Equity Funds Misleading Clients Face New Requirements in Denmark

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Denmark is considering new, stricter rules to protect investors after finding that more than one in 10 equity funds may have overcharged clients for the work they claim to be putting put in to generate extra returns.

The Financial Supervisory Authority in Copenhagen is reviewing 35 of about 268 equity funds to find out why they are charging clients as though they were actively managing assets, when they appear only to be tracking indexes. The review may well result in new guidelines, Annette Andersen, head of department for collective investments, told Bloomberg.

“We are now in the process of looking at the 35, at the numbers and at the explanations we get, whether it is a good enough explanation or is it a bad explanation,” Andersen said. “If it’s possible, we will come up with some best practices.”

Regulators, including the European Securities and Markets Authority, are cracking down on so-called closet indexing. Households have been plowing money into funds at record levels in recent years in an effort to squeeze out extra returns as interest rates remain at record lows. Most prefer active portfolio management, with almost 90 percent of all funds in Denmark calling themselves actively managed.

Investors are counting on the regulator to police an area in which clients have little hope of knowing what funds are really doing, according to Jens Moeller Nielsen, chief executive officer of the Danish Shareholders’ Association.

The Danish Investment Fund Association said last year that members not meeting criteria aimed at preventing closet indexing need to explain themselves. That led the 35 funds to acknowledge they had fallen short. More specifically, they failed to meet the thresholds that measure the difference in stock holdings in a portfolio versus a benchmark and the extent to which returns differ.

“This is a problem area” and the FSA has “used a lot of resources” to investigate what’s going on, Andersen said. The regulator hopes to be finished with its efforts to overhaul the industry this year, she said.