Fees for advisory and distribution, not management

In a Securitisation the fees may be charged differently from in a fund or Actively Managed Certificate (AMC).

The first point to remember is that a Securitisation cannot be "actively managed" unless its underlying assets comprise only debt instruments. Securitisations with non-debt underlying assets are "passively managed" on a "prudent man" or defensive basis. Therefore it is common, at least for "passively managed" Securitisations, for the title "Manager" to be used only for the Luxembourg-resident professional director of the Securitisation.

For Swiss AMCs, the title Manager is generally used for the FINMA-licensed entity which is required to be appointed. For many Luxembourg funds an Alternative Investments Fund Manager (AIFM) must be appointed.

For a "passively managed" Securitisation, a financial professional, even one with a license, will generally not receive "management fees".

Instead the financial professional may receive distribution fees or advisory fees from the Securitisation.

Distribution fees.

Distribution fees may comprise an upfront one-time payment in respect of each investor (in consideration for distribution services, e.g. private placement services), and a distributor may also receive ongoing fees (in consideration for investor maintenance, for as long as the investor remains invested). Upfront fees may be amortized in the Securitisation's books (the financial professional may prefer this so that the investors do not "feel" the fees in the form of a day-one drop in their reported investment value).

Advisory fees.

Advisory fees may comprise ongoing fees (often paid once per quarter) for services provided to the Securitisation including initial due diligence and analysis of underlying assets prior to and after product launch, and ongoing monitoring of the assets and the market, as well as ongoing administrative support. The financial professional cannot provide investment advice to the Securitisation unless it has the necessary license in its jurisdiction to do so, and the advisory services contract should make it clear that the financial professional will not provide to the Securitisation any services which it does not hold the necessary licenses to provide.

The services of initial due diligence and analysis of underlying asset may be provided directly to the Securitisation in parallel with the arrangement services that are provided by the Arranger, and may effectively enable the Arranger to arrange the product. The Arranger of a Securitisation is an entity which is separate from the Securitisation and fulfils a required function because the Securitisation cannot itself take initiative or, as the Luxembourg regulator puts it, be an entrepreneur. The Arranger arranges the Securitisation terms and conditions and arranges its service providers (including distributors), so that the Securitisation can receive investments and function. If the Arranger is a Luxembourg entity it must hold a Luxembourg Business License (an except to this is if it is in the same company group as the Securitisation). If the Arranger is not a Luxembourg entity it may need to be a licensed investment advisor in its jurisdiction.

The fees, whether distribution, client maintenance or advisory fees, do not need to be set at market rate for the services actually provided, but they should be fully disclosed to the investors in the Securisation terms and conditions.