6.1 Authorized Charges

It is important to ensure that investors have been charged only those expenses which have been agreed contractually and that these expenses are at arm's length and made on commercial terms. Regulations may prescribe the type of charges which can be made and how those charges should be calculated. It is likely that the CIS offering or constitutive document will explain, in detail, the actual charges, including their limits, which can be made.

There are a number of specific risks, namely that charges have not been disclosed or are obscure or difficult to understand. Charges may have been calculated incorrectly, taken from a CIS on the wrong date, or inflated because of an excessive number of transactions. Supervision should seek to confirm that charges have been calculated properly by considering any provisions in an agreement, whether disclosure is clear, whether charges have been made to affiliated companies and, if so, whether they are legitimate.

When reviewing charges, there are a number of checks that can be performed. Confirmation that the charges which have been levied are permissible can be sought by reviewing the relevant regulations and the prospectus or rules. A check should be made to ensure each type of charge has been fully disclosed in a CIS's offering document. It may also be appropriate to reperform some calculations to confirm that the correct amount of a particular charge has been levied. This may involve ensuring the valuation at the correct time has been used, upon which the calculation has been based, and also that the correct percentage has been applied to the calculation. It is likely that a prospectus will prescribe when the charge can be made. This can also be checked.

6.2 Charges Levied by the Operator

The types of permissible charges will vary between jurisdictions. Typically an operator may be able to levy an up-front and/or an exit charge, in addition to a periodic management fee. In some situations the scope to levy charges may be much broader, on the condition that charges which have been levied are fully disclosed to investors.

Where transaction charges are imposed by an operator, in addition to the executing broker's commission, supervision should also seek to ensure that such charges are not inconsistent with an operator's responsibility to act in the best interests of the CIS.