The Central Bank has issued a policy update permitting all Irish authorised investment funds to charge fees and expenses to capital, provided certain requirements are met.
The new policy is contained in the Central Bank’s Policy Update 3/2010 “Collective investment schemes: Charging of fees and expenses to capital in fixed income funds; Names of sub-funds within umbrella funds” and became effective from 1 September 2010.
The position prior to the adoption of this new policy was that Irish authorised funds, except open-ended retail distribution funds which invest predominantly in debt markets, were permitted to charge fees and expenses to capital subject to the following requirements:
- provision for charging fees and expenses to capital being made in the relevant constitutional document;
- the prospectus including appropriate disclosure including;
- the rationale behind the policy;
- a prominent risk warning to describe the effects of charging fees and expenses to capital, i.e. that capital may be eroded and that income will be achieved by forgoing the potential for future capital growth;
- a similar risk warning in the subscription application form referring to the effect of the charging policy including possible capital dilution, as follows: “unit holders/shareholders should note that all/part of the fees and expenses will be charged to the capital of the CIS. This will have the effect of lowering the capital value of your investment”.
The Central Bank has now revised its approach in relation to open-ended distributing fixed income funds and such funds are now also permitted to charge fees and expenses to capital provided they also comply with the following additional requirements:
- the prospectus highlighting the greater risk of capital erosion given the lack of potential for capital growth, together with the likelihood that due to capital erosion the value of future returns would also be diminished;
- where the priority of the fund is the generation of income rather than capital growth this must be highlighted. In addition the prospectus must include a statement that distributions made during the life of the fund must be understood as a type of capital reimbursement; and
- any income statement issued to investors where expenses have been charged to capital should include a statement to explain the effect of this accounting policy (including workings) to the effect that the investors’ capital amount has been reduced.
Similar statements/risk warnings are also required to be included in all marketing documentation.