UCITS update – The Norwegian regulator takes action against closet-tracking

Earlier this month, the Norwegian regulator took action against alleged mis-selling of a fund that charges high fees for active management but, in the regulator’s view, merely mirrors an index – i.e. closet-tracking.
Wednesday, March 18, 2015

The Financial Supervisory Authority of Norway (“FSAN”) issued DNB Asset Management AS, the fund management company of Norway’s largest bank, DNB, with a corrective action order for violation of the conduct of business rules with respect to its management of the investment fund DNB Norge, a UCITS in a master-feeder structure. DNB Norge places its investment in the master fund DNB Norge (IV), also a UCITS.

DNB Norge is a large fund in Norwegian terms, with approximately NOK 8 billion in AuM. The management fee amounts to 1.8% p.a., and the fund is primarily marketed to retail investors.

The FSAN has found that the management of DNB Norge for the last five years has deviated considerably from the investment strategy which follows from the fund’s prospectus and articles of association. DNB Norge is marketed as an actively managed fund, and the management fee reflects this. According to the FSAN’s statement the results from their investigations show that the actual management of the fund does not justify charging the fund with an active management fee, as the management resembles index management. In the FSAN’s view, the low tracking error and active share of the fund clearly indicates that the fund is not being actively managed.

The management of DNB Norge, combined with the high management fee, represents a breach of the conduct of business rules, the FSAN stated. They consider this to be a serious breach, particularly considering the fund’s size, the fact that it is primarily marketed to retail investors, and further that DNB Asset Management also has marketed an index fund (using the same index as DNB Norge) with an annual management fee of not more than 0.3%, as opposed to 1.8% for DNB Norge.

The FSAN has issued a corrective action order against DNB Asset Management, and has instructed the latter to bring the management of the fund in line with the characteristics of active management, or to lower the management fee of the fund to fit with the investment strategy that is actually being performed. For practical purposes, the latter implies to restructure the fund from being actively to passively managed, which requires consent from the investors of the fund.

At the time of writing it is not clear if DNB Asset Management will comply with the corrective order, or if they will appeal the decision to the Ministry of Finance. The FSAN has on their side stated that they are investigating the management of other “actively managed” funds as well.