ALFI UCITS IV implementation project â€“ KID Q&A Document

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Chapter 3, Content of Sections of the Key Investor Information DocumentSection 1, Objectives and Investment PolicyNo referenceQ. How important is it for promoters to ensure that their prospectus is fully harmonised with their KIDs?A. The KID and the main prospectus should be coherent. At its simplest that means that they should not contradict oneanother. The EU Regulation 583/2010 also says in Recital 10 that the KID "should contain all information necessaryfor the investor to understand the essential elements of the UCITS." (ALFI's emphasis.) Provided that they do notcontradict one another and that the KID does not omit essential information, practitioners must decide for themselvesthe degree to which the contents of the two documents should be conformed, keeping in mind that Recital 10 alsoacknowledges that the prospectus will contain information that cannot be included in the KID for lack of space. Thereis no explicit requirement for the KID and the prospectus to share identical text but ALFI said in its response toconsultation CESR/09-552 (question 8) that it "finds it hard to see how the description of the objectives, policy and theinvestment strategy will be anything but a verbatim copy of what is in the main prospectus, particularly when the civilliability statement is so onerous". Conversely, CESR's consultation on the use of plain language and the layout of theKID (CESR/10-532, page 9) says, "do not copy from the prospectus unless that is in clear language. Some elementsof the prospectus … may be immaterial … [and] you may need to go beyond the prospectus wording to ensure thatyou give a balanced description [of the UCITS]".Art 7Q. Is it likely that management companies will amend the investment objectives and investment policies intheir prospectuses in order to ensure that they are the same as the text in the relevant sections of the KID?A. At this early stage in the implementation of the KID there are signs that some practitioners are reviewing their mainprospectus language to ensure that it complies with the plain language requirement of the KID. There is nothing in theEU Regulation 583/2010 that explicitly obliges them to do so.Q. May the KID cross-reference the prospectus text that describes the fund's investment objective andinvestment policy?A. There is no prohibition on such a cross-reference but the KID must contain "all information necessary for theinvestor to understand the essential elements of the UCITS". Practitioners who employ cross-references in this part ofthe KID may wish to take special care that they have upheld the spirit of the EU Regulation 583/2010. See also Art 21.Q. Can the KID present the investment objectives and investment policy in separate sections if that would aidclarity?A. Strictly speaking, no. Art 3(1) says, "No other information or statements shall be included …" The title "Objectivesand investment policy" is prescribed text and there is no provision that would permit it to be divided. However,provided that they comply with the rules on the contents of this section, practitioners are free to write the section asthey think best. In its consultation paper CESR/10-532 (a guide to plain language and layout) CESR presented theoption to split the Objectives and Investment Policy into separate paragraphs and to use sub-headings.Q. May I use the title "investment strategy" rather than "investment policy" if I think it is more commonlyunderstood?A. No. Art 3(1) says, "No other information or statements shall be included …". The title "Objectives and investmentpolicy" is prescribed text and there is no provision that would permit it to be amended.Q. May a brief description of the eligibility criteria for a share class be inserted in the "Objectives andinvestment policy" section? For example, could the KID say, "You may buy shares of this Fund if you qualifyas institutional and initially invest at least USD 10 million"?A. The EU Regulation 583/2010 does not prescribe this information for the KID and nor does it permit it (Art 3(1): "noother information or statements shall be included"). There is also no example of this information in CESR/10-1321 (theKID template) nor is it mentioned in CESR/09-949.ALFI KID Q&A, Issue 1314, 11 April25 September 2012 Page 12
Art 7(1)(b)Q. Information on the investor's ability to redeem units on demand seems to belong more to the sectionPractical Information than to the section Objectives and Investment Policy. Can I move it to the sectionPractical Information?A. No. You must put information in the sections strictly in accordance with the EU Regulation 583/2010. This isintended to ensure the comparability of KIDs issued by different promoters.Q. May the statement on redemption possibilities be moved to the Practical Information section?A. No. Art 7(1) is clear that the information must be provided in the section Objectives and Investment Policy.Art 7(1)(d)Q. May a benchmark be disclosed in this section for the sole purpose of showing it alongside the pastperformance?A. No. This is not a simple question and it is useful to examine various ways in which benchmarks are used by theindustry and how they should be presented in the KID.If the fund is an index-tracker, the benchmark must be included in the KID (Art 7(1)(d), "where the UCITS hasan index-tracking objective, this shall be stated [in the objectives and investment policy section]" and Art 18(1),"where the objectives and investment policy section makes reference to a benchmark, a bar showing theperformance of that benchmark shall be included in the chart [of past performance]".If the benchmark is implied (for example, if the name and a tracking error are stated in the marketing material orif the investment manager's internal design documents say that the portfolio is constructed and managed withrespect to a benchmark) it must be included in the KID – see Art 7(1)(d), "includes or implies a reference to abenchmark" and Art 7(1), "even if these features do not form part of the description of objectives and investmentpolicy in the prospectus".ESMA/2012/592 elaborated on these provisions, and concluded(1) that it is necessary to show the performance of a benchmark index in the past performance section, where aUCITS refers to an index in its investment objectives and policies as a benchmark and will measure theperformance against this but does not intend to track that index. In addition, it should be made clear in thepast performance section that the performance is not tracking the index.This means that if the fund is not an index-tracker but wishes to measure its performance against an index(including in marketing material), it must include the index on its chart of past performance and it mustdeclare next to the chart that the fund is not a tracker.(2) by deviating from the wording of Art 18 that it is not necessary to refer to the index in the past performancesection, where a UCITS refers to an index in its investment objectives and policies, but does not intend tomeasure performance against that index.Accordingly, we think that if the fund is not an index-tracker and does not wish to measure its performanceagainst an index but uses the index in the portfolio construction process, it must mention that fact in itsinvestment objectives and policies, but is not obliged (although it may choose) to show the index on its chartof past performance.If the portfolio is constructed and managed without reference to a benchmark and yet a benchmark is includedon marketing material or in the fund's factsheet simply because it provides general market context (this doeshappen) there should be no implication within the meaning of Art 7(1)(d). A benchmark which is used in this waymust not be included in the KID, which should contain only information about the "essential features of theUCITS" (Art 7(1)). However, even if the portfolio is constructed without reference to a benchmark, the latter maybecome essential as part of the presentation to the investor (e.g. LIBOR on an absolute return fund).If the portfolio is constructed and managed without reference to a benchmark and yet a benchmark is used tocalculate a performance fee, the benchmark must be included in the charges section of the KID (Arts 10(2)(3)and 12(3)) but there should be no implication within the meaning of Art 7(1)(d).In summary, with particular regard to the chart of past performance:If the benchmark is described in the objectives and investment policy section of the KID it must be shown onthe chart of past performance.ALFI KID Q&A, Issue 1314, 11 April25 September 2012 Page 13
Page 4: IndexPart 1 EU Regulation 583/2010
Page 9 and 10: "Management Company:", which would
Page 11: Q. Will it be compulsory to use a g
Page 15 and 16: Chapter 3, Content of Sections of t
Page 17 and 18: Currently published SRRI value: 5Is
Page 19 and 20: decide what is materially relevant
Page 21 and 22: Q. If switch charges are applied in
Page 23 and 24: A. Yes, we think that both designs
Page 25 and 26: Art 16Q. Past performance "shall be
Page 27 and 28: A. Yes, we think that both designs
Page 29 and 30: Chapter 3, Content of Sections of t
Page 31 and 32: Chapter 4, Particular UCITS Structu
Page 33 and 34: Q. The EU Regulation 583/2010 reque
Page 35 and 36: annual update process. The practiti
Page 37 and 38: Art 38(2)(b)Q. Can deemed consent b
Page 39 and 40: Q. If the shares of a UCITS are hel
Page 41 and 42: Q. Is the management company oblige
Page 43 and 44: Q. It may be hard to tell apart abs
Page 45 and 46: Q. Who should be in charge of the S
Page 47 and 48: Part 3CESR/10-674CESR's guidelines
Page 49 and 50: Page 5, Para 6(b)Q. Does this parag
Page 51 and 52: Q. Should average net assets be cal
Page 53 and 54: Part 4Using KID in distribution net
Page 55 and 56: The following diagrams (which are n
Page 57 and 58: Q. Art 80 of the UCITS IV Directive
Page 59 and 60: the subscription in the future, dem

ALFI UCITS IV implementation project â€“ KID Q&A Document

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