The Financial Markets Authority (FMA) is supporting the use of buy/sell spreads when there is a material increase in trading costs driven by investors' buy, sell and switch decisions.
Fund trading expenses are generally spread across all investors in proportion to their holding. But in times of high investor-driven buy, sell or switch activity (as in March 2020), managers need to consider whether buy/sell spreads (or similar mechanisms) would provide a fairer allocation of costs, based on a “user-pays” principle.
The FMA’s guidance for fund managers in these situations includes that:
- managers “will need to weigh the benefit of implementing buy/sell spreads against other factors, including any additional complexity both operationally and in regard to investor understanding”. This calculation involves analysing likely fund inflows and outflows under different scenarios, based on the benefit to the fund – not the manager
- before implementing a buy/sell spread, managers should consider whether their governing documents allow for this and, if not, how they should be amended
- maintaining an appropriate spread would require that the manager:
- set a threshold that would trigger a review to determine if the level of the spread is still aligned with underlying costs, and
- periodically review the level of the spread to ensure it remains appropriate in the overall context of the market
- buy/sell spreads should be treated similarly to individual action fees with relevant information disclosed in PDSs (namely in the ‘What are the fees?’ section) and in fund updates. Managers should also consider how to inform existing investors about the use of buy/sell spreads, and
- the FMA will monitor the implementation and level of buy/sell spreads in conjunction with MIS Supervisors.
Chapman Tripp comment
We welcome the FMA’s practical guidance on the use of buy/sell spreads. The adoption of buy/sell spreads will not be appropriate in every circumstance and fund managers need to implement a strategy that is consistent with their duties to act in the best interests of all scheme participants and treat scheme participants equitably.
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