Share Classes in Investment Funds and Fair Treatment of All Investors

Abstract

Against the backdrop of the US and EU academic debate on share classes or preferential treatments in investment funds, the paper focuses on an Italian case study. In this jurisdiction, ‘reserved’ alternative investment funds (AIFs) issue Class A and Class B shares, where Class A are granted preferential rights in the form of non-exposure to risk of losses (seniority privilege) and/or a guaranteed minimum interest related to the nominal value of contributions (minimum interest privilege). In details, the seniority privilege entails that, if the net asset value (NAV) of the fund at T1 is lower than at T0, this will only impact on the aggregate value of Class B shares. Thanks to the minimum interest privilege, if the fund at T1 has yielded no returns (or a return lower than the minimum interest), the aggregate value of Class A shares will nevertheless increase by an amount equal to the minimum interest (e.g., 10% of the value of the contributions to the fund). In either case, the aggregate value of Class B shares is correspondingly (proportionately) reduced. The paper analyses such preferential rights under the ‘non-contagion’ principle, according to which, features specific to one share class shall not have a potentially adverse impact on other share classes of the same fund. According to the European Securities and Markets Authority (ESMA) (as well as the International Organization of Securities Commissions (IOSCO)), such a principle is an expression of the broader fairness standard. The outcome of the analysis is that preferential treatment shall be permitted as long as it has the effect of increasing the overall welfare of the relevant fund’s investors, whereas any preferential treatment resulting in a ‘wealth shift’ from one investor (or class) to another runs counter to the ‘non-contagion’ principle and is therefore unfair.

Keywords: fairness, investor, investment fund, share classes, preferential treatment, UCITS, AIF, seniority privilege, minimum interest privilege, non-contagion principle, welfare growth