As with the consultation on risk measurement, the two most recent consultation papers form part of CESR’s response to the Commission’s provisional request for assistance which it published in February 2009. The Commission’s mandate requires CESR to deliver technical advice on possible implementing measures concerning UCITS IV by 30 October 2009.
Consultation on the format and content of Key Information Document (KID) Disclosures for UCITS
The KID is designed to enhance the quality of UCITS disclosures, and to avoid the perceived inadequacies of the Simplified Prospectus, by the introduction of a short, pre-contractual disclosure document containing only the key elements of information investors need before making a decision on whether to invest in a fund. In order to fulfil these criteria, CESR has set out a number of proposals under the following main headings:
The objectives and investment policy
CESR invites comment on their proposals that the KID should provide a full description of the objectives and investment policy of each UCITS in plain and concise language, not necessarily repeating the description given in its prospectus. CESR particularises a non-exhaustive list of what should be included in this section, ie, the objective statement should indicate whether the returns can be expected in the form of capital growth, payment of income, or a combination of both and the investment policy should indicate to the investor how the objective is to be achieved (by exposure to specific markets or instruments, or the application of a specific formula).
CESR also points out that the consumer testing exercise it carried out between March 2008 and May 2009 highlighted that a significant number of investors failed to understand one of the essential features of UCITS. Accordingly, it recommends the addition of a statement that investors may redeem their units on request.
Risk and reward disclosures
The consultation paper suggests two options for risk and reward disclosure: a synthetic risk and reward indicator (SRRI) supported by a narrative explanation versus an improved version of the narrative approach. The paper proposed the use of a SSRI as the preferred option taking into account a range of factors, in particular in terms of improved comparability of funds. CESR has set out the methodology for calculating the SSRI at Annex 1 of the paper. In brief, the proposed methodology is a measure of the volatility of the fund based on investment returns (past performance) over a historical period of three to five years.
At the time of the publication of the consultation paper, CESR had not yet finalised some elements of the proposed methodology. In particular, some "fine-tuning" was required in respect of the definition of upper and lower bounds for the volatility of the returns of a fund and a detailed explanation of the risk classification process for structured funds. On 4 August 2009, CESR published an addendum to the consultation which includes an explanation of the aforementioned issues.
CESR has invited feedback on the recommendations it has made on the range of options for disclosure of charges in the KID. The approach proposed in the consultation paper consists of a table setting out clearly the different elements of the charging structure in percentage terms, namely, the entry and exit charges, ongoing charges and performance fees. This should be accompanied by a simple summary measure of charges presented in narrative terms and including a cash figure where relevant. CESR has recommended the methodology to be used for calculating ongoing charges and also that the KID should explain that these charges can change from year to year.
UCITS will need to display past performance
CESR has sought views on the proposed approach to presentation of past performance which is based on use of a bar chart displaying up to ten years’ performance, where available and on their proposals on the calculation of past performance. CESR recommends that every past performance record is revised annually at the end of the calendar year and that this revision should be carried out promptly to ensure, as far as possible, that all KIDs contain comparable track records.
Other points considered in the consultation paper include information to be included in the practical information section of KID, the circumstances in which a KID should be revised and special cases requiring the KID to be adapted for particular fund structures.
Consultation on the UCITS Management Company Passport
CESR’s advice on the Management Company Passport has been prepared taking account of the principles of a high level of investor protection and supervision and the principle of proportionality. Following the directions given by the Commission in their mandate, CESR’s advice also seeks to be consistent, where possible, with the provisions of the Markets in Financial Instruments Directive (MiFID).
CESR has set out its draft advice under the following sections:
Organisational requirements and conflicts of interest
CESR has invited comment on their proposals with regard to general organisational procedures, responsibility of senior management, remuneration policy and complaints handling. In relation to conflicts of interest, CESR has recommended criteria for the identification of conflicts of interest and the management of same.
Rules of conduct
CESR proposes that “MiFID-like” conduct of business rules should apply to management companies providing individual and collective portfolio management services. CESR proposes that specific requirements be introduced regarding the due diligence that management companies are expected to carry out in the selection of investments.
CESR considers that the activity of direct selling of UCITS by management companies should be subject to conduct of business rules which are consistent with the relevant MiFID rules. This issue is due to be further explored by the Commission in its work on Packaged Retail Investment Products (PRIPs) as set out in its Communication of 29 April 2009. CESR also invites feedback on their proposals regarding client order handling and the reporting obligations of management companies in respect of execution of subscription and redemption orders.
Measures to be taken by a depositary of a UCITS managed on a cross-border basis
CESR states that it does not see grounds for the overall framework applicable to depositaries acting in a domestic context being different from cross-border situations. CESR’s advice covers the requirements of the standard arrangements between the depositary and management company in order to appropriately set out the rights and obligations of both parties. CESR proposes that the agreements between these entities should be governed by the same law which governs the UCITS.
CESR has requested feedback on the criteria for assessing the adequacy of the risk management process. In relation to derivative instruments, stakeholders are asked to consider whether the proposals put forward in the CESR consultation on risk measurement methodologies for UCITS will lead to additional costs for management companies and self-managed investment companies.
The Commission asked CESR’s advice on two key elements regarding supervisory cooperation: first, on-the-spot verification and investigation, and second, the exchange of information between competent authorities that host either the management company or the UCITS. CESR’s proposals take into account the existing legal framework in relation to international cooperation, as well as best practice developed within CESR and IOSCO.
CESR invites responses to both consultation papers by 10 September 2009. It is due to publish another consultation paper on the level 2 measures related to fund mergers, master-feeder structures and notification procedures later in 2009 which will be the last piece of advice in response to the Commission’s February 2009 mandate.