The distribution of CIS products has continued to develop across borders and operators are seeking to maximize their opportunities by utilizing management, administration and custody services in different jurisdictions.

It is therefore important that operators of CIS throughout the world adhere to high standards of conduct and that member countries of IOSCO ensure that effective supervisory arrangements are in place. Failure to effectively supervise each of an operator's activities may result in damage to investors, and more generally, a loss of public confidence in an investment vehicle of growing domestic and international importance.

1. Scope

This Paper sets out 10 Principles for the Supervision of Operators of CIS (the Supervision Principles) and provides commentary on those Principles.

It is recognized that operators of CIS² have different responsibilities in different jurisdictions and may be subject to supervision by a number of different parties (such as trustees, custodians, depositories, external auditors, independent directors and compliance committees etc.), even where the regulatory authority plays a primary role in supervision. This Paper explains the rationale as to why operators should be supervised and more importantly, sets out those activities carried out by operators that are considered to be sufficiently important to warrant supervision. These activities may relate to how the operator manages a CIS in accordance with a jurisdiction's product regulations as well as how the operator conducts its business generally.

The Supervision Principles do not attempt to specify which entity, whether it be a regulatory authority or third party, is responsible for any particular supervisory activities, nor does it attempt to specify which regulatory techniques should be employed to attain effective supervision.

It should be noted that the Supervision Principles do not seek to endorse one particular approach, nor are they intended to impose binding obligations upon any IOSCO member. Notwithstanding this, it is hoped that the Paper will assist IOSCO members in reaching a common understanding of the reasons why it is important to supervise operators of CIS and those activities which are considered to be of prime importance in requiring effective supervision. It is also hoped that development of the Supervision Principles will enhance cooperation among member countries in supervision and overseeing the investment management industry.

2. Background

In 1995, the IOSCO Technical Committee published Principles for the Regulation of Collective Investment Schemes (the CIS Principles) and in 1996, WP5 developed a Paper on International Cooperation in Relation to Cross-Border Activity of CIS which provided Model Agreements for mutual recognition and exchange of information.

There are two CIS Principles and their accompanying Explanatory Memoranda, which deal with supervision of operators of CIS, and set out minimum standards for conduct and for supervision of a CIS:

CIS Principle 3-"Eligibility to Act as an Operator"-looks at the regulator's role in imposing minimum eligibility standards of conduct that require approval by the regulatory authority prior to commencement of marketing of a CIS, which include:

• Honesty and Fairness;
• Capability (i.e. human and technical resources);
• Diligence and Effectiveness;
• Operator Specific Powers and Duties (i.e. duty to make decisions as to the investment portfolio structure and administrative procedures); and
• Compliance (i.e. adherence to strictly defined standards set by the regulatory authority).

CIS Principle 5 -"Supervision "-provides that a regulatory regime must provide for a regulatory authority to take overall responsibility for the supervision of a CIS authorized within its jurisdiction. The Principle deals with supervisory techniques:

• Registration and Authorization;
• Inspections and Investigations;
• Powers of the Regulatory Authority;
• Third Party Supervision.

In June1996, the Technical Committee Working Group on Investment Management (WG5) proposed to the Technical Committee that it wished to examine the activities of operators of CIS (both institutional and retail) and consider supervision issues in greater detail. This would expand the CIS Principles 3 and 5 described above by providing further guidance on what activities carried out by operators require supervision, and further international cooperation by the adoption of common principles of supervision.

It was therefore agreed by the Technical Committee that WP5 should commence work on a new mandate which would focus its attention on the supervision of operators of CIS³. The Committee noted that:

" Having developed Principles for the regulation of CIS and Model Agreements for mutual recognition and exchange of information, the Working Party should turn its attention to the supervision of the operators of CIS. As has already been identified in the International Cooperation Discussion Paper, CIS operators increasingly engage in cross-border activities. The development of Principles for the supervision of these entities would not only facilitate the international coordination of the regulation of investment management, but would also contribute to the ultimate goal of reducing impediments to the cross border activities of CIS and their operators. "

This Paper has been developed in response to WG5's new mandate.

Footnotes:

1 A CIS is defined in the Principles for the Regulation of Collective Investment Schemes, Report on Investment Management of the Technical Committee of IOSCO, July 1995. That is "an open ended collective investment scheme that issues redeemable units and invests primarily in transferable securities or money market instruments". It excludes schemes investing in property / real estate, mortgages or venture capital.

2 "Operator" has the same meaning as set out in the CIS Principles. That is "the legal entity that has overall responsibility for management and performance of the functions of the CIS, which may include investment advice and operational services".

3 IOSCO Technical Committee meeting in Edinburgh, June 1996.