2011 Guidance Note -/11 Guidance Note 1/11 Undertakings for Collective Investment in Transferable Securities (UCITS) Publication of a Key Investor Information Document 2011 1
Contents 1. General Rules 3 2. Presentation and Language 4 3. Individual Sections of the KIID 5 3.1 Investment objective and policy 5 3.1.1 Structured UCITS 6 3.1.2 Fund of Funds 6 3.1.3 Feeder Funds 7 3.2 Risk and Reward Profile 7 3.2.1 Fund of Funds 7 3.2.2 Feeder Funds 7 3.3 Charges 8 3.3.1 Portfolio transaction costs 8 3.3.2 Performance fees 8 3.3.3 Fund of Funds 8 3.3.4 Feeder Funds 9 3.4 Past Performance 9 3.4.1 Structured UCITS 9 4. Signposting 9 5. Application of the KIID to sub-funds and share classes 10 5.1 Umbrella UCITS 10 5.2 Share Classes 10 6. Preparation of the KIID 11 7. Updates 12 8. Filing Requirements 12 2
Guidance Note 1/11 Undertakings for Collective Investment in Transferable Securities (UCITS) Publication of a Key Investor Information Document Regulation [] of the European Communities (UCITS) Regulations 2010 ("the Regulations") requires inter alia that a UCITS must draw up a key investor information document ( KIID ). Notice UCITS 19 of the Central Bank of Ireland ( the Central Bank ) UCITS Notices sets out the requirements for the preparation and content of a KIID which reflect the provisions of the Regulations. This note provides guidance on the publication of a KIID and the information which must be included therein. It takes into account the following pieces of legislation and European Securities and Markets Authority ( ESMA ) Level 3 Guidance in this area: - Council Directive 2009/65/EC on the coordination of the laws, regulations and administrative provisions relating to undertaking for collective investment in transferable securities (UCITS) ( UCITS Directive ); - Commission Regulation (EU) 583/2010 1 of 1 July 2010 ( Commission Regulation ); - CESR/10-1320 ESMA s guide to clear language and layout for the key investor information document; - CESR/10-1321 ESMA s template for the key investor information document; - CESR/10-1318 - Selection and presentation of performance scenarios in the key investor information document for structured UCITS; - CESR/10/673 - ESMA s guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the key investor information document; - CESR/10-674 ESMA s guidelines on the methodology for the calculation of the ongoing charges figure in the key investor information document. Note - CESR/10-1320, CESR/10-1321, CESR/10-1318, CESR/10-673 and CESR/10-674 are collectively referred to throughout this document as ESMA KIID Guidelines. 1 Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions which must be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website. 3
1. General Rules (a) (b) (c) (d) (e) (f) The KIID shall be fair, clear and not misleading. The KIID shall be written in a concise manner and in non-technical language. The KIID shall not exceed two pages of A4-sized paper when printed (or three pages in the context of a structured UCITS). The KIID shall include appropriate information about the essential characteristics of the UCITS, which is to be provided to investors so that they are reasonably able to understand the nature and the risks of the investment product that is being offered to them and consequently to take investment decisions on an informed basis. The essential elements of the KIID shall be kept up-to-date. The contents of the KIID shall constitute pre-contractual information. A UCITS must provide the KIID to investors in good time before their proposed subscription of units in such UCITS. This Guidance Note clarifies certain aspects of the Commission Regulation and the ESMA KIID Guidelines and provides guidance for their practical application in drafting a KIID. Notwithstanding any additional clarification included in this note, a UCITS must comply in full with the provisions of the Regulations, the Commission Regulations and ESMA KIID Guidelines. 2. Presentation and Language The purpose of the KIID is to ensure that the content of the information is relevant, the organisation of the information is logical and the language is appropriate for retail investors. The KIID should engage investors, assist them in making an informed investment decision and facilitate comparisons through its format, presentation and the quality and nature of the language used. While the KIID must comply with the requirements of the Regulations, the Commission Regulation and must be drafted in accordance with ESMA s guide to clear language and layout, it is the responsibility of the UCITS to write and design the KIID in such a way as to make it understandable to investors. A UCITS must not copy text from the simplified prospectus or the prospectus of the UCITS unless it has been critically reviewed in the light of ESMA s guide to clear language. 4
In accordance with Article 5 of the Commission Regulation, the KIID shall be: (a) Presented and laid out in a way that is easy to read, using characters of a readable size. (b) Clearly expressed and written in language that communicates in a way that facilitates the investor s understanding of the information being communicated in particular where: (i) The language used is clear, succinct and comprehensible; (ii) The use of jargon is avoided; (iii)technical terms are avoided when everyday words can be used instead. (c) Focused on the key information that investors need. In respect of each of the above, the following should be noted: (a) A UCITS is required to prepare a KIID in line with ESMA s template document. Each section within the KIID should follow the same running order and have consistent headings. The type used must be an appropriate size and should not be less than 10pts. Colour is permitted insofar as it is consistent with the UCITS brand or design preferences. However, as a KIID may be printed or photocopied in black or white, understanding of the contents should not depend on the use of colour. The KIID may include the corporate branding of the UCITS management group to which it belongs provided it is unobtrusive. Any branding that is so large as to distract the reader or obscure the text is not acceptable. (b) The use of plain language should convey information that will be understood by retail investors. The removal of jargon and confusing words without redrafting remaining language will not necessarily make the KIID user friendly. Other barriers to clear language include legalistic words and phrases, or long sentences. (c) The information presented in the KIID shall consist only of information that potential investors need to make an informed investment decision. It should avoid including information that is not relevant to the decision-making process. 3. Individual sections of the KIID 3.1 Investment objective and policy The prospectus of each UCITS will contain a full description of the investment objective and policy of the UCITS. The purpose of the investment objective and policy section in the KIID is not to reproduce that description but to set out in plain and concise language what the UCITS aims to do and how it will go about achieving this aim. 5
The investment objective must be clearly stated so that investors can easily see whether the UCITS will be suitable for their needs. The investment policy should indicate how the investment objective will be achieved, for example, by exposure to particular markets or specific instruments or through the application of a particular formula. A description of the investment strategy may be included as well if it is likely to remain in force for a sufficiently long time to be of relevance to prospective investors. The KIID does not need to contain an exhaustive list of investment instruments. Only investment instruments likely to have a material impact on the UCITS performance should be included. If there is the potential to invest in a wide variety of investment instruments in different markets, their inclusion should be analysed based on past and expected usage. 3.1.1 Structured UCITS In the context of structured UCITS, it should be clear if the pre-determined pay off is only available to those investors who buy units at a certain point and hold them until a certain date. The KIID must include an explanation of what happens when investors buy and sell their units at other times (i.e. they receive the current NAV). If a guarantee from an independent third party is offered this should be explained in this section. 3.1.2 Fund of Funds In the context of UCITS established as fund of funds, the investment objective and policy section should briefly explain the manager s approach to the selection of the underlying funds. A generic statement, for example, that the fund selects the most appropriate underlying funds after careful quantitative and qualitative assessment will not be permitted. The disclosure should provide some description of the quantitative or qualitative approach taken, for example, that underlying funds are selected based on their Sharpe ratio or they pay high dividends. 6
3.1.3 Feeder Funds In the context of UCITS established as feeder funds, the UCITS should provide where relevant, the possibility to hold ancillary assets (i.e. other than the shares of the master fund). 3.2 Risk and Reward Profile A UCITS must calculate a synthetic risk and reward indicator in accordance with the methodology prescribed in ESMA Guidelines CESR/10-673. This indicator must be disclosed in the KIID and accompanied by a narrative explanation of the main limitations of the indicator as outlined in the Commission Regulation. The impact of some material specific risks, for example, credit, counterparty, liquidity or operational risks may not be fully captured by the synthetic indicator. As a result the KIID must also include a narrative presentation of the material risks relevant to the UCITS which are not fully captured by the indicator. It is the responsibility of the UCITS to identify the material risks not adequately captured by the indicator and to ensure that those risks are captured by the risk management function of the UCITS. The narrative presentation of the material risks shall be fair, clear and not misleading. A UCITS is permitted to signpost to the prospectus where full details of all of the risks of the UCITS are disclosed. 3.2.1 Fund of Funds The narrative description of the risk factors to accompany the synthetic risk reward indicator should take into account the risks posed by the underlying funds and the extent to which these are likely to be material to the UCITS as a whole. 3.2.2 Feeder Funds The description of the feeder UCITS risk and reward profile should not be materially different to the risk and reward profile of the corresponding master UCITS. It should be possible for the feeder UCITS to copy this information from the KIID of the master UCITS. Where the ancillary assets held by the feeder UCITS impact on its risk and reward profile, this should be clearly disclosed. 7
3.3 Charges A UCITS must calculate its charges in accordance with the methodology prescribed in ESMA Guidelines CESR/10-674. The methodology presumes that all costs borne by the UCITS must be taken into account unless they are explicitly excluded. The accuracy of the charges figure should be reviewed on an on-going basis and revised in accordance with Article 24 of the Commission Regulation. 3.3.1 Portfolio transaction costs Portfolio transaction costs are not included in the charges figure disclosed in the KIID. However, where the potential impact of these costs on investors return is known or considered likely to be material, the KIID must include a statement that these costs are paid out of the assets of the UCITS. This should be disclosed under the investment objective and policy section. 3.3.2 Performance Fees A UCITS which charges a performance fee is required to disclose this fact in the KIID. The amount of performance fee charged during the UCITS last financial year should be included as a percentage figure. The performance fee should be explained as clearly and simply as possible through a narrative description of the calculation methodology applied. Cross referencing to the prospectus is permitted in order to provide for more information. Where no performance fee is being paid out of the assets of the UCITS, it should be disclosed as none in the table of charges. 3.3.3 Fund of funds The description of charges in the case of a UCITS fund of funds shall take into account any changes incurred by the UCITS as an investor in the underlying funds. Specifically any subscription or redemption charges and ongoing charges levied by the underlying funds must be reflected in the UCITS calculation of its own charges figure. 3.3.4 Feeder Funds The description of charges in the case of a feeder UCITS should cover both the 8
cost of investing in the feeder UCITS and any costs and expenses that the master UCITS may charge the feeder UCITS. The master UCITS may not charge subscription or redemption charges to the feeder investor. The charges figure of the feeder UCITS must be aggregated with the charges figure of the master UCITS. 3.4 Past Performance Past performance shall be calculated based on the net asset value of the UCITS, assuming any distributable income has been reinvested. Where there has been a material change in the investment objective and policy of the UCITS the past performance of the UCITS achieved prior to the material change may be included in the bar chart, with the inclusion of a prominent warning that it was achieved in circumstances that no longer apply. 3.4.1 Structured UCITS Structured UCITS must present their past performance in accordance with ESMA/10-1318 on the selection and presentation of performance scenarios for structured UCITS. 4. Sign-posting The KIID may signpost to information which may be useful to the investor. The KIID should avoid sign-posting to such a degree that comprehension of the essential information is not possible. Other sources of information include the prospectus, annual or half-yearly reports and the website of the UCITS. While it is acceptable to use several signposts within the KIID, the number of cross references should be kept to a minimum. These signposts must direct the reader to a specific section 2 of the relevant source of information (for example, the performance fee disclosure may cross refer to the section within the 2 The Central Bank does not recommend cross referencing to specific page numbers of the prospectus as any non-material amendment to the prospectus of the UCITS may result in an amendment to the KIID referencing. The longevity of the cross referencing may be increased by avoiding reference to specific page number. 9
prospectus dealing with charges). All signposting to the prospectus or the annual or half-yearly financial statements must be to the current versions of these documents. 5. Application of the KIID to sub-funds and share classes A UCITS is required to draw up a KIID containing all of the information required by the Regulations, the Commission Regulation and the ESMA KIID Guidelines, in the format prescribed by ESMA in its template for the KIID. 5.1 Umbrella UCITS An umbrella UCITS must publish an separate KIID for each sub-fund. The KIID for each sub-fund must, under the Practical Information section, (a) identify itself as a sub-fund of an umbrella UCITS and state, if relevant, that the prospectus and periodic reports are prepared for the entire umbrella UCITS identified in the KIID; (b) details of whether the assets and liabilities of each sub-fund are segregated by law and how the absence of segregation might affect the investor; (c) state whether or not the investor has the right to switch his/her investment in units in one sub-fund for units in another sub-fund of the umbrella UCITS, and if so, where information about how to exercise that right may be obtained. Where a switching charge exists, and this charge differs from the standard subscription /redemption charge, this charge must be separately disclosed in the Charges section of the KIID. 5.2 Share Classes A KIID may be published for individual share classes within a UCITS or within a sub-fund of an umbrella UCITS. Information relevant to two or more share classes of the UCITS may be combined into a single KIID provided the resulting document complies in full with all of the requirements set out in Section 2, Chapter II of the Commission Regulation including those applicable to length of the KIID. The UCITS may select a class to represent one or more other classes of the UCITS provided the information is fair, clear and not misleading to potential investors in 10
those other classes. The UCITS must consider which is the most suitable representative share class having regard to the characteristics of the UCITS, the nature of the differences between share classes in the UCITS and the range of choices on offer to each investor. Where charging structures differ between share classes, the Central Bank requires that the share class with the highest overall charge must be selected as the representative share class to avoid the risk of understating charges or overstating performance. The KIID based on the representative share class may be provided to investors in other share classes of the UCITS. selected the following conditions apply: Where a representative share class has been (a) the UCITS shall keep a record of the other classes are represented by the representative share class and the grounds for selection of this share class; (b) specific features of different share classes may not be selected and combined into a mixed profile of a representative share class. (c) the Risk and Reward Profile section of the KIID shall contain an explanation of material risks applicable to other share classes being represented; (d) the Practical Information section of the KIID shall include details of the representative share class, using the terms by which it is designated in the prospectus of the UCITS. This section shall also indicate where investors can obtain information about the other share classes of the UCITS that are marketed in their own Member State. 6. Preparation of the KIID The KIID can only contain the information specified in the Regulations and in Article 4 of the Commission Regulation. It cannot contain any other information. The KIID must be prepared in accordance with ESMA s template. 7. Updates A UCITS is required to update its KIID on an annual basis within 35 business days of each calendar year. 11
The KIID should be reviewed and revised as appropriate and as frequently as it is necessary to ensure that it continues to meet the requirements of the Regulations and the Commission Regulation. A UCITS is required to review the KIID before entering into any new initiative that is likely to result in a significant number of new investors acquiring units in the UCITS. Furthermore, any changes to the prospectus or fund rules should prompt a review of the KIID to ensure there are no consequential changes that need to be signalled to prospective investors. 8. Filing Requirements A KIID must be submitted to the Central Bank prior to the authorisation of each UCITS, or approval of a new sub-fund in the context of an umbrella UCITS. The UCITS or its legal advisor must confirm in writing to the Central Bank that the KIID complies in full with the requirements of the Regulations, the Commission Regulation, all related ESMA Guidelines, and this Guidance Note. This confirmation must also state that the information in the KIID does not conflict with the content of the prospectus, where relevant. The amended KIID must be filed in accordance with the requirements set out in Section 7. Central Bank of Ireland 2011 12
T +353 1 224 6000 F +353 1 671 6561 www.centralbank.ie FIFApolicy@centralbank.ie 1