1. LEGAL FORM AND STRUCTURE
The regulatory regime should have requirements as to the legal form and structure of CIS which provide certainty to investors in assessing their interest in a CIS and enable the pool of investors' funds to be distinguished from the assets of other entities. This may be achieved either through the use of the corporate form, a trust arrangement or other structure recognised under the law of the home jurisdiction as an acceptable form of collective investment scheme. The regime must place limits on or regulate the use of different types of securities which have differing claims on the assets of a CIS.
1.1 Umbrella Funds
1.1.1 The regulatory regime should require that the different sub-funds of an umbrella fund together exclusively comprise a single legal form with a common generic denomination and set of constituting documents. The law or the CIS rules should further make clear the nature of the relationship between the sub-funds especially the liability of one sub-fund for the liability of another sub-fund.
1.1.2 The regulatory regime applicable to individual CIS should apply equally to all sub-funds of an umbrella fund.
2. CUSTODIAN, DEPOSITARY OR TRUSTEE
The regulatory regime must seek to protect the physical and legal integrity of the assets of a CIS by separation of the assets from the assets of management, its related entities and other schemes, as well as from the assets of the custodian itself.
2.1 Appointment of Custodian
A custodian must be appointed to hold the assets or be in a position to ensure their safekeeping. The liability of a custodian for any losses suffered by the investors as a result of its unjustifiable failure to perform its obligations or its improper performance of them cannot be affected by the fact that it has entrusted to a third party all or some of the assets in its safekeeping.
2.2 Financial and Other Resources of the Custodian
The regulatory regime must impose qualifying requirements on custodians in relation to their financial and other resources, which either rely on the status of the custodian (for example, as a bank) or its ability to carry out the tasks required as judged by the regulatory authority under an individual approval regime.
2.3 Independence
A custodian should be functionally independent of the operator of a CIS and must always act in the best interests of investors.
3. ELIGIBILITY TO ACT AS AN OPERATOR
The regulatory regime should impose standards of conduct and minimum eligibility standards that require approval by the regulatory authority prior to commencement of marketing of a CIS. The degree of restrictions imposed on eligibility will be likely to vary according to the overall context of collective investment regulation, including the extent of ongoing regulation of CIS transactions and the existence of independent monitoring systems. To the extent that a regulatory regime imposes specific requirements, they should include the following.
3.1 Honesty and Fairness
An operator should observe high standards of integrity and fair dealing while acting in the best interest of a CIS. High standards of market conduct should be maintained. In addition to its investment responsibilities, the operator should also ensure that the assets of a CIS are adequately protected and segregated.
3.2 Capability
An operator should have sufficient human and technical resources to ensure that it is capable of carrying out the necessary functions of fund management.
3.3 Capital Adequacy
An operator should at all times maintain adequate financial resources to meet its investment business commitments and to withstand the risks to which its business is subject.
3.4 Diligence and Effectiveness.
An operator should act with due skill, care and diligence and employ effectively the resources and procedures which are needed for the proper performance of the schemes. An operator must organise and control its internal affairs in a responsible manner, with proper records and adequate arrangements for ensuring that employees are suitable, adequately trained and properly supervised. There should be well defined procedures in place to ensure compliance with regulations and all operators should deal with regulators in an open and co-operative manner.
3.5 Operator Specific Powers and Duties
An operator has a duty to make decisions as to the investment portfolio structure and administrative procedures of the CIS so as to secure its objectives. The operator must not exceed the powers conferred on it by the CIS's constituting documents or particulars.
3.6 Compliance
Operators and schemes must meet strictly defined standards as set by the regulatory authority, for both initial approval and continuing operation.
4. DELEGATION
The regulatory regime should ensure that the level of protection afforded to investors in CIS is maintained at all times. Where the management of CIS activities is provided externally to the operational management of the CIS through the engagement of third parties (delegates) to carry out certain tasks for the operator, the Principles which govern eligibility and conduct of the operator should also apply to such delegates. The following subprinciples apply to those jurisdictions that provide for external management.
4.1. Responsibility
An operator should take responsibility for the actions or omissions, as though they were its own, of any person to whom it delegates any part of the provision of services to a CIS.
4.2 Ongoing Monitoring
An operator should ensure that procedures are in place, designed to monitor the behaviour of delegates.
4.3 The Delegate
An operator must be able to show that a delegate is and remains competent to undertake the function in question. The operator must have a sufficiently detailed knowledge of the operating procedures of a delegate to be able to meet its regulatory responsibilities in a full and thorough manner.
4.4 Ongoing Co-operation
An operator should provide all reasonable means to permit a delegate to fulfil its obligations and should ensure that the contractual relationship between the operator and its delegate is unambiguous.
4.5 Level Playing Field
The use of delegates should not, in any way, diminish the effectiveness of the primary regulation of a CIS. The regulation of the business undertaken by a delegate should embody similar Principles of regulation to those relating to the regulation of schemes generally.
4.6 Compliance
A delegate should comply with all regulatory requirements applicable to the conduct of its business activities.
5. SUPERVISION
The regulatory regime must provide for a regulatory authority to take overall responsibility for the supervision of CIS authorised within its jurisdiction.
5.1 Registration and Authorisation
A CIS must be registered with or authorised by the regulatory authority prior to commencement of marketing of its units. That process may take the form of document filing, CIS registration or approval of the parties to the CIS (such as the operator and custodian) as appropriate to the overall regulatory system.
5.2 Inspections and Investigations
The regulatory authority should have the means to investigate conduct relating to CIS, including the power to conduct on-site inspections. These inspections may be carried out by the authority itself or its delegate (which may be the CIS's auditor).
5.3 Powers of the Regulatory Authority
The regulatory authority should have adequate powers to protect investors' interests, including but not limited to revoking an operator's licence, freezing CIS assets or the operator's assets, taking action to withdraw the CIS's authorisation or stop the use of a prospectus, instituting administrative or civil proceedings, and recommending criminal action where appropriate.
5.4 Third Party Supervision
The regulatory regime may provide for an independent third party or parties (in addition to the regulatory authority) to supervise the activities of the operator and any other parties involved in CIS activities.
6. CONFLICTS OF INTEREST
The regulatory regime should recognise that an operator of a CIS may have interests that if exercised without restraint would conflict in a material way with the interests of investors. Regulatory authorities should respond to this risk by ensuring that a regime provides for the exercise of management responsibilities with full regard to the best interests of investors. Such a regime may be general in nature, relying on the concept of "fiduciary responsibility" as interpreted domestically. Equally the establishment of detailed regulations designed to monitor potential conflicts between operator and investors is recognised as an acceptable regulatory method.
6.1 Possible Conflict of Interest Situations
Whether the concept of overall fiduciary responsibility is utilised, or provisions exist for detailed rules to monitor potential conflicts, a regulatory regime must be capable of dealing with certain situations which may give rise to conflicts of interest. They include (but may not be limited to):
(a) principal transactions between a CIS and its affiliates (including affiliates of the operator and custodian);
(b) transactions where a CIS and its affiliates jointly participate;
(c) soft commissions;
(d) lending or borrowing to or from affiliates;
(e) purchase of affiliate's securities;
(f) purchase of securities underwritten by affiliates;
(g) use of affiliated brokers; and
(h) employees' transactions for their own account
6.2 General Duties & Obligations
Possible conflict of interest situations may be addressed by the following:
(a) the duty of an operator to act in best interests of investors; and
(b) the power of the regulatory authority to impose sanctions for self-dealing, such as revoking the operator's licence, taking action to withdraw a CIS's authorisation or stop the use of a CIS's prospectus, freezing the assets of the operator, instituting administrative or civil proceedings, and recommending criminal action where appropriate.
6.3 Specific Regulatory Response
In addition to general duties and obligations, the means available to control conflict of interest situations (to the extent that they may arise within the regulatory framework of a particular jurisdiction) include all or a combination of some of the following:
(a) direct prohibition under the law;
(b) a precise code of business conduct either established by the regulatory authority, or a code established by a practitioner's organisation, which is approved and enforced by the regulatory authority;
(c) review and/or approval of certain transactions and activities by the regulatory authority;
(d) surveillance of operators by the regulatory authority;
(e) disclosure by the operator;
(f) record keeping by the operator;
(g) limitation of the activities of the operator; or
(h) independent review by a third party.
7. ASSET VALUATION & PRICING
The regulatory regime must provide a system for valuation of CIS assets, pricing of interests and procedures for entry to and exit from a collective investment which are fair to existing investors as well as to investors seeking to purchase or redeem interests. It is a fundamental principle that the price of interests in a CIS be calculated according to the net asset value of the CIS which must be determined on a regular basis in accordance with accepted accounting practices used on a consistent basis.
7.1 Valuations
7.1.1 Assets of the CIS must be valued according to their market price unless otherwise permitted by Law in particular circumstances. "Market price" means the price at which significant transactions have recently been concluded and disclosed to the market, or the best price available from a market maker. Should the market price not be available for any reason, the asset price should be calculated in good faith according to a permanent and reliable valuation procedure approved by the regulatory authority.
7.1.2 The net asset value per unit must be calculated in accordance with applicable accounting standards by dividing a CIS's assets less its liabilities by the number of units.
7.1.3 The net asset value per unit should be published at the operator's or at the custodian's offices or through the appropriate media.
7.1.4 The rules for asset valuation and for calculating the price of units must be laid down in the law or a CIS's rules or its public disclosure documents.
7.1.5 Information on the system for pricing, valuation and associated procedures must be made available to investors on requests.
7.2 Purchasing and Redemption of Units
7.2.1 A CIS must redeem its units at the request of any investor, in a manner and frequency laid down in the law or the CIS rules.
7.2.2 Redemption of units may only be suspended on a temporary basis. Any such suspension must be in accordance with the procedures provided for by the law or the CIS rules and must be in the interests of investors. A CIS must inform the regulatory authority of a suspension. In accordance with the laws of its jurisdiction, a regulatory authority may permit a CIS to suspend the right of redemption for the protection of investors.
7.2.3 Purchase of units may be done in cash, or in certain circumstances an investor may be allowed to use securities to purchase units. Redemption of units may be paid in cash, except when the CIS is liquidated and this possibility has been disclosed in the prospectus, or in certain circumstances when redemption may be by way of securities.
7.2.4 Purchase and redemption orders are to be settled as soon as possible, in accordance with the law, the CIS rules and the prospectus.
7.3 Unit Pricing
7.3.1 A CIS must calculate the purchase and redemption price of its units on a regular basis in accordance with the law and the CIS rules.
7.3.2 Purchase and redemption orders must be executed at the net asset value calculation price as defined in Principle 7.1.2, excluding any subscription or redemption fees disclosed in the prospectus. The amount received by the CIS on the issue of its securities must equal the net asset value calculation price as defined in Principle 7.1.2. Any redemption fees disclosed in the prospectus may be deducted from the net asset value calculation price otherwise payable to the investor.
7.3.3 Any purchase or redemption fee applicable to units in a CIS (as well as any management fee) must be clearly indicated in the CIS rules or the prospectus, and actual rates disclosed in the prospectus.
7.3.4 The distribution or reinvestment of the income of a CIS must be effected in accordance with the law and the CIS rules.
8. INVESTMENT & BORROWING LIMITATIONS
There should be investment restrictions, portfolio diversification and borrowing limitations that address the investment goals, the risk profile and the degree of liquidity required for a CIS to meet redemption in all market conditions. The need for liquidity typically contemplates a CIS investing primarily in transferable securities, money market instruments and derivatives incidental to the management of a securities portfolio.
8.1 Investments
Limitations imposed on CIS should indicate the extent of investment inter alia in the following:
(a) transferable securities not listed on a regulated market;
(b) transferable securities issued by the same issuer;
(c) derivative instruments; and
(d) other CIS.
8.2 Borrowing
Limitations imposed on CIS should also prescribe the extent of borrowing permitted, other than on a temporary basis, and the extent to which securities lending transactions may be entered into by the CIS.
9. INVESTOR RIGHTS
The regulatory regime should provide investors with certain rights in relation to a CIS, which are appropriate to the overall context of CIS regulation. A fundamental right of an investor in a CIS is the right to withdraw funds from the CIS within a reasonable period. The regime should also enable investors to participate in significant decisions concerning the CIS to the extent applicable under the structure of the CIS, or for the regulatory authority or another third party to have the capacity to act in the interests of investors.
9.1 Redemption Conditions
9.1.1. At the outset of the participation investors in a CIS must be fully informed through the prospectus of the charging of redemption and management fees.
9.1.2 Units of CIS must be repurchased or redeemed at the request of any unit holder, in a manner which does not give an unfair advantage to one investor in the CIS over any other investor. The regulatory regime should ensure that investor rights are maintained in the event of a major change in the activities of the CIS.
9.2 Access To Remedies
In addition to the normal access to legal procedures in the courts, investors should be able to refer matters to the regulatory authority for consideration. The regulatory authority must have proper powers of investigation, means to review investment managers and should have adequate powers (as noted in Principle 5.3) to enforce its decisions on the operator and on the custodian in order to protect investor's interests.
9.3 Investment Companies Only - Shareholder Powers
When a CIS is an investment company, investors should have the ability to participate in the affairs of the company through the exercise of a right to vote at periodic or special meetings of the shareholders.
10. MARKETING & DISCLOSURE
The regulatory regime must impose a disclosure requirement to ensure that there is full, accurate and timely disclosure to prospective investors providing all the information necessary for an investor to make an informed investment decision in relation to a CIS. Financial data and other information relating to the management and operations of a CIS must be provided on a regular (annual or semi annual) basis for the benefit of existing and prospective investors in the CIS. These requirements must be monitored by the regulatory authority to ensure that information provided meets the standards required.
10.1 Prospectuses
10.1.1 There must be a prospectus which complies with the standards applicable in the home jurisdiction of a CIS. No additional documents may be used for marketing a CIS, except for permitted advertisements or other literature which comply with applicable requirements.
10.1.2 A CIS prospectus must include all material information which investors would reasonably require and reasonably expect to find to make an informed investment decision. A prospectus must not contain information that is false or misleading. A prospectus must be in one of the recognised languages of the country of circulation, although a CIS may also provide advertisements and prospectuses in additional languages.
10.1.3 To the extent applicable under the relevant regulatory regime, minimum contents that would be expected to be addressed in the offering documentation include (but are not limited to):
the date of issue of the prospectus;
information concerning the legal constitution of the CIS, the rights of investors in the CIS and any pending material legal proceedings involving the CIS;
information on the operator and its principals;
procedures for purchase, redemption, and pricing of units;
relevant financial information concerning the CIS;
information on the custodian;
the investment policy of the CIS, indicating the markets and instruments in which investments are made;
information on the risks involved in achieving investment objectives;
the appointment of any external administrators or investment managers or advisers who have a significant and independent role in relation to the CIS;
fees and charges relating to the CIS;
the regulatory authority, auditors and other independent third parties and their responsibilities in relation to the CIS.
10.1.4 Prospective investors must be offered (free of charge) a copy of the prospectus before the completion of an application form or the conclusion of a contract to purchase units.
10.1.5 The prospectus distributed to investors must be kept up-to-date to take account of any material changes affecting the CIS. In addition, prospectuses must either be revised on a periodic basis (such as annually or semi annually), or be accompanied by the most recent annual report and any subsequent semi annual report. Any material changes to information in a prospectus must be notified to the regulatory authority and by amendment to the prospectus, if necessary.
10.1.6 Circulation of a CIS prospectus to prospective investors should be conditional on filing of the prospectus with the regulatory authority. The regulatory authority must have the power to review all CIS prospectuses and suitable arrangements should be made for the review of their content, although it is not necessary for every prospectus to be reviewed. The regulatory authority must have the power to enforce withdrawal of a prospectus or take action if it does not meet applicable standards. Such review or approval of a prospectus should not be taken as endorsement of a CIS or as a guarantee to investors.
10.2 Regular Reporting
10.2.1 A report must be prepared in respect of a CIS's activities either on an annual or semi annual basis. The report must be filed with the regulator and made freely available to investors. The annual report of the CIS must be reviewed by an independent third party.
10.2.2 The annual and semi annual (if any) reports must contain accounting information relevant to the CIS and a statement concerning the interests in the CIS that have been redeemed or repurchased over the relevant period. The accounts of a CIS included in these reports must be prepared in accordance with applicable accounting standards.
10.3 Advertising
10.3.1 Advertising must normally be undertaken after all the necessary authorisations have been granted to permit the CIS to market to the investing public. Advertising must not contain information which is false or misleading or presented in a manner which is deceptive.
10.3.2 Advertising (except where only the prices of authorised schemes are quoted) should refer to the prospectus applicable to the CIS. There must be nothing in advertising of a CIS which is inconsistent with the prospectus. The regulator must have the power to enforce withdrawal of advertising or take appropriate action against non compliance.
