IOSCO publishes principles on suspension of CIS redemptions

The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published its final report, Principles on Suspensions of Redemptions in Collective Investment Schemes, which contains principles regarding the suspension of redemptions for open-ended collective investment schemes (CIS).

The principles reflect a common level of approach and provide standards against which both regulators and the industry can assess the quality of regulation and industry practices concerning suspensions of redemptions.

Principles for Suspension of Redemptions of Collective Investment Schemes

The principles, which are based on the CIS responsible entities’ basic duty to manage CIS liquidity on an on-going basis so as to avoid suspensions to the extent possible, generally cover all types of openended CIS which offer a continuous redemption right, and apply irrespective of whether they are offered to institutional or retail investors. They are addressed to those entities responsible for the overall operation of the CIS and in particular its compliance with the legal/regulatory framework in the respective jurisdiction and thus for the implementation of the principles. The delegation of activities may not be used to circumvent the principles and there should be compliance with the principles, whether activities are performed directly or through a third party.

Management of liquidity risk

1. The responsible entity should ensure that the degree of liquidity of the open-ended CIS it manages allows it in general to meet redemption obligations and other liabilities.

2. Before and during any investment, the responsible entity should consider the liquidity of the types of instruments and assets and its consistency with the overall liquidity profile of the open-ended CIS. For this purpose, the responsible entity should establish, implement and maintain an appropriate liquidity management policy and process.

Ex-Ante Disclosure to Investors

3. The responsible entity should clearly disclose the ability to suspend redemptions in exceptional circumstances to investors prior to their investment into the CIS.

Criteria/Reasons for the suspension

4. Suspension of redemptions by the responsible entity may be justified only a) if permitted by law and in exceptional circumstances provided such suspension is exclusively in the best interest of unitholders within the CIS, or b) if the suspension is required by law, regulation or regulators.

Decision to suspend

5. The responsible entity should have the operational capability to suspend redemptions in an orderly and efficient manner.

6. The decision by the responsible entity to suspend redemptions, in particular the reasons for the suspension and the planned actions should be appropriately:

a. documented;

b. communicated to competent authorities and other relevant parties;

c. communicated to unit-holders.

During the suspension

7. During the suspension of the redemptions, the responsible entity should not accept new subscriptions.

8. The suspension should be regularly reviewed by the responsible entity. The responsible entity should take all necessary steps in order to resume normal operations as soon as possible having regard to the best interest of unit-holders.

9. The responsible entity should keep the competent authority and unit-holders informed throughout the period of suspension. The decision to resume normal operations should also be communicated as soon as practical.

However, it should be noted that not all principles would necessarily be appropriate for, or apply to, specific non-retail CIS which are not offered to the public and are not subject to approval/registration but instead are subject to specific rules under their national applicable law and regulation.

Implementation of the principles may vary from jurisdiction to jurisdiction, depending on local conditions and circumstances.