Global securities regulators are examining whether international standards for the fees and expenses of investment funds need to be revised in the wake of the financial crisis.
The International Organization of Securities Commissions (IOSCO) published a consultation paper on Thursday. The paper proposes an updated set of international best practices for fund managers and regulators to consider in the area of investment fund fees. The deadline for comments on the paper is Sept. 23.
The paper deals with a series of common issues. These include: the types of fees and expenses that should be permitted; the use of performance-related fees; disclosure requirements; transaction costs and the use of hard and soft commissions.
IOSCO first established standards in this area back in 2004. Today’s consultation paper aims to assess whether these standards need to be revised in light of the changes that have taken place in the industry, and among regulators, since then. For example, the paper notes that since the 2004 report, the industry has launched new product structures, embraced new investment strategies and adopted new distribution models.
At the same time, regulatory reform has changed the way fees and expenses are treated in certain jurisdictions. “Since the financial crisis, regulatory developments have aimed at achieving greater transparency in the world of investment funds as well as clearer, more focused investor disclosure,” the paper states.
In turn, this increased transparency may exert downward pressure on fees, the paper adds, “as investors learn to consider them in their investment decisions.” It also notes that some jurisdictions have focused on improving the alignment of the interests of the industry and investors, by creating “skin in the game” requirements, or establishing rules for remuneration policies.
“This strengthened regulatory approach has run in parallel with significant developments in the market environment since the 2004 report,” the paper states, as low returns and rising regulatory costs have driven asset managers to innovate in the search for greater returns.
“In certain markets, some active fund managers decided to launch ‘semi-active’ funds, which are meant to offer alpha at a lower cost, while others have chosen to differentiate themselves with new products or new services to justify the level of their fees, and have invested in new alternative asset classes enabling them to deliver higher alpha,” the paper adds. “This has included demand for investment funds with high-yield, multi-asset, unconstrained and alternative strategies, as well as for exchange-traded products (ETPs) with illiquid underlying assets. It has also included an increase in index tracking and low cost products.”
In addition, the rise of new technologies is changing how investors receive and process financial product information, including information on fees and expenses, the paper notes.
Distribution models are also changing, it adds. In some jurisdictions, this has meant the development of more-complex models, which may result in more elaborate fee-sharing arrangements. Whereas in other models, product manufacturing and distribution have been separated in an effort to increase the transparency of costs and reduce conflicts of interest.
All of these forces may impact fund fees practices, the paper concludes.