The European Securities and Markets Authority (ESMA) on Tuesday announced that it has found evidence of closet indexing by hundreds of equity funds, which could be harming retail investors who believe that they have selected and are paying for active management.

Closet indexing “refers to the practice of fund managers claiming to manage portfolios actively when in reality the fund stays close to a benchmark,” ESMA says is a statement.

“ESMA is concerned the practice may harm investors as they are not receiving the service or risk/return profile they expect based on the fund’s disclosure documents while potentially paying higher fees compared to those typically charged for passive management,” the statement adds.

ESMA examined a sample of 2,600 funds, for the period 2012-2014, to see if they could detect any evidence of widespread “closet indexing” — on the basis that funds with low active share, low tracking error, and high correlation to the benchmark, represent indications of passive management. On that basis, they concluded that between 5% and 15% of European equity funds “could potentially be closet indexers,” the ESMA statement says.

ESMA then reviewed the investor disclosure documents of the funds “to see how they described their management strategy, and found they tended to confirm the quantitative analysis results,” the statement says. As a result, ESMA concludes that further work is needed to address the issue of closet indexers.

The ESMA research only represents an initial indication of whether particular funds are closet index trackers. Further analysis is required at the national level to investigate on a fund-by-fund basis, ESMA says. Moreover, the European regulators say they will work with the national regulators to assess the need for further regulatory action to ensure that fund managers are fully complying with their disclosure obligations.

“Definitive evidence, potentially leading to supervisory action, will require a more detailed follow-up by national competent authorities, including on the actual information provided by funds to investors,” the ESMA statement says.

“Closet indexing is an issue which has attracted the attention of investor protection groups and investors alike throughout the European Union and ESMA has played a key role in an EU-wide inquiry to get to the heart of the matter,” says Steven Maijoor, chairman of the ESMA, in a statement.

“Investor protection is core to our mission and the preliminary findings raise questions that merit closer analysis. Fund managers must provide investors with information that is fair, clear and not misleading. In partnership with national regulators we are taking a closer look into this issue,” he adds.