A New Benchmark for Distribution Oversight

By Ahmed Elghazaly

July 21, 2020

On June 1, the fund industry achieved a milestone for global cooperation. In an industry-led agreement, fund distributors and fund managers of Undertakings for the Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs) joined together to issue a common protocol for distribution oversight.

The Challenge

In recent years, regulators have enhanced their oversight of third-party services, including fund distribution channels, through MiFID II product governance and target market provisions. National regulators have increased their supervision practices, as seen in recent circulars from the Central Bank of Ireland and the Luxembourg financial regulator (CSSF).

To carry out their oversight obligations, fund managers used varying approaches when onboarding new distributors and reviewing their activities on an ongoing basis. As a result, distributors received multiple, often conflicting, due diligence questionnaires (DDQs) and requests for information to satisfy regulatory requirements. Faced with an unmanageable volume of requests for answers to different sets of questions, distributors frequently supplied standard responses, which often fell well short of meeting the needs of funds.

The Solution: A Balanced Industry Approach

In recognition of this issue, ICI Global formed an industry working group in March 2019 tasked with developing a single due diligence questionnaire. This working group succeeded—where others had fallen short—because of its unique structure. Formed to ensure true participation from all sides of the industry, the group included representatives from financial intermediaries (distributors and platforms), many fund companies, and representatives from prominent fund trade bodies in the European Union.* Moreover, the working group adopted a cochair structure to reflect a balanced representation between fund distributors and fund managers, with Allfunds representing the distribution side and Wellington Management the fund side.

After much deliberation on varying distribution practices, the working group successfully issued a uniform due diligence questionnaire. This questionnaire is now publicly available to any fund manager or distributor and serves as standard for UCITS and AIFs in performing both onboarding and ongoing oversight of distribution channels.

Benefits for All

The DDQ offers many benefits to funds, distributors, and investors. For distributors, it is a valuable and efficient tool, as the uniform questionnaire can be completed annually and made available to all fund clients, contributing significant cost and time savings. For fund companies, the uniform questionnaire satisfies their oversight regulatory requirement and ensures a uniform flow of due diligence information across all their distribution partners. Ultimately, fund shareholders reap the greatest benefits of more efficient and effective fund distribution oversight.

DDQ: The Work Continues

Wide market adoption is key to the success of this project. To help foster this, the industry working group will convene regularly to monitor the implementation of the DDQ and will conduct annual reviews as needed to account for any changes in the market or the regulatory framework.

The due diligence questionnaire is also available on EFAMA’s website.

^*These groups included the European Fund and Asset Management Association (EFAMA), the Association of the Luxembourg Fund Industry (ALFI), the Irish Funds Association, the Investment Association (IA), the French Asset Management Association (AFG), and the Italian investment management association (ASSOGESTIONI).

Ahmed Elghazaly is director of operations at ICI and the organizer of the DDQ working group.

Permalink: https://www.ici.org/viewpoints/20_view_ddq

TOPICS: Europe Fund Governance Fund Regulation Global ICI Global International Operations and Technology Shareholder

Simulating a Crisis

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The Bank of England (BoE) recently published a paper detailing results from a simulation intended to “stress-test” open-end investment funds. The paper suggests that under “severe but plausible” assumptions, investors could redeem so heavily from open-end investment funds (e.g., mutual funds or UCITS funds) during a period of market stress that they could cause “dislocations” in corporate bond markets.

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U.S. Bond ETFs Resilient on August 24

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Some observers have suggested that equity market volatility on August 24, 2015, spilled over into other markets and products, in particular to bond exchange-traded funds (see, for example, Bank of England Financial Stability Paper, no. 34, October 2015, pages 26 and 27). In our analysis of the events of that morning, we conclude that U.S. bond ETFs were resilient and largely immune to the turmoil in the equity markets.

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By Chris Plantier

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In this ICI Viewpoints series, we’re examining the wide range of data errors, inconsistencies, results that don’t bear statistical scrutiny, and misinterpretations in the International Monetary Fund’s April 2015 Global Financial Stability Report (GFSR)—specifically, the chapter on “The Asset Management Industry and Financial Stability.” These problems undercut the IMF’s conclusion that “Even simple investment funds such as mutual funds can pose financial stability risks.”

The IMF on Asset Management: Which Herd to Follow?

By Sean Collins

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Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.

In April 2015, the International Monetary Fund (IMF) published its most recent Global Financial Stability Report (GFSR), which included a chapter titled, “The Asset Management Industry and Financial Stability.”

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By Sean Collins

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Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.

In April, the International Monetary Fund (IMF) released its most recent Global Financial Stability Report (GFSR), including a chapter on “The Asset Management Industry and Financial Stability.”

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By Chris Plantier

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By Sean Collins and Chris Plantier

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By Chris Plantier

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By Sean Collins and Chris Plantier

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By Sean Collins and Chris Plantier

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European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June

By Chris Plantier

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A New Benchmark for Distribution Oversight

By Ahmed Elghazaly

The Challenge

The Solution: A Balanced Industry Approach

Benefits for All

DDQ: The Work Continues

Simulating a Crisis

By Sean Collins

What's the “Exposure” of Money Market Funds to Europe?

By Sean Collins

Matching Models to Reality: Doomsayers Are Disappointed—Again—as Funds Weather Brexit Shock

By Paul Schott Stevens

When Investor Protection Becomes Protectionism

By Patrice Bergé-Vincent

Conducting Business in a Rapidly Changing World

By Jeanne Arnold

Derivatives—Please Don’t Let Them Be Misunderstood

By Shelly Antoniewicz

U.S. and European Fund Investors Continue to Take Long View on EM Economies

By Chris Plantier

Traders, Start Your Engines: After August 24, Exchanges Need to Coordinate

By Jennifer Choi and George Gilbert

U.S. Bond ETFs Resilient on August 24

By Shelly Antoniewicz

New York Times Paints False Picture of Funds’ Emerging Market Investments

By Mike McNamee

The IMF on Asset Management: Handle Empirical Results with Care

By Chris Plantier

The IMF on Asset Management: Sorting the Retail and Institutional Investor “Herds”

By Sean Collins

The IMF on Asset Management: Which Herd to Follow?

By Sean Collins

The IMF on Asset Management: The Perils of Inexperience

By Sean Collins

SEC Chair White Affirms Agency Has Tools to Address Risks in Industry

By Rachel McTague

The IMF Quietly Changes Its Data, but Not Its Views

By Chris Plantier

Federal Reserve Reverse Repo Facility Helps Stabilize Short-Term Money Markets

By Chris Plantier

The IMF Is Entitled to Its Opinion, but Not to Its Own Facts

By Sean Collins and Chris Plantier

European Banks Borrow Less from MMFs; the Federal Reserve Borrows More

By Chris Plantier

The IMF Makes All of OFR’s Mistakes—And More

By Sean Collins and Chris Plantier

Why Regulated Funds Are a Relatively Stable Source of Foreign Investment for Emerging Economies

By Chris Plantier

“Preemptive Runs” and Money Market Fund Gates and Fees: Theory Meets Practice

By Sean Collins and Chris Plantier

Sizing Up Mutual Fund and ETF Investment in Emerging Markets

By Chris Plantier

European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June

By Chris Plantier

Seasonality, U.S. Money Market Funds, and the Borrower of Last Resort

By Chris Plantier