Luxembourg's Financial Sector Supervisory Authority (CSSF) has published on March 10 the eighth update of its Frequently-Asked Questions document on the legislation of December 17, 2010 on undertakings for collective investment. The changes deal with disclosure of performance, investment managers' and investment advisors' fees to investors in a UCITS fund.
Clarifying how a UCITS should disclose performance fees to the investors and to whom performance fees are payable, the CSSF says performance or performance-related fees are designed to motivate the investment manager to outperform a benchmark or achieve some other performance target. The investment manager, it says, is responsible and accountable for the investments of the fund and its performance.
Both the fee model and the identity of the investment manager as the recipient of a performance fee must be disclosed in the fund's prospectus. If there is an arrangement for sharing of the performance fee with one or more investment advisors in a contractual relationship with the fund, this information should also be disclosed in the prospectus.
Disclosure of investment managers' and investment advisors' fees
Regarding how a UCITS should specify and disclose the investment manager's and investment advisor's fees in comparison with other fees paid out of the funds' assets, the CSSF notes that according to point 6 of Schedule A of Annex I of the 2010 legislation, expenses or fees should be disclosed in the prospectus.
This disclosure should distinguish between fees to be paid by the fund's shareholders or unit-holders, and those to be paid from the fund's assets. Where service fees are directly paid out of the assets to the investment manager and to any investment advisor, the method of calculation or the rate of the fee to each recipient must be disclosed in the prospectus.
The CSSF says that for the sake of transparency and to enable investors to make an informed judgement about the proposed investment, as required under Article 151 (1) of the legislation, the investment manager's and/or investment advisor's fees should only pay for investment management or investment advice. In general, the investment advisor's fee would be expected to be lower than that of the investment manager.
Disclosure of other expenses or fees
Any other expenses or fees for activities outside the direct scope of investment management or advice are payable out of the fund's assets to the investment manager or investment advisor, they should be disclosed separately from the investment manager's and investment advisor's fees, and should clearly inform investors about the nature of the expenses or fees.
In cases where an all-in fee is proposed, under which a single compensation amount is paid out of the fund's assets to a recipient (usually the management company) that will afterwards pay the other service providers, the prospectus must clearly detail the scope and nature of the all-in fee, and ideally, each contractual recipient from the fee should be specified.
The CSSF says this provides clarity to investors regarding compensation, fees and expenses that makes comparison between different UCITS possible and facilitates the investor in making their choice.
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