Amendment to the rules governing the charging of fees and expenses to capital
The Financial Regulator has announced a change in its rules governing the charging of fees and expenses to capital in fixed income funds following a number of submissions from fund promoters. As a matter of law, funds are free to allocate expenses to income or capital as they choose. However, the Financial Regulator, as a matter of policy, precluded fixed income retail funds from charging fees and expenses to capital and it required that these be charged, in the first instance, to income, and only if there was insufficient income to cover these charges could they be set off against capital. The argument advanced by the Financial Regulator in support of this rule was that investors in a fund investing predominantly in debt instruments and money market instruments could not expect the same capital growth as may arise in the case of an equity fund and so the charging expenses to capital for this type of fund led to a greater risk of capital erosion.
In response to the submissions made by promoters seeking a relaxation of this policy restriction the Financial Regulator has acknowledged that the restriction is no longer necessary provided that the risks relating to the charging of fees and expenses to capital for fixed income funds are properly disclosed. With effect from 1 September 2010, all collective investment schemes will be permitted to charge fees and expenses to capital, provided that the following conditions are satisfied:
the articles of association or trust deed for the fund must provide expressly for the charging of fees and expenses to capital;
the prospectus must disclose the rationale for the policy and describe the effects of this policy, making it clear that capital may be eroded and that income will be achieved by foregoing the potential for future capital growth; and
the subscription application form must include a legend to the effect that unit holders should note that all or part of the fees and expenses will be charged to the capital of the fund and that this will have the effect of lowering the capital value of the investment.
In the case of fixed income funds, the following additional requirements must be satisfied:
a specific risk warning must be included to the effect that there will be a greater risk of capital erosion given the lack of potential for capital growth, a further warning of the likelihood that, due to capital erosion...