Early closure of an ETF: rights and obligations of the distributor and fund management company

Facts

In March 2024, Mrs X received a letter informing her of the early liquidation of the exchange-traded fund (ETF) in which she held 300 units. This information letter set the fund's net asset value at €15.3797 per unit held. However, she stated that she had initially acquired these units for €18.4533 each.

She therefore claimed an unfavourable difference of a total of €922.89, for which she had requested reimbursement from investment management company Y and also from bank Z, the fund's distributor.

In addition, Mrs X would have preferred to transfer to another similar ETF rather than be subject to forced liquidation.

Distributor Z and investment management company Y both rejected the client's claims, relying on the terms of the fund's prospectus and rules. In its response, the distributor also stated that it had not recommended this type of product.

Mrs X argued that ETFs were widely promoted and highlighted on the stock market area of the distributor’s website, and that she had never been sent the fund prospectus or rules.

It was in this context that Mrs X asked me to intervene in order to obtain compensation for the difference. 

Investigation 

At the outset, it is useful to recall what an ETF is: an ETF (Exchange Traded Fund), also known as a tracker, seeks to track the performance of a stock market index as closely as possible, both upwards and downwards. ETFs are investment funds managed by authorised investment management companies. Unlike other funds, they are listed on a continuous basis, i.e. they can be bought or sold throughout the day (For more information: What you need to know about ETFs (trackers) before investing, only available in French.).

In investigating this case, I first contacted banking network Z, the distributor of the fund, and then investment management company Y.

Firstly, bank Z told me that it considered Mrs X to be a ‘qualified’ investor in terms of the Markets in Financial Instruments Directive (MiFID) investor categories, and that she had subscribed to the fund completely independently, using her online stock market account, in 2021. The distributor also asserted that, at the time of subscription, the client had confirmed that she had taken note of the fund's legal documentation.

Finally, the distributor told me, with regard to Mrs X's wish to obtain a transfer to another similar ETF, that this was not within its remit, since the forced liquidation of an ETF and the exit options offered are choices falling exclusively to the investment management company.

Secondly, the investment management company told me that two months prior to the postal letter referred to by the client, a notice to unitholders had been published on its website, which was freely accessible.

With regard to Mrs X's claim for compensation, the investment management company argued that the risk of capital loss was clearly explained in the fund's prospectus. 

With regard to her request to transfer to another similar ETF, the professional pointed out that this was not offered in the notice to unitholders, which set out the various options available to unitholders (to request a redemption of units on the primary market or on the secondary market until 28 February 2024).

As Mrs X had failed to take action within the time limit, the investment management company automatically redeemed her units at the net asset value on 7 March 2024, as provided for in the notice to unitholders.

Although the investment management company does not market this ETF directly, it told me that it makes all the fund's legal documentation available on its website.

In any event, the investment management company asserted that the fund had been in existence for ten years and that the development strategy for ETF products was guided primarily by investor demand.

The disputed liquidation had, furthermore, been authorised by the AMF, prior to any communication to the unitholders.

Recommendation

I carefully examined all the information I had collected.

I first noted, with regard to the prejudice alleged by Mrs X, that this was the result of developments on the financial markets and that the liquidation of the ETF had simply realised an unrealised loss. I also explained to Mrs X that as the ETF was held in a PEA (share savings plan), there were no tax implications, as the liquidation had no impact on the taxation of the PEA.

I also reiterated that the mere fact that a product is promoted on a distributor's stock market platform does not mean that this constitutes an investment advice service. This service is defined as the provision of personalised recommendations to a third party, either at the request of the third party or at the initiative of the service provider providing the advice, concerning one or more transactions involving financial instruments^[1].

In addition, I noted that at the time she purchased the units, Mrs X was considered to be an qualified client within the meaning of the MiFID categories, and that she had purchased the units of this ETF completely independently, using her stock market account, after confirming that she had read the fund's legal documentation.

I therefore informed Mrs X that the prospectus and fund rules had been made available to her and were indeed enforceable against her.

I also pointed out that the prospectus for the fund in question, which Mrs X had indicated that she had read and which was also available on the investment management company's website, clearly stated that the investment management company could liquidate the fund early.

The decision to liquidate an ETF set up as a unit trust (FCP)^[2] early does not require the approval or agreement of the unitholders. However, before implementing such a decision, the investment management company had to apply for and obtain authorisation from the AMF by submitting a mutation application. In the case in question, the mutation application was approved by the AMF in December 2023.

Finally, I noted that from January 2024, i.e. after authorisation had been obtained from the AMF, the investment management company had published a notice on its website informing unitholders of the forthcoming suspension of the fund and its early liquidation. On this point, I explained to Mrs X that this information to holders had also been approved by the AMF at the time the mutation application was approved. 

In addition to the information issued by the investment management company, Mrs X had also received two letters from the distributor. The first letter informed her of the date of the forthcoming liquidation by redemption of units. The second letter specified the net asset value that would be applied on redemption.

As a result, I considered that neither the distributor nor the investment management company had breached their obligations and that I could not therefore issue a favourable proposal in relation to Mrs X's request.

Lesson to be learned

For investors:

• The decision to liquidate a fund set up as an FCP early, whether an ETF or not, does not require the approval or agreement of unitholders;
• All unitholders must be offered the same exit options by the investment management company in order to ensure compliance with the principle of equality between unitholders.

For the investment management company:

• If the professional wishes to liquidate the fund, they must submit a ‘change’ application to the AMF in order to obtain the necessary authorisation;
• The information document must also be approved by the relevant AMF department.

For the distributor:

• Although it markets the fund directly, the decision to liquidate the fund and the procedures for exiting the fund do not fall within its remit;
• Depending on the nature of the document, it must provide or make available to the client the fund's legal documentation prior to any subscription.