IOSCO Moves to Increase Protection of Investors in Investment Funds

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Goddy Egene

The International Organisation of Securities Commissions (IOSCO) has published a consultation report on which proposes a set of good practices on the voluntary termination process for investment funds.

IOSCO, which is the leading international policy forum for securities regulators and is recognised as the global standard setter for securities regulation. The organisation’s membership regulates more than 95 per cent of the world’s securities markets in more than 115 jurisdictions including Nigeria.

The body recognises the importance for investment funds to have termination procedures in place from an investor protection perspective.

According to IOSCO the decision to terminate an investment fund can have a significant impact on investors in terms of cost or their ability to redeem their holdings in a timely manner during the termination process.

It said both retail and professional investors can be affected by the ultimate value of their investment in a fund at the time of termination. The report targets a broad range of investment funds including collective investment schemes (CIS) and other fund structures such as commodity, real estate and hedge funds.

IOSCO noted that most regulatory regimes have certain criteria for the termination of investment funds in their jurisdiction, ranging from the overarching obligation to act in the best interests of investors, to prescriptive requirements for liquidating the portfolio and the payment of final distribution proceeds. But legislation at a national level in most jurisdictions addresses involuntary terminations (for example, in the case of insolvency of an investment fund).

However, IOSCO’s work focuses on voluntary terminations with the objective to develop a set of good practices for the termination of investment funds which take into account investor interests during this process.

“Voluntary terminations typically occur because an investment fund, although still solvent, is no longer economically viable or can no longer serve its intended objectives. The decision to terminate in these cases is taken by the responsible entity, although this decision may be based on factors outside its direct control,” IOSCO said.

It added that in a number of jurisdictions, an investment fund may elect not to terminate by liquidating its assets and repaying investors, and instead will seek to merge its assets with another investment fund, often managed by the same responsible entity.

In this regard, IOSCO said it is considering whether the issues arising from investment fund mergers generally would have a particular impact on the termination process.

IOSCO is consulting on 15 good practices for the termination of investment funds that are categorised into: disclosure at time of investment, decision to terminate, decision to merge, during the termination process and specific types of investment funds.