On 4 June 2020, the European Securities and Markets Authority (ESMA) issued a supervisory briefing on the supervision by Member State national competent authorities (NCAs) of costs applicable to Undertakings for the Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). The supervisory briefing comes in response to the need to improve convergence across NCAs in the approach to undue costs.

Article 22(4) of the UCITS Level 2 Directive provides that Member States shall require management companies to act in such a way as to prevent undue costs being charged to the UCITS and its unitholders. Based on Article 14(1)(a) and (b) of Directive 2009/65/EC (UCITS Level 1 Directive), each Member State shall draw up rules of conduct to ensure that a management company: (a) acts honestly and fairly in conducting its business activities in the best interests of the UCITS it manages and the integrity of the market; and (b) acts with due skill, care and diligence, in the best interests of the UCITS it manages and the integrity of the market.

Article 17(2) of the Alternative Investment Fund Managers Directive (AIFMD) Level 2 Regulation provides that alternative investment fund managers (AIFMs) shall ensure that the alternative investment funds (AIFs) they manage or the investors in these AIFs are not charged undue costs. Also, Article 12(1) of the AIFMD provides that Member States shall ensure that, at all times, AIFMs: (a) act honestly, with due skill, care and diligence and fairly in conducting their activities; (b) act in the best interests of the AIFs or the investors of the AIFs they manage and the integrity of the market; and (c) treat all AIF investors fairly.

The briefing includes indicators which should allow NCAs to identify costs that should be considered as “undue” to investors and examples of such costs. It also covers elements to be taken into account by NCAs for the purpose of their supervision of the duty to prevent undue costs being charged to investors.

The briefing is expected to be considered by NCAs when supervising cost-related issues, including the duty of not charging undue costs to investors. It can also give market participants indications of compliant implementation of the relevant UCITS and AIFMD provisions.