BlackRock, Inc. (“BlackRock”)

Mr Mohamed Ben Salem International Organization of Securities Commissions (IOSCO) Calle Oquendo 12 28006 Madrid Spain

Submitted via email to: consultation-2015-06@

23 September 2015

Public Comment on International Regulatory Standards on Fees and Expenses of Investment Funds.

Dear Sirs,

BlackRock, Inc. ("BlackRock")[1] is pleased to have the opportunity to respond to the Consultation Report on Elements of International Regulatory Standards on Fees and Expenses of Investment Funds issued by IOSCO.

As a fiduciary for our clients, BlackRock supports a regulatory regime that increases transparency, protects investors, and facilitates responsible growth of capital markets while preserving consumer choice and assessing benefits versus implementation costs.

We welcome the opportunity to address, and comment on, the issues raised by this consultation and we will continue to contribute to the thinking of IOSCO on any specific issues that may assist in improving the update to the 2004 Principles.

Executive summary

Effectively supporting investors to make informed decisions

We are supportive of increased transparency and helping investors improve their decisionmaking. It is important that consumers are able to weigh up the relative costs, performance and risk of individual Collective Investment Schemes (CIS). Each of these elements should be highlighted in CIS disclosures to assist investors to assess the relative value of one CIS over another.

The process of delivering meaningful transaction cost data to investors will rely on the development of large sets of standardised trading history which allow the development of reliable and consistent models. This is likely to be an iterative process as the industry collectively develops consistent quantitative methods of providing this data.

Managing transaction costs within the context of performance

We believe that the key purpose of improved cost disclosure standards is to empower investors, by providing them with comprehensive and comparable information which allows them to understand the money spent in obtaining the performance the fund achieves: i.e. cost vs. benefit. In this context understanding market dynamics is critical in achieving the most efficient balance between cost and performance.

[1] BlackRock is one of the world's leading asset management firms. We manage assets on behalf of institutional and individual clients worldwide, across equity, fixed income, liquidity, real estate, alternatives, and multi-asset strategies. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world.

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We set out below a number of key considerations and potential pitfalls which should drive the analysis of how to report transaction costs. Situating costs alongside performance leads us to

propose a number of key assumptions:

o Transaction costs should be presented alongside performance o It should be clear to clients that transaction costs are already netted out of performance: i.e.

the management fee and other ongoing charges connected with running the scheme are costs that the client explicitly pays

Given the complexity of transaction cost analysis, and the various methods that can be used by different asset managers, there is a risk of clients being misled by a simple comparison of transaction costs, unless a standardised approach is used. For example, if one asset manager is more conservative in their estimates than a competitor, the same objective cost may be reported quite differently.

1. Recommended approach to asset classes where elements of cost are explicit (e.g. equities and futures)

For asset classes where elements of cost are explicit, such as equities and futures, BlackRock considers the most appropriate solution at present is to only reflect explicit costs, namely commissions and taxes, rather than using a total cost approach. This approach reflects the existing Dutch Pension Federation model of including only explicit costs for commission-based products. This methodology provides transparency and objectivity in the client reporting and in the EU builds on existing MiFID disclosure requirements.

2. Recommended approach to asset classes where elements of costs are implicit (e.g. fixed income and FX)

Transaction costs are generally not explicit in fixed income transactions, as these costs are embedded in the quoted price. Estimates of implicit commission costs for fixed income transactions may be based on a number of assumptions and measured in a number of ways. Different assumptions can significantly impact cost estimates, making meaningful comparison difficult. If the IOSCO Principles call for a standardised presentation, the provision of client reports will inevitably have to be based on a number of assumptions, since the vast majority of fixed income products are traded OTC on a principal basis. From the various options available, we recommend using the model used by the Dutch Pension Federation for fixed income as a basis and enhancing this framework by including additional asset classes.

3. Market impact costs

We do not recommend separate reporting on market impact costs, as there is no agreed standard formula or benchmark. There is too much subjectivity in the calculation and too many qualitative interpretations are required in order to properly interpret and understand how the choice of benchmarks and inclusion of various elements of cost impact the overall numbers reported to clients. As such, it will not assist clients in comparing costs between managers or assessing how market impact affects the portfolio's risk and return profile. In any case, as mentioned above, market impact is already reflected in reported performance figures, and funds using anti-dilutive measures, such as swing pricing, already mitigate the effect of market impact.

Soft commissions/payment of investment research from dealing commissions

We support the need for transparent and robust management of potential conflicts (whether between managers and their clients and between different clients of the same manager) that may arise in connection with the procurement of, and payment for, research. We also welcome further study and analysis of possible solutions coordinated at an international level by IOSCO, which deliver enhanced outcomes for investors.

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Performance Fees

We fully endorse the overriding principle that CIS operators ensure that any remuneration taken from a CIS is not unfair to, or materially prejudicial to the interests of, any investor or potential investor. The ability to charge performance fees varies between jurisdictions. We also wish to clarify that where performances fees are not permitted for retail CIS, we do not recommend change to current national practice as a result of the IOSCO Principles.

There are a number of different ways of delivering an appropriate alignment of interest across a wide range of scenarios within retail CIS. Rather than recommend specific rules we have set out in our response a number of key principles which we believe CIS operators should take into account when designing performance fees for retail CIS.

In addition, while we understand the aims behind the use of fulcrum fees or symmetry in the design of performance fees, there are significant operational issues in applying for a typically daily dealing fund unless specific share class accounting can be used. Our suggested principles aim to mitigate concerns regarding a potential lack of alignment of interest.

We welcome further discussion on any of the points that we have raised.

Yours faithfully,

Bundna Jaswal Director BlackRock BlackRock Platform Innovation bundna.jaswal@

Martin Parkes Director BlackRock Public Policy, EMEA martin.parkes@

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Responses to questions

Question 1:

Are there any other developments that C5 should take into account when formulating good practices regarding fees and expenses of CIS?

We direct IOSCO's attention to forthcoming changes in both the EU and the UK regarding the disclosure of costs and charges. The majority of our responses are made within the context of these forthcoming rules changes and the consumer testing carried out by European and national regulators. The application of these rules more widely to other jurisdictions should be accompanied by consumer testing to assess the level of information and format that best appeals to local investors.

The forthcoming EU rules include the ex-ante and ex post disclosure of costs and charges proposed in the Markets in Financial Instruments Directive II (MiFID II), the product costs disclosure rules in The Packaged Retail Investment and Insurance Products Regulation (PRIIP) and forthcoming rules on the cost disclosure requirements to trustees and independent governance committees proposed by the UK's Department of Work and Pensions (DWP) and Financial Conduct Authority (FCA). BlackRock has commented extensively on these proposals and on the detailed methodologies proposed1.

Our key concern in developing good practice in this area is ensuring consistency of methodology, given the increasing number of CIS that are sold on a cross border basis. For example, at a European level the final disclosure requirements for investment advisors and discretionary managers under MiFID II should dovetail with product cost disclosures in PRIIPS to be adopted by the European Supervisory Authorities, as well as being consistent with the additional disclosure requirements in both UCITS and AIFMD. Although the final presentation may vary e.g. the provision of an aggregated figure under MiFID, as opposed to a line by line break down elsewhere, it is essential that the figures are derived from the same building blocks. This will allow investors to benefit from a consistent presentation of costs, thereby enabling meaningful comparability between providers. We urge close cooperation between all IOSCO members working on cost disclosure to agree consistent methodologies.

Question 2:

If you think defining permitted and prohibited costs is useful, should this be done by the regulatory authority or the CIS operator?

- What types of costs should be permitted and/or prohibited to be charged?

- Are there alternatives to prohibiting certain fees and expenses and if yes, what are they are why are they effective?

Our experience is that the regulatory authorities of the CIS we manage take a number of different approaches to what constitutes permitted or prohibited fees, for example in relation to set up costs or distribution fees.

It would be helpful to define permitted costs to ensure a consistent approach to disclosure, as there are varying practices between jurisdictions.

We believe that the focus of the IOSCO principles should be to fully disclose all fees and charges which can be charged in a given jurisdiction to the fund. The methodology for the ongoing charges figure in the EU's UCITS Key Investor Information Document provides a comprehensive methodology. This allows investors to compare the total costs between jurisdictions.

1 See BlackRock responses to the Joint UK DWP and FCA consultation in May 2015 and the response to the ESAs joint Discussion Paper on disclosures for PRIIPs in August 2015.

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Question 3:

- Which do you consider to be the most appropriate method of performance fee calculation currently employed and why? Are there methods other than a fulcrum fee or "last in, first out" that are more effective?

- What other requirements might curb incentives for excessive or inappropriate short-term risk-taking? Should there be specific recommendations as to how the calculation, benchmark, and target of a performance fee are disclosed? What further disclosures could be recommended?

When permitted, the use of performance fees in retail CIS can be beneficial, where they are designed to bring about increased alignment of interest between the CIS operator and the investors. Performance fees can be complex to design, operate and explain succinctly to retail investors as opposed to institutional investors. There is, therefore, benefit in setting out a number of detailed principles which should lie behind retail disclosure standards.

We fully endorse the overriding principle such as that set out by the UK's FCA, which requires managers to ensure that any remuneration taken from a CIS is not unfair to, or materially prejudicial to the interests of, any investor or potential investor.

In practice we believe that the following core principles should be taken into account in the design of performance fees for retail investors by CIS operators:

The structure of the performance fees used in a CIS should be in line with the interests of the investor.

Performance should be measured against a benchmark and/or an absolute performance hurdle. The benchmark or absolute performance hurdle should disclosed in advance.

The choice of the benchmark and/or an absolute performance hurdle should be based upon relevant criteria such as the investment objective of the CIS, its stated risk profile or investible universe.

A hurdle and/or a benchmark should be described in adequate detail to be fully transparent to the investor.

The performance fee should be calculated on the actual performance realised during the performance period, i.e. the performance fee should be calculated on the performance after all other fees and expenses have been deducted.

The performance fee should be accrued at each NAV calculation point, based on the assets of the CIS (or specific class) at that point.

We recommend a default 12 month performance period for the crystallisation of any performance fee. A limited number of exceptions could be allowed for technical reasons, such as the first period of operation, liquidation or fund mergers, but should be disclosed to investors in advance.

Where possible, performance fees should be accrued to and paid by those unit/shareholders that benefitted from the out performance ? (see further comments on symmetry below).

Where a performance fee is realised, past periods of performance have to be taken into consideration. The absolute loss or relative underperformance per share should be carried forward and has to be recovered through outperformance before further performance fees can be accrued. Until then, no further performance fees should be realised. The method for observing this loss (i.e. high water mark or equivalent) or past underperformance (i.e. carrying forward of relative underperformance) has to be applied consistently and disclosed clearly to the investor.

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