efama’s comments on the iosco’s · objectives. generally speaking, some specific calculation...

rue Montoyer 47, B-1000 Bruxelles

+32 2 513 39 69 Fax +32 2 513 26 43 e-mail : [email protected] www.efama.org VAT Nr BE 0446.651.445

EFAMA’s comments on the IOSCO’s

Report on Elements of International Regulatory Standards

on Fees and Expenses of Investment Funds

Introductory Comments

EFAMA would like to thank IOSCO for the opportunity to provide views to its Report on Elements of

International Regulatory Standards on Fees and Expenses of Investment Funds. We support IOSCO’s

policy agenda to update the regulatory foundations on how to provide clear, concise and comparable

information to retail investors.

We strongly agree with IOSCO’s scope for these standards which should apply to funds targeting retail

clients and advocate a consistent application to allow comparability between different collective

investment schemes (CIS) products and to foster global consistency and fair competition.

Question 1:

- Are there any other developments that C5 should take into account when formulating good

practices regarding fees and expenses of CIS?

From a European perspective the already existing UCITS KIID (Key Investor Information Document),

which provides easy-to-understand information to retail investors, should be regarded as the

benchmark for pre-contractual disclosure towards retail fund investors. It has to be particularly

stressed that these rules were adopted after long deliberations in conjunction with intensive consumer

testing and have, since then, met investors’ expectations. Apart from these pre-contractual

requirements, both the fund’s main prospectus and the annual financial statements provide more

details on the charges of investment funds.

Furthermore, we encourage IOSCO to take stock of the recently adopted EU legislations, concretely

MiFID II and the PRIIPs Regulation. These cover EU disclosure requirements for financial instruments

(and packaged retail investment products) aimed at retail investors. Both initiatives aim to provide a

comprehensive disclosure of all cost elements incurred by funds, thereby significantly expanding the

requirements for costs disclosures and the feasibility of corresponding quantifications. While the PRIIP

Regulation defines transparency standards through a new summary disclosure document (the KID),

MiFID II focuses on the legislative requirements for cost disclosure at the point of sale.

Last but not least, we stress that investment funds are not the only type of financial products being

offered to retail investors. We strongly support the high standards demanded for funds products, but

would encourage IOSCO to extend these established principles to other investment products. In the

EU this idea was followed through by using the existing disclosure rules for fund products and

mailto:[email protected]

http://www.efama.org/

of 14 EFAMA’s comments on the IOSCO’s Report on Elements of International Regulatory Standards on Fees &

Expenses of Investment Funds [CR06/2015]

extending these cost transparency standards to other types of investment products through the PRIIPs

Regulation which applies to all forms of packaged investments including, not only funds, but in

particular life-insurance products, structured notes and structured deposits. Such an approach

contributes to a level-playing field and is needed for effective investor protection and ensures that the

high level of transparency for fund products does not lead to an unlevel-playing field with other

investment products. This, for example, could be the case if retail investors start perceiving funds as

comparatively expensive (e.g. due to their disclosure of transaction costs) which may simply not be

disclosed in other products (such as structuring costs for structured products) and are thus perceived

as less expensive. For further suggestions on how this wider alignment can be achieved, please also

consider our comments to Q19.

Question 2:

- If you think defining permitted and prohibited costs is useful, should this be done by the

regulatory authority or the CIS operator?

- What types of costs should be permitted and/or prohibited to be charged?

- Are there alternatives to prohibiting certain fees and expenses and if yes, what are they are why

are they effective?

We believe that the very definition of which costs are or are not permitted should be determined by

the regulator. IOSCO seems to agree with this line of argumentation, as it mentioned in para. 105 that

its original view from 2004 remained unchanged and that “regulators do not dictate the level of fees

and expenses because the focus has been to promote competitive and informed markets, which will

ensure fees and expenses are understood in the context of the type and quality of service provided”.

We agree consequently that this competence therefore cannot lie with the CIS operator.

Regarding specific types of costs and in the understanding that paragraph 25 of the Consultation Paper

contains examples of expenses which cannot be legitimately deducted from the fund assets, we

challenge IOSCO’s thinking whether costs associated with the foundation of a fund should be regarded

as prohibited costs. In some EU countries the deduction of a fund’s formation expenditure (which can

also include administrative fees) is considered a legitimate expense only if covered by a separate

charge and explicitly agreed as part of the investment contract. We believe that under these

preconditions this type of costs is appropriate and should not be considered illegitimate by IOSCO’s

future standards.

While we agree that a new type of fee or an increase in the management fee must not be deducted

from the fund assets before the required approval process has been completed, we have some

hesitations on statements made in paragraph 26(c). With regards to the appropriateness of

breakpoints to the management fee in case of economies of scale when a fund grows in size, we

caution that this depends to a large extent on a fund operator’s internal structures, its specific business

activities and the competitive environment. Hence, the decision on imposing such breakpoints is part

of the commercial strategy of a fund operator and should not be impacted by regulatory measures and

should thus be deleted from the future standards.



Question 3:

- Which do you consider to be the most appropriate method of performance fee calculation

currently employed and why? Are there methods other than a fulcrum fee or “last in, first out”

that are more effective?

- What other requirements might curb incentives for excessive or inappropriate short-term risk-

taking? Should there be specific recommendations as to how the calculation, benchmark, and

target of a performance fee are disclosed? What further disclosures could be recommended?

As a general overarching principle, any performance fee levied should be calibrated to reward the asset

manager’s skill in providing outperformance and thus aligning interests between both the manager

and the investor.

While there are no detailed rules on performance fees at EU level, rules exist in certain EU member

states. Furthermore, best practices already exist in some EU countries to ensure alignment between

manager and investor. We therefore agree with IOSCO’s thinking that a fund’s performance should be

measured against a benchmark and/or an absolute performance hurdle to determine the overall (out-

) performance and its connected performance fee.

While agreeing with IOSCO’s intentions in creating this alignment, we cannot agree with the

prescriptive use of certain methodologies (i.e. fulcrum fee/“last in, first out”) to achieve these

objectives. Generally speaking, some specific calculation methods may only be suited for equity funds,

and are less appropriate for other types of funds (e.g. bond funds). Some methods refer to a

benchmark, some do not. It is also possible to combine benchmark-related with other calculation

elements. Therefore we suggest that the fulcrum fee model or any other specific calculation model are

not given preference by IOSCO in its final recommendations.

To further underline this point, one also must consider the particular nature of retail funds (which are

in scope of these standards) when discussing equal treatment of investors. In the majority of cases the

fund does not know the individual end-investors (which may be different for institutional funds with a

limited number of investors), as fund units/shares are subscribed and redeemed via various

distribution channels such as banks, investment advisors or insurance companies. Therefore, it is

impossible for the fund manager to determine the individual investor’s holding period. Consequently,

performance fees cannot be calculated individually. Nonetheless, tools like accrual at each NAV date

and crystallisation periods of generally no less than one year exist to ensure performance fees are

levied fairly among all fund investors. We would also wish to refer to IOSCO’s 2004 report, which

describes such methods as a possible means to avoid, or at least minimize, unequal treatment of

investors.

For the above reasons, we would suggest to refrain from all references to specific models, such as the

fulcrum fee, and instead add an additional standard in Paragraph 3(1) that ensures that the calculation

of accruals (or any other method used) ensures an equal treatment of all investors.

With regards to the second sub-question, we think the current disclosure requirements for

performance fees in the UCITS KIID are appropriate and provide the investor with both ex-ante



disclosure, as a percentage, and ex-post as the actual fee paid for the previous twelve months. This

combined with a more detailed description in the fund’s constitutional documents (i.e. prospectus) on

how the fee is calculated provides a clear disclosure to retail investors.

Question 4:

- Do summary documents present the right amount of information about fees and expenses and

in a way that is useful for investors?

Experience in the EU has shown that summary documents, such as the UCITS KIID, are a useful tool for

prospective investors. Also, retail investors’ feedback has been overwhelmingly positive. The fact that

the KIID is limited to a certain number of pages (i.e. three doubled-side pages) ensures that only

essential information is related to the investor.

In the last number of years, there has been a trend in European regulation that shifts from disclosing

(different) cost items to also aggregating them in the form of an aggregated cost figure in the summary

document. Such an aggregated cost indicator is required in both MiFID II and the PRIIP KID Regulation

and aims to illustrate the estimated overall charges over a certain holding period as well as their

potential impact on returns.

While we appreciate the benefits of simplifying costs, we believe that too much aggregated

information can be detrimental to retail investors’ understanding of these costs. In our opinion

investors should always be able to distinguish between one-off entry costs and ongoing costs. In

particular, a differentiation should be made between recurring costs and contingent charges such as

transaction costs and performance fees, which should be displayed separately. Such differentiated cost

information in addition to the aggregated figure allow investors to better appreciate specific cost

elements and the different circumstances of their occurrence.

Nonetheless, while agreeing with providing the right information about fees and expenses, it has

become a recent trend of lawmakers and regulators to sometimes overemphasise the cost aspects of

funds (and other financial products) compared to the benefits that are related to these costs. The right

information on these potential benefits is as important and should be allowed to also feature in the

disclosure information. This balance will allow investors to make a fully informed decision whether to

choose actively-managed funds over passive index-trackers or funds using efficient portfolio

management.

While we are clearly in favour of easy-to-understand pre-sales information, we are worried of IOSCO’s

intentions to use this document for both prospective and current investors. In the EU the UCITS KIID

and PRIIP KID are being used solely to inform prospective investors. They are therefore focused on

providing information about the investment product’s functioning, its benefits, risks and costs.

Extending its scope to include additional information more relevant from a current investor’s

viewpoint might seriously undermine the focused nature of these documents. For this reason EU

lawmakers have kept current investors outside the scope of these regulatory initiatives. We suggest

that IOSCO should follow the same approach.



Also, we agree with the suggestion to keep the documents easy to understand and to pinpoint

investors to sources or documents that give further details where more detailed information can be

found.

Lastly, the explanation in the summary document on where and how further details can be obtained

should not be required to refer specifically to fees and expenses. Rather, the specification of a general

information source such as a dedicated website that provides further information on all items covered

by the summary document should be also considered good practice for the purpose of the IOSCO

report.

Question 5:

- Should regulators do more – and if so, what – to ensure disclosures to investors about fees and

expenses are: (a) easier to understand?; (b) more prominent?; (c) more easily accessible?

- Is it necessary to expand the standard “Information delivered must be simple, concise and set

out in clear language”? Would you find it helpful to have recommendations on (for example) the

use of easy-to-read formats (font size, using tables/charts/graphs) or the use of uniform

terminology)

- Does a standardised fee table, if applicable, provide sufficient information regarding certain fees

and expenses?

- Are there specific sub-categories (e.g. management fee, transaction costs) that should be

disclosed separately?

From an EU perspective, we believe that there is a sufficiently robust EU legislative framework that

addresses the need to make disclosures to investors about fees and expenses easier to understand,

more prominent and more easily accessible. The proposed IOSCO standard that “information delivered

must be simple, concise and set out in clear language” is in line with the EU’s own requirements to

ensure that information is “accurate, fair, clear and not misleading” and that it is provided in the form

of a “short document written in a concise manner”.

While we therefore see no further need for more explicit guidance from an EU perspective, we

acknowledge that the IOSCO’s recommendations could lead to comparable rules in non-EU

jurisdictions which could lead to the adoption of the same standards on the international level and

ensure a global level playing field.

Nonetheless, as already pointed out in our reply to Question 4 above, we believe that investors should

always be able to distinguish between one-off entry costs and ongoing costs and that recurring costs

and contingent charges should be disclosed separately. This level of detail allows investors to better

appreciate specific cost elements and the different circumstances of their application. In particular, it

is important for investors to recognise that the performance fee according to some (pre-sales)

calculation models is relevant only in certain predefined conditions. Therefore performance fees needs

to be disclosed separately. The same is true for other contingent charges such as transaction costs

which are contingent on the overall trading activities in a fund during a year.



More particularly with regard to funds using “swing pricing” we would recommend to display related

costs in a separate category, if applied, as a general percentage number, without disclosing defined

thresholds that would prompt swing pricing adjustments of respective NAVs.

Question 6:

- Should there be a standard regarding the frequency of updating of fees and expenses

information in disclosure documents?

- How often should historical information on fees and expenses be updated?

- In which situations (e.g. where historical information on CIS does not exist) should disclosure on

an anticipated basis be obligatory?

- What is the most accurate or representative methodology for calculating fees and expenses on

an anticipated basis (i.e. one that reduces the chance of over-estimates or under-estimates)?

- How should material changes to the fees and expenses of a CIS be treated in terms of historical

/ anticipated disclosure requirements?

- In cases where the information can only be provided on an anticipated basis to begin with, should

the disclosure be updated later with historical information?

In general, we are in favour of an IOSCO standard regarding the frequency of updating of fees and

expenses information in disclosure documents. Detailed rules on this matter already exist within the

UCITS IV Directive which require that disclosure documents are updated at least annually1, irrespective

of whether the figures are based on historical or anticipated information. We also expect this approach

to be copied into the more encompassing PRIIP KID Regulation.

With regards to disclosure in a pre-contractual context, the current approach taken in the EU (under

MiFID II and the PRIIP KID framework) requires that costs are presented on an ex-ante basis as forecasts

of potential charges relevant for certain holding periods. However, for estimating costs ex-ante,

actually incurred costs can and should be taken as a proxy. Therefore, the latest ongoing charges figure

can be used as a basis for computing the ex-ante estimates for the purpose of pre-contractual cost

disclosure. As we regard the implementation of a model to calculate upcoming cost impact as difficult

and complex, which would have the opposite effect of simplifying and better informing potential

investors, we recommend to base cost charges on historic figures and explicitly state that market

developments could impact the cost structure going forward.

Moreover, since both EU regimes require disclosure of anticipated costs as a market standard, there is

generally no requirement to update the information ex-post once the actual figures are available.

Under the new MiFID II rules, ex-post information on costs – relating to both the product and the

service – shall be provided by distributors only if they have or have had an ongoing relationship with a

client during the relevant year. Such an ongoing relationship can relate e.g. to the service of portfolio

management or the provision of continuing advice. We support this solution since the obligation for

an updated cost disclosure pertains to situations where the investor counts on continuing support by

1 The Directive also requires additional reviews in case of changes to the prospectus, the fund rules or the instruments of incorporation and if material changes to the disclosed information occur outside the regular review cycle.



the service provider in terms of relevant information. Otherwise, information on costs incurred in the

fund management is disclosed as part of the annual fund reports. Investors can access this information

which is made publicly available.

Question 7:

- Is it desirable to add a standard recommending the use of electronic media for fees and expenses

disclosure documents? What are the reasons for your view?

- How can the CIS and the CIS operator ensure that electronic disclosures are received and accessed

by investors?

- What could constitute approval from investors?

The use of electronic media for fees and expenses disclosure documents should be recommended, as

it can reduce costs for the product manufacturer and allow investors to receive up-to-date information

faster. Such encouragement should, of course, never undermine retail investor’s right to receive the

information free-of-charge in paper form at a physical meeting with an investment adviser.

As regards the second and third sub-questions, however, the fund operator should not be responsible

for ensuring that disclosures are duly received and accessed by investors. Under the aforementioned

EU frameworks, such responsibility is vested with the intermediary which has a direct contractual

relationship with the investor. The fund manufacturer’s obligation is generally satisfied by providing

legally required information documents to intermediaries with whom it cooperates on the basis of a

distribution agreement. However, in order to account for situations in which financial products are

sold to investors without an underlying distribution agreement, the EU’s PRIIP KID Regulation requires

the product manufacturer, in particular, to publish the Key Information Document on its website

before a product being made available to retail investors.

On a general note, we wish to highlight that (in line with what is prescribed by the UCITS KIID

Regulation) the provision of an e-mail address by the investor is considered appropriate to ensure that

electronic disclosure can be received and accessed.

Question 8:

- Should there be a standard definition of what transaction costs are? If so, which types of cost

should be included in, or excluded from, such a definition and why?

- What are the most effective ways of determining the value and impact of transaction costs in a

CIS?

Under the EU frameworks of MiFID II and the PRIIP KID, transaction costs are considered part of the

overall cost figure to be provided to the client. This is a clear departure from the currently used “on-

going charges figure” model for UCITS funds that explicitly excluded transaction costs due to its hard-

to-define nature. For this very reason it is essential to agree on a standardised definition of not only

what transaction costs are, but also what type of costs elements are included when these are



calculated. Different approaches to these costs elements and their calculation would create further

barriers to distributing CIS on a cross-border basis.

The discussions at the EU level on what elements should considered as transaction costs are still

ongoing within the context of the PRIIPs Regulation. From the most recent debates it is clear that the

disclosure of transaction costs will comprise broker and exchange fees, broker commissions included

in bid-ask spreads and transaction taxes. The current developments in the PRIIPs context ask for a

disclosure of transaction costs in monetary and percentage points. The added value of such a

disclosure approach is questionable, as the assessment of such costs ex-ante will unavoidably be

imprecise and will complicate the understanding of related cost implications for the investor. An

approach based on historical numbers in percentage points with added information that the future

costs might be impacted by market developments coupled with the commitment to best execution

should be the most useful approach to display transaction costs.

However, market impact and opportunity costs are not costs and should thus not be used to calculate

transaction costs. Market impact reflects the change in the market price due to supply/demand

imbalances as a result of a trade and, hence, should rather be assessed as part of market risk if a

transaction as such moves the market. The same pertains to opportunity costs, if perceived as the costs

of failing to ensure best possible execution. IOSCO should recognise that asset managers are generally

interested in the most cost-efficient way of executing transactions since transaction costs and market

impact reduce the overall net performance of the fund.

As regards determining the value of transaction costs incurred in a fund, we believe that historical

figures provide an appropriate basis for the disclosure of ex-ante cost estimates. For further details,

please consider our response to Question 9 below.

Question 9:

- Which costs, especially implicit costs, can be accurately quantified after the event?

- If they cannot be accurately measured, can they be reliably estimated instead and how useful

are such estimates to investors? Could such estimates be helpful to investors in considering their

investment decision making process when comparing different methodologies? What

methodologies could be used?

- What are the challenges of disclosing transaction costs to investors?

The ongoing discussions on the detailed rules of MiFID II and the PRIIP KID have clearly demonstrated

that it is impossible to calculate accurately implicit transaction costs. Even after the execution of a

transaction, there is no standardised method to quantify which part of a spread actually represents

the implicit commission. Fund operators may be able to make their own estimates of broker

commissions covered by spreads, but the outcomes of such estimations varies depending on the

methodology chosen and must therefore not be mistaken for accurate calculations.

The fact that much subjective interpretation and subjective calculations are needed to come up with

a cost measure shows that meaningful comparison is either challenging or simply impossible, unless



common standards are put in place. In the context of the PRIIP KID Regulation, the European regulators

are currently proposing to design a centralised cost table in order to lay down implicit transaction costs

for different categories of instruments in basis points of the underlying transaction price2. We support

this approach as it would ensure a standardised computation of implicit transaction costs for the

purpose of a summary cost disclosure for all types of product manufacturers.

Question 10:

- To what extent can the total amount of transaction costs be predicted for future periods? Are

there standards of good practice that could be applied to such disclosures?

- What are the risks of using past information in this context?

A calculation methodology based on historical data is the most appropriate practice. In many cases a

hybrid approach may be necessary to ensure that actual costs (where available) are combined with

estimated costs (i.e. implicit costs). In such a case, standardised methodologies will need to be

provided by regulators to ensure consistent calculations across all types of products and asset classes.

Moreover, the requirement now in MiFID II and the PRIIP KID Regulation goes towards using ex-ante

disclosure to estimate potential future costs whose calculation is based on historical data, if such data

is available. For transaction costs, including implicit broker commissions, it is suggested to compute

the relevant figures as an annual average of costs incurred for the last three years in order to smooth

potential swings in transaction costs and to provide for a better guide to the future3.

It should be clear that ex-ante estimates are not useful for the purposes of investors wishing to

understand specific future costs, since the actual costs may turn out different than their estimates. We

recognise this understandable mismatch can however affect investors’ trust and prompt legal actions

against the fund manufacturer. This risk is being catered for by inclusion of meaningful disclaimers in

the product information document and by limitation of liability for information provided in the PRIIPs

KID in line with regulatory requirements4.

A remaining challenge is the potential misunderstanding of transaction costs by retail investors. It is

essential to acknowledge that higher transaction costs do not necessarily make a fund more expensive,

but instead reflect a specific investment strategy. In addition, there is no incentive for the asset

manager to turn the portfolio other than pursuing this investment strategy. Transaction costs do not

benefit the asset manager; they are earned by brokers and/or trading venues. Hence, an asset manager

has an incentive to keep transaction costs as low as possible and to only trade if this has the potential

to increase the investment performance, thereby exceeding transaction costs, since transactions costs

reduce the fund’s NAV and thus negatively impact the calculation basis for the management fee.

Without transactions, however, an investment strategy cannot be executed. If the investment

2 Cf. Technical Discussion Paper „Risk, Performance Scenarios and Cost Disclosures in Key Information Document for Packaged Retail and Insurance-based Investment Products (PRIIPs)“ dated 23 June 2015 (PRIIPs Technical Discussion Paper), page 61-62. 3 Cf. PRIIPs Technical Discussion Paper, page 67 4 Cf. Article 11 of the PRIIPs Regulation



decisions are good, higher transaction costs will deliver better net returns to investors. In contrast,

ongoing charges will always erode those returns. Therefore, we are in favour of disclosing transaction

costs as a separate indicator alongside the ongoing charges figure.

Question 11:

- What experience have CIS operators and investors had of funds which apply a single fee that

includes transaction costs? Has the level of transaction costs changed as a result of introducing

this model? Are there any disadvantages for investors?

We are not aware of any CIS operators including transaction costs in all-in fees. We believe that it could

be impractical, in particular given the difficulties in assessing implicit transaction costs. These costs are

highly variable in nature and reflect relative investment risk over the investment cycle. In any case,

the rate of any such fee would have to be stress tested to ensure it was sufficient to cover increased

transaction costs in a stressed market scenario and would be likely to include an appropriate buffer.

Over time paying for this buffer would mean that investors would pay more than if they only bore the

actual transaction costs.

In any case, any such fee could only be consistently applied in the case of a CIS investing in assets with

an explicit transaction costs (such as equity CISs). Given the lack of clarity of how to account for the

costs of dealing in a standardised manner in non-equity spread-based instruments an “all in fee” would

easily be misleading and fail to account for costs which investor would expect to see included. As

mentioned above our preference would be to work on providing greater detail of transaction costs to

investors and develop more standardised, and thus comparable, methodologies for disclosing these

costs.

Question 12:

- What disclosure methods are appropriate for transaction costs? If disclosure is in a numeric form,

what other pieces of information will help the CIS or its investors to understand the impact of

these costs on investment returns?

Providing meaningful transparency on transaction costs can be useful, if these are presented

appropriately to the retail investor. It is absolutely essential not to overload investors with too much

details. Providing excessive disclosures would instead confuse investors. While finding the right

balance between costs and benefits is essential, fund managers should be incentivised to lower the

volume of transactions simply in order to keep transaction costs down, even if such a behaviour would

not benefit the investor. Ultimately, the proper disclosure is meant to help investors make informed

decisions.

In terms of overall presentation, we therefore recommend to clearly separate transaction costs from

other ongoing cost indicator (before possible merging the cost elements into an aggregated figure) as

is currently being discussed in the EU.



Question 13:

- What is the most appropriate comparison method to ensure the transaction produced value for

money?

Cost measures should never be analysed in isolation. In our opinion, the best method for

demonstrating that the transaction activities in an investment fund produce value for money is a

presentation of past performance figures net of all costs, supplemented by the performance

information of a relevant benchmark where appropriate.

Question 14:

- What are the most effective ways of mitigating conflicts of interest relating to soft commission

arrangements?

- Do lists of forbidden or permitted goods and services give enough certainty to CIS operators and

investors about what can be paid for in this way?

- What other steps might regulators and/or CIS operators take, to enable goods and services

provided by the sell side to be paid for in an efficient way that does not adversely affect the

interests of CIS investors?

The most effective way of mitigating conflicts of interest relating to soft commissions is to ensure that

soft commissions5 may only be used for the benefit of the investor. In this regard, it is important to

differentiate between soft commissions that benefit the portfolio manager (such as entertainment)

and those that benefit the investor. The latter applies to research which facilitates the portfolio

manager in making well-informed investment decisions to the benefit of the investors. Conflicts of

interest are in particular critical where soft commissions may benefit the portfolio manager; in such

cases he has a personal interest to receive the soft commissions.

An appropriate way to identify and avoid such conflicts would be non-exhaustive guidance of positive

and negative examples. The negative list, for example, would include forbidden goods and services

that solely benefit the portfolio manager such as accommodation and entertainment. A positive list

would enumerate goods and services that will include, among other things, investment research and

arrangements for corporate access. Such an approach will provide the necessary legal certainty to both

fund operators and investors on what type of soft commissions could be paid for through soft

commission arrangements. Of course, neither of these lists, should affect the provision of services

where no payment is either explicitly or implicitly required.

Since asset managers do not have an interest in excessive trading or churning, managing conflicts of

interest arising from soft commissions should thus focus on adequate controls and oversight of the

amounts of dealing commissions spent on behalf of fund investors. Controls should include an

oversight of how costs for soft commissions are allocated as fairly as practicable to the specific funds.

5 Non-monetary benefits (broker research, financial analysis or pricing information systems) provide important assistance for asset managers in the process of taking investment decisions or transmitting orders for execution and are subject in the EU to the requirement that they enhance the quality of the service.



Question 15:

- What types of disclosure concerning hard and soft commission arrangements are most useful to

the board of directors of a CIS, and/or investors in a CIS?

While we generally agree with IOSCO's suggestion relating to ex-ante and ex-post disclosure of hard

and soft commission arrangements, we also believe that sufficient and stringent measures already

exist within the EU to adequately govern hard and soft commission arrangements.

In the EU not all types of CIS feature a board structure, therefore the focus of the legislator has been

on appropriate disclosure to investors. Ex-ante disclosure in the EU therefore generally describes the

type of commissions to be received as well as the policy on how costs for soft commissions are

allocated to the respective fund.

A more detailed disclosure may lead to an information overload, with the effect that the important

information would not be sufficiently prominent and thus overlooked by investors.

Question 16:

- Are current disclosure requirements about fees and expenses, for funds investing in other

vehicles, appropriate to assist investors in making an informed decision?

- Are disclosure requirements about fees and expenses enough to manage potential conflicts of

interest arising from investment in other vehicles? What other requirements might help to

mitigate those conflicts of interest?

We agree with IOSCO’s proposal and would like to provide some more details on the methods

employed in the EU when investing into other vehicles.

The EU legislative framework already contains strong conduct of business rules and disclosure

requirements concerning such type of fees. Since the introduction of the UCITS KIID in 2011, it is the

regulatory standard in the EU that UCITS holding a “substantial proportion of its assets in other UCITS

or collective investment undertakings” shall account for the management fee and other ongoing

charges of those target funds when calculating their ongoing charges figure6. While there is no further

legal details on what a “substantial portion” is, best practice in Europe has identified that this threshold

to be at 20% NAV7.

In our view, accounting for costs incurred in target investments in the calculation of costs at the fund

level represents the best way of providing information to investors. Disclosure of a separate figure is

6 Cf. CESR’s guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document dated 1 July 2010, para. 8. 7 Under the pending PRIIPs initiative, the requirements to account for costs of target products shall be extended to all PRIIPs on the one hand and cover the costs not only of target funds, but also of target investments in other investment products on the other. This widened scope of application takes account of the fact that under the PRIIPs Regulation all EU investment products sold in the retail market will be bound to provide for cost disclosures which then can be included in the relevant calculations.



probably not as meaningful, as the investor will generally not be able to relate e.g. the management

fee of a target fund to the costs incurred at the fund-of-fund level. Such calculation standard should of

course apply to all target investments regardless of whether the relevant target product has been

issued by a third party or an affiliated company. If consequently applied, inclusion of the target fund’s

costs in the ongoing charges calculations should be sufficient to manage potential conflicts of interest

arising from investment in other vehicles.

Question 17:

- Are you aware of problems in identifying what constitutes a change in the main characteristics

of a CIS in relation to fees and expenses?

- Should there be more specific standards of good practice concerning disclosure of changes, e.g.

a minimum period of prior notice, and the ability of investors to respond to such changes? Please

give examples of appropriate measures, if possible indicating the likely costs they would involve.

Generally speaking, it is important to distinguish between changes in the fee structure of a CIS that are

under the control of CIS’ governing body, and changes that are beyond its control (e.g. transaction

taxes or other tax events that do not only apply to a single CIS but globally and that occur unilaterally

at governmental discretion).

From an EU perspective, the current standard for UCITS requires that the cost information in the UCITS

KIID shall properly reflect any changes to the maximum amount of any one-off charge payable by

investors8. As regards changes to the other fees or the anticipated level of overall costs that lead to

the assumption that the ex-post figures are no longer reliable, the fund provider has to estimate an

ongoing charges figure which it believes, on reasonable grounds to be indicative of future charges. In

this case, the cost disclosure has to be accompanied by a statement explaining its indicative nature9.

Moreover, in the event of changes to the fee structure that result from a decision by the management

company, an updated version of the KIID needs to be provided before the relevant changes take

effect10.

Question 18:

- Which other areas of the 2004 report, if any, do you believe should be updated and/or amended?

Please provide any suggested changes to specific standards of good practice or definitions of key

terms set out in Annex A, including drafting proposals and rationale.

Given the recent developments in Europe, which generally go far beyond the suggested best practice

standards, we do not see the need for further updates or amendments to the 2004 report.

8 Cf. Article 24 para. 1 of the UCITS KIID Regulation 9 Article 24 para. 2 of the UCITS KIID Regulation. 10 Article 23 para. 2 of the UCITS KIID Regulation.



However, we draw IOSCO’s attention to the fact that the EU legislator replaced the commonly used

“Total Expense Ratio” (TER) concept for CIS by the one of “Ongoing Charges”.

Question 19:

- Does the report cover all of the key issues on standards regarding fees and expenses of CIS? Are

standards needed to address any additional issues? Please provide a summary of the issue and

suggest wording for the proposed standards

We believe that the report covers all key issues on standards regarding fees and expenses of CIS, and

that no standards are needed to address additional issues.

Finally, we would like to point out that in the EU the creation of standardised disclosure rules through

the UCITS KIID has led to the conception of the PRIIP KID, which extends the cost transparency

standards prevailing in the fund sector to other investment products. The current PRIIPs KID has a

broad scope of application covering not only funds, but all forms of packaged investments including in

particular life-insurance products, structured notes and structured deposits11. We believe that this will

contribute to a level playing field and ensures effective investor protection at the point of sale. In a

context of diversified distribution channels and open architecture, it is important to recognise that

investment funds compete directly with other products offering similar or comparable investment

opportunities. Defining transparency standards that target only investment funds, but disregard other

forms of investment, creates competitive disadvantages for funds despite the fact that investment

funds are governed by the highest regulatory standards and thus, offering the highest level of

protection to investors. In light of these developments, we encourage IOSCO to take similar steps and

engage in discussions with the BCBS and IAIS within the Joint Forum on how to enhance and harmonise

global transparency standards for all investment products issued by banking, securities and insurance

sectors.

***

Brussels, 23 September 2015 [15-4088]

11 Article 4 para. 1 No. 1 of the PRIIPs Regulation defines a PRIIPs as an investment where, regardless of the legal form, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor.

efama’s comments on the iosco’s · objectives. generally speaking, some specific calculation...

Documents