Building a robust governance framework supporting fund expenses and cost recharge models

As cost-recharging practices have become more advanced in the alternative investment sector in recent years, regulatory scrutiny of these arrangements has increased significantly. Authorities such as the European Securities and Markets Authority (ESMA), the Commission de Surveillance du Secteur Financier (CSSF), and the Securities and Exchange Commission (SEC) are sharpening their focus on how fund managers allocate costs to their funds, placing the governance and justification of fees and expenses high on the supervisory agenda.

Regulators now expect fund managers not only to confirm that recharged costs are eligible, but also to demonstrate that these costs are appropriately allocated, monitored, and justified. This requires clear visibility into the nature and purpose of recharged external expenses or internal costs, the methodologies used to determine them, and the internal controls that govern the process.

A recurring theme in recent regulatory actions is the need for transparency. Fund managers must be able to clearly explain what is being, directly or indirectly, charged to investors, why it is being charged, and how it compares to market standards. Meeting these expectations calls for a combination of structured internal documentation, robust control functions, and regular fee benchmarking. However, many fund managers find it challenging to benchmark fees in the Alternatives space, given the lack of publicly available data and the bespoke nature of the services provided.

From a governance perspective, clear and pre-defined pricing policies, supported by an adequate cost and fee mapping, are becoming essential. Senior management and independent directors are increasingly involved in overseeing cost recharging frameworks, ensuring that the fee structures applied are both fair and well-supported.

Internal control functions, including compliance, risk, and finance, are expected to play an active role in reviewing and challenging fee practices on an ongoing basis. The distinction between recharged internal costs and recharged external fees can be important here. Under a risk-based approach, more attention should be given to internal costs as they naturally raise more risks of conflicts of interests compared to fees charged by arm’s-length external providers.

Building a cost recharging model is therefore no longer just an operational task; it is a strategic exercise that directly influences investor confidence, regulatory compliance, and reputational risk. Fund managers need to take a structured, forward-looking approach to ensure their frameworks are resilient, transparent, and aligned with evolving regulatory expectations.

In our next article, we will focus on how to translate these principles into day-to-day operations, exploring how managers can design methodologies to calculate, allocate, and invoice recharged costs in a way that is practical, consistent, and aligned with regulatory expectations.