ALFI UCITS IV implementation project – KID Q&A Document

Q. Is it permitted to exclude the cost of action in respect of withholding tax recovery or similar administrativeor legal action on other grounds?A. CESR/10-674 says at Para 2 on page 2 that, "there is a presumption that all costs borne by the fund must be takeninto account unless they are explicitly excluded," and it says at Para 1 on page 3 that the guidelines were drafted withthe intention that the KID should disclose, "a single figure representing all annual charges and other payments takenfrom the assets of the UCITS on a periodic basis." If these expenses arise periodically, as they might if protective taxclaims are being made every year, there appears to be good reason to include them under Paras 4(a), (b) or (e),depending on how the expense arises. If in the opinion of the relevant board of directors the expense is extraordinary,for example, arising from a single legal action, there may be grounds to exclude it.The EU Regulation 583/2010 also provides an insight into this question:Art 10(2)(b) says that the ongoing charges figure should be the charges taken from the fund over a year andshould be "based on the figures for the preceding year" (i.e., an ex-post calculation);Art 11(1)(b) confirms that the basis for the ongoing charges figure should be the last year's expenses (i.e., anex-post calculation);Art 24(2) says that if the "ongoing charges calculated in accordance with Art 10(2)(b) are no longer reliable, themanagement company shall instead estimate a figure for 'ongoing charges' that it believes on reasonablegrounds to be indicative of the amount likely to be charged to the UCITS in the future."An extraordinary charge may therefore be excluded from the ongoing charge figure provided that the disclosurestatement prescribed by Art 24(2) is included in the KID.Page 5, Para 5(d) and 6(a)Q. CESR says that transaction fees are generally excluded for the purposes of calculating ongoing charges(paragraph 5d) but it also says that this exclusion shall not extend to transaction based payments to parties,including the custodian, "in respect of which the recipient is not accountable to the UCITS" (paragraph 6a).What does this mean?A. We think that the phrase "in respect of which the recipient is not accountable to the UCITS" refers to paymentsmade for the benefit of any party referred to in paragraph 4(a) or 4(b) when that party raises charges against theUCITS in connection with the UCITS' acquisition or disposal of assets for its portfolio, even if the charges are notexplicit. Consider one possible scenario in the following diagram:In this case, we think that all transaction-based payments made to the sub-custodian (whether they are invoices raisedagainst the principal custodian or applied as a spread on a transaction) must be included in the ongoing charge figure.This is only one of many possible applications of this concept.Q. Paragraph 6(a) says that "the exclusion in 5(d) for transaction-related costs shall not extend to …payments made to any of the persons listed in 4(a) or 4(b) in respect of which the recipient is not accountableto the UCITS." Does this mean that the exclusion in 5(d) may be applied to payments to persons listed in 4(a)or 4(b) in respect of which the recipient is accountable to the UCITS?A. We think that paragraphs 4(a) and 4(b) have precedence over paragraph 5(d): payments must be included in theongoing charges figure if they are made for the benefit of any party referred to in paragraph 4(a) or 4(b) when thatparty raises charges against the UCITS in connection with the UCITS' acquisition or disposal of assets for its portfolio.ALFI KID Q&A, Issue 1314, 11 April25 September 2012 Page 48