IOSCO Issues Consultation Report on Termination of Investment Funds; Seeks Comments on Proposed Good Practices
On August 18, 2016, the Board of the International Organization of Securities Commissions (“IOSCO”) issued guidance on voluntary termination processes for investment funds.1 The consultation report, “Good Practices for the Termination of Investment Funds” (the “Report”), solicits feedback on proposed good practices on the voluntary termination process for collective investment schemes (“CIS”) and other fund structures; the list of “Good Practices” is attached hereto as Annex A. Along with the proposed “Good Practices,” the Report features a series of questions addressed to stakeholders soliciting feedback.
IOSCO is an international policy forum for securities regulators, with the organization’s membership regulating more than 95% of the world’s securities markets in more than 115 jurisdictions. The Report states that the “Good Practices” included in the Report “generally reflect approaches to issues currently acknowledged by regulators.” IOSCO notes in the Report that it is mindful that not all of the proposed “Good Practices” will be applicable in all circumstances, given the specific nature of fund terminations. Moreover, the Report does not envision the proposed “Good Practices” as overriding national regulatory regimes, recognizing, rather, that the approaches taken in different jurisdictions may vary.
The suggestions in the Report fall into the following categories:
- Disclosure at Time of Investment: The Report highlights the importance of disclosure to investors at the time of initial investment as to fund termination procedures, including disclosure of the general circumstances in which a fund may be terminated, the extent to which investor approval may be required for termination, the preparation of a termination plan, and an overview of what such a termination plan will cover. The Report also points out that there should be procedures in place for dealing with investors who cannot be contacted at the time a decision to terminate is made.
- Decision to Terminate: The Report stresses that any decision to terminate must take account of the best interests of the investors. Once a decision to terminate has been made, the Report urges that a termination plan be issued, setting out the steps which will be undertaken as part of the termination process. The Report goes on to examine a number of issues that any such plan should address, including the rationale for termination, the extent to which investor approval is required, estimated costs of termination and who will bear them, whether a liquidator will be appointed, the duration of the process, the existence of alternative investment opportunities, the asset valuation method to be used and the process for dealing with illiquid investments. The Report states that the plan should be clearly communicated to investors, and proposes that investor subscriptions and redemptions should be suspended during the termination process of an open-ended fund.
- Decision to Merge: The Report notes that there are situations where the merger of two investment funds may be advantageous. Such decisions should be clearly communicated to investors, per the Report, and, to the extent possible, the option to merge should only be presented to investors where the acquiring fund has similar investment objectives, policies and risk profile. In addition, investors in the fund to be acquired should have a right to redeem free of any redemption or exit charges prior to the merger. The Report goes on to propose that, when a decision to merge is made for commercial reasons, the responsible entity should bear all costs associated with the merger and, if the responsible entity does not, the rationale for not doing so should be clearly communicated to investors.
- During the Termination Process: The Report stresses the need to keep all investors up to date during the termination process with appropriate, adequate and concurrent reporting to them, and highlights specific issues and developments which should be the focus of such communication. Additionally, during the termination process, the Report notes that assets should be fairly valued; to that end, valuation policies should be set out in advance, yet “should be sufficiently robust to permit the investment fund to make adjustments to the valuation policy where it is considered necessary to reflect fair value.” It also notes that the valuation policies should seek to address conflicts of interest, identifying instances in which such conflicts can arise.
- Specific Types of Investment Funds: The Report makes several recommendations for more specific types of investment funds. Notably, the Report recommends that the responsible entity in a termination may offer the ability to redeem in specie to professional investors where investor consent has been obtained, provided that the best interests of other investors are not negatively affected. Citing an earlier IOSCO report “Principles of Liquidity Risk Management for Collective Investment Schemes,”2 the Report states that retail investors should not generally be required to accept in specie transfers. The Report also notes the desirability, in certain situations, of using side pockets as part of the termination process, particularly in the case of illiquid assets. Lastly, the Report states that, in the case of funds with a finite duration, procedures for effecting an orderly wind-up of the fund should be considered well in advance of termination.
IOSCO seeks comments on or before the 17th of October, 2016. The full text of the Report can be found at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD542.pdf.