the CIS and its investors, and emphasised disclosure of hard and soft commission arrangements and the relevant information about them.

Additionally, in case of the CIS investing in other vehicles, including funds of funds, investors should be aware that there could be a double fee structure, conflicts of interest arising because of investment in other funds and how they could be avoided, while in terms of multi-class CIS, the existence of different share classes should not breach the principle of equal treatment of investors who invest in the same share class.

Furthermore, all requirements should aim to make current investors aware of changes to fees and expenses that have occurred.