Key Investor Information Document
Q. What is UCITS Directive?
A. The Undertakings for Collective Investment in Transferable Securities (UCITS) Directive comprises of a comprehensive framework for the regulation of harmonised investment funds within Europe. The extensive requirements with which UCITS must conform are intended to ensure that these products can be sold on a cross-border basis. Its objective is to provide investors with a secure environment for collective investment scheme investing. It covers universal rules on how these schemes should be structured, managed and governed, and how their assets should be safeguarded. Any collective investment scheme that meets the standard UCITS notification requirements, and therefore qualifies as a UCITS, may be sold freely to the public in any EU country.
The UCITS framework is made up of the following EU legislation:
a. Directive 2009/65/EC, which was adopted in 2009. It is a ‘framework’ Level 1 Directive which has been supplemented by technical implementing measures;
b. Directive 2007/16/EC1; Directive 2010/43/EU2; Regulation No 583/20103; Directive 2010/42/EU4; and Regulation No 584/20105.
Q. What is a KID?
A. A Key Investor Information Document (KID) is a two-page (three-page for structured products), “factsheet” style document which includes the pre-contractual information which must be provided to investors prior to investment. Its main objective is to provide clear investment information to investors. The KID sets out the essential characteristics of a fund or share class necessary for an investor to understand the nature and the risks of the fund being offered and make investment decisions on an informed basis. The KIID needs to be updated at least once a year.
Content of Sections of the Key Investor Information Document Objectives and Investment Policy
Q. How important is it for practitioners to ensure that their prospectus is fully harmonised with their KIDs?
A. The KID and the main prospectus should be coherent and should not contradict one another. The EU Regulation 583/2010 states that the KID "should contain all information necessary for the investor to understand the essential elements of the UCITS." Provided that they do not contradict one another and that the KID does not omit essential information, practitioners must decide for themselves the degree to which the contents of the two documents should be conformed, keeping in mind that the prospectus will contain information that cannot be included in the KID for lack of space.
Content of Sections of the Key Investor Information Document Risk and Reward Profile
Q. What does SRRI mean?
A. The Risk & Reward Profile includes a” synthetic risk and reward indicator” (SRRI), which is a risk category calculated based on volatility of returns. Its aim is to provide investors with a method of assessing a fund's risk. The SRRI show the collective investment scheme’s targeted risk/reward profile on a scale between 1 and 7, with 1 being the lowest level of risk and potential reward and 7 the highest level.
Q. How often does the promoter have to calculate the synthetic risk and reward indicator (SRRI)?
A. The published SRRI must be updated (1) "when changes to the risk and reward section of the KID are the result of a decision by the management company regarding the investment policy or strategy of the fund", and (2) "if the relevant volatility of the UCITS has fallen outside the bucket corresponding to its previous risk category on each weekly or monthly data reference point over the preceding 4 months". This last test is a "sliding window" test, which means that the SRRI must be calculated weekly or monthly depending on whether weekly return data are available and in practice all monthly calculations are made only after that month has passed.
The quotations above are from CESR/10-673 dated 1 July 2010 – the CESR guidelines on the methodology for the calculation of the SRRI for the KID. The EU Regulation 583/2010 says that "in applying the rules on the synthetic indicator account should be taken of the methodology developed by competent authorities working within the Committee of European Securities Regulators".
Content of Sections of the Key Investor Information Document Review and Revision of the Key Investor Information Document
Q. In the event of a material change to a fund (e.g., change to investment objective) or a change to the KID (e.g., change to the risk narrative), should the revised KID be sent to existing shareholders?
A. There is no obligation to send the revised KID to existing shareholders and practitioners may decide whether or not to do so. Material changes to a fund (e.g., investment objective, management fee, dealing frequency) must in any event be notified to investors in writing prior to the change taking effect. We do not consider a change to the risk narrative of the KID to be a notifiable change because it is only a narrative and it does not form part of the UCITS' investment and borrowing powers.
Q. How material must be a change to the ongoing charges to cause an update of the KID?
A. The EU Regulation 583/2010 does not prescribe a materiality threshold but CESR/09-949 at Box 7, Para 2(b) sets a threshold of 5% of the published ongoing charges figure. Practitioners should note that CESR/09-949 was technical advice to the European Commission and, not being cited in EU Regulation 583/2010, is not binding but may be taken as a guide.
The KID must also be updated if the management fee is changed (Art 23(2) or if the maximum rate of any one-off charge is changed (Art 24(1)).
Particular UCITS Structures Share Classes
Q. Is it possible to have multiple representative share classes in one KID?
A. No. A UCITS may issue several KIDs using representative share classes but there must be only one representative share class in each KID.
Q. Is it possible to have a mixture of multiple representative share classes and multiple single share classes in one KID?
Q. Should individual KIDs be prepared for each class of units or shares within a UCITS?
A. In accordance with Article 26 of Commission Regulation (EU) No 583/2010 a separate KID shall be produced for each individual share class. However, information relevant to two or more share classes may be combined into a single KID provided the resulting KID complies in full with all KID requirements. Also, a UCITS may select a class to represent one or more other classes of the UCITS provided the information in the KID is fair, clear and not misleading to prospective investors in those other classes.
Where charging structures vary between classes, the share class with the highest overall charge is the most appropriate representative share class to avoid the risk of understating charges. However, it is the responsibility of the UCITS to select the most appropriate representative share class having regard to the characteristics of the UCITS, the natures of the differences between share classes in the UCITS and the range of choices on offer to each investor
Q. When the web address changes, should management companies send an update to investors?
A. There is no obligation to send an update to investors. Practitioners may wish to consider their website design carefully so that the address is unlikely to change. If change is unavoidable, practitioners should leave a "redirection" facility on the old web page, which ensures that visitors reach the correct page or information about who the investor should contact in order to retrieve the required KID.
Q. On whose website must the KID be published?
A. Art 81 of Directive 2009/65/EC says that "an up-to-date version of the key investor information shall be made available on the website of the investment company or management company". Art 38 of EU Regulation 583/2010 simply says "a website", which we interpret to mean that the KID may also be published on any other appropriate website. If the KID uses cross-references then they must be "to the website of the UCITS or the management company" (Art 21 of EU Regulation 583/2010).
Q. When a KID is updated, should management companies inform investors?
A. No. Art 23(1) of EU regulation 582/2010 only requires that it be "made available promptly", which means that it should be delivered to investors as a pre-contractual obligation and that it should be published on the practitioner's website.
Q. What does "for such period of time as the client may reasonably need to inspect it" mean?
A. It means for as long as that issue of the KID remains valid, and that it should be replaced when the next issue is published. The practitioners should keep archive copies of each edition of a KID that it produces and make them available to investors either upon the investor's request or through an archive section on the practitioner's website.
Preparation of KID by UCITS that are no longer marketed to the public or by UCITS in liquidation
Q. Where an existing UCITS is no longer marketed to the public, should it be required to prepare a KID?
A. In accordance with Article 82 of the UCITS Directive a UCITS is required to keep the essential elements of key investor information up-to-date. In accordance with Article 23 of Commission Regulation (EU) No 583/2010, a KID with duly revised presentation of past performance of the UCITS shall be made available no later than 35 business days after 31 December each year. Notwithstanding that a UCITS is no longer marketed to the public, an up-to-date version of the KID should be available to the existing investors.
Q. Should there be an obligation to prepare a KID for a UCITS that is in liquidation?
A. When a UCITS is in liquidation there can be no obligation to prepare a KID as the liquidator may have assumed many of the powers of the UCITS management company.
Q. For a structured UCITS, as defined in Article 36 of Commission Regulation (EU) No 583/2010 that is no longer marketed to the public, should there be an obligation to update the KID?
A. Yes. A structured UCITS, as defined in Article 36 of Commission Regulation (EU) No 583/2010, needs to keep its KID up to date.
Communication of KID to investors
Q. Should existing investors within a UCITS be provided with a KID in the case of additional investments?
A. Yes. Existing investors should be provided with a KID in the case of additional investments, on the basis that the KID is a pre-contractual document and each additional subscription is a new contract. However, where unit holders in a UCITS invest through a regular savings plan, a KID is not required in relation to the periodic subscriptions, unless a change is made to the subscription arrangements, for example, increases or decreases in the subscription amount, which would require a new subscription form.
Q. Should existing investors within a UCITS umbrella fund, who switch or exchange units in one sub-fund for units in another, be provided with the KID for the sub-fund in which they are going into?
A. Yes. As a pre-contractual document, the investor must receive the KID for the sub-fund they are going into, including where this investment arises from switching from another sub-fund within the umbrella.
Q. Should an amended KID be provided to existing investors within the UCITS?
A. No. In accordance with Article 79 of the UCITS Directive, key investor information shall constitute pre-contractual information. A KID does not need to be provided to existing unit holders unless they are making additional subscriptions. Investors always have the right to be provided with the KID on request.
Q. Must professional investors be provided with a KID?
A. Yes. All prospective investors must be provided with a KID.
Q. How frequently must the KID be produced and updated?
A. Each KID must be updated at least annually, within 35 business days of year-end, to include updates of performance data to the end of the previous calendar year. Interim updates may be triggered throughout the year based on a number of potential events.
Shareholders’ rights directive
Q. Why did the European Commission revise the Shareholders 'rights directive?
A. Many weaknesses in corporate governance of listed companies contributed to the financial crisis. Some of the weaknesses include excessive directors' remuneration not justified by performance which led to mistrust among stakeholders and complicated access and costly procedures for exercise of shareholder rights, amongst others.
The new rules aim to contribute to the long-term sustainability of the EU companies, enhance the efficiency of the chain of intermediaries and to encourage long-term shareholder engagement.
Q. What are the main changes?
A. The new rules will make it easier for shareholders to exercise their rights by giving them stronger shareholders 'rights and facilitation of cross-border voting.
Intermediaries will have to ensure that they communicate all the essential information from the company to the shareholders, and vice versa. This will make it easier for shareholders resident in another EU country than where the investee companies is based to participate in the general meetings of such companies and vote.
Moreover, the new rules will require institutional investors and asset managers to be transparent about how they invest and how they engage with the investee companies. This will encourage more-long-term focus in the investment strategies and consider social and environmental issues. These new rules will be based on a 'comply or explain' approach which means that if the investor decides not to comply with the rules, he needs to provide explanations why this is the case.
The new rules will encourage more transparency and accountability about directors' pay. Shareholders will have the right to know and influence how much the company's directors are paid. This will guarantee a stronger link between pay and performance.
Also, companies will be required to publicly disclose material related party transactions that are most likely to create risks for minority shareholders at the latest at the time of their conclusion. Companies will also have to submit these transactions for approval of the general meeting of shareholders or of the board.
Q. How will the new rules increase the level and quality of engagement by institutional investors and asset managers?
A. Institutional investors will be required to disclose how they take the long-term interests of their beneficiaries into account in their investment strategies and how they incentivise their asset managers to take these long-term interests into account. Asset managers will be required to report to the institutional investors for whom they manage funds how they have performed in relation to their mandate.
Q. How will the new rules solve the problem of exercising rights (e.g. voting rights) by shareholders, in particular in cross-border situations?
A. The exercise of rights by all shareholders will be significantly improved by the new rules. However, problems arise when there is more than one intermediary between the listed company and the shareholder, especially in cross-border situation. In this case, intermediaries will be required to communicate the voting information from the shareholder to the company while companies will be required to confirm the votes cast at the request of the shareholder. Shareholders could therefore be certain that their votes have effectively been cast, including across borders.
Q. Do the new rules result in an obligation to vote for institutional investors and asset managers?
A. The new rules does not specify that there is an obligation to vote. However, there is an obligation for institutional investors and asset managers to disclose an engagement policy and how it has been implemented, including how they have voted. This requirement applies on a 'comply or explain' basis, which means that investors may choose not to disclose an engagement policy or its implementation, provided that they give an explanation why this is the case.
Q: In such a case when an investment firm ascertains that a particular investment product/service is not appropriate to a particular client, should the firm proceed to the provision of the service right after the issue of the warning given to the client?
A. According to Article 19(5) of MiFID, when an investment product or service is not appropriate to a client or potential client, it must advise and warn the client or potential client. Henceforth, if a client wishes to proceed with a transaction after the receipt of the warning, the investment firm is then to decide whether to do so or not. Nevertheless, in such cases it may be prudent for the investment firm to ask the client or potential client to confirm in a durable medium his intention to proceed with the service.
Q. Should an investment firm provide ex-post information on total costs and charges?
A. According to Article 50(9) of the MiFID II Delegated Regulation, investment firms shall provide information on total costs and charges, at least, on an annual basis. This means, the client should receive an overview of the total costs and charges incurred in the previous year, based on their personal circumstances and actually incurred costs. Article 50(2) of the MiFID II Delegated Regulation also states that these costs and charges shall be totalled and expressed both as a cash amount and as a percentage.
UCITS standards of investor protection
Q. What are the key factors included in the UCITS standards of investor protection that ensure the highest protection provided to retail investors?
A. The main factors that safeguard retail investors include: rules on the eligibility of assets a collective investment scheme may invest in, the diversification of these assets, liquidity, valuations, risk management and compliance, oversight and safekeeping and the information provided to the retail investors on a monthly basis.
Q. In which type of assets a UCITS collective investment scheme is eligible to invest?
A. Different schemes may be eligible to invest in different type of assets. A potential investor may refer to the investment policy section of the prospectus of the respective fund to understand in which type of assets a scheme is eligible to invest.
UCITS schemes may only invest in transferable securities, money market instruments, and other collective investment schemes or in other liquid financial assets. Under certain conditions, a UCITS Fund, may also use financial derivative instruments, such as futures, options or swaps based on an eligible UCITS asset or an approved financial index, either for investment or hedging purposes.
Q. Why it is important for a UCITS collective investment scheme to diversify its assets?
A. Diversification is a vital means of reducing risk and vulnerability to the performance of a small number of assets for retail investors. Hence, the more different assets a collective investment scheme holds, the less the risk to investors of losing a substantial portion of their portfolio if one particular asset falls in value.
Different types of UCITS funds may invest in different type of assets classes and strategies whose performance may vary in line with the market and economic conditions. The UCITS Directive ensures that all UCITS funds offer investors diversification in terms of the assets that the fund is eligible to invest in, the business sectors they cover, and the countries or regions where investments are located.
The most commonly known restriction that is enforceable under the UCITS Directive, which ensures diversification, is known as the 5/10/40 rule which states that a maximum of 10 per cent of a collective investment scheme’s net assets may be invested in transferable securities from a single issuer, and that investments of more than 5 per cent with a single issuer may not make up more than 40 per cent of the whole portfolio of the collective investment scheme.
Q. Why is liquidity and valuations considered to be two important characteristics that provide protection to retail investors under the UCITS Directive?
A. The UCITS Directive put emphasis on the importance of providing retail investors with an ease to buy or sell their shares in a UCITS collective investment scheme. Investors investing in a UCITS fund shall be allowed to buy or sell their shares at least twice a month. In most cases, UCITS schemes also offer daily liquidity solutions. The price at which shares are traded in a collective investment scheme is determined by the Net Asset Value of that scheme divided by the number of shares held by investors. The Net Asset Value is the value per share of a mutual fund on a specific date or time and it is determined by a valuation of all the assets held by the fund. The price at which a share/unit is traded is only established after the deal has been placed.
Q. Why does the UCITS Directive place a lot of importance on risk management and compliance?
A. Risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs whenever a fund manager analyses and attempts to quantify the potential for losses in an investment and then takes the appropriate action given his investment objectives and risk tolerance. The risk management function must be independent of the portfolio management activity, to mitigate the possibility of conflicts of interest. The risk management procedure for a UCITS fund must be appropriate, satisfy specific requirements, be described in detail, and approved by the CSSF.
All type of investments involve at least some element of risk. However, risk management is essential for UCITS funds to ensure that such funds adhere to the level of risk it is expected to take. The risk of the eligible assets of the collective investment scheme shall be measured on an on-going basis. Risk management solutions such as asset allocation, diversification, and valuation timing can be used to mitigate systematic and unsystematic risks.
Systematic risk is risk associated with market returns. This type of risk can be partially mitigated by asset allocation. Owning different asset classes with low correlation can smooth portfolio volatility because asset classes react differently to macroeconomic factors. To further reduce risk, asset allocation investment decisions should be based on valuation. On the other hand, unsystematic risk is company specific or industry specific risk. This is also known as diversifiable risk since proper diversification can nearly eliminate unsystematic risk.
The most commonly known approach to measure the fund’s risk profile is value at risk or VaR. It estimates how much a set of investments might lose, given normal market conditions, in a set time period.
The investment compliance function must monitor compliance with the fund’s policy and procedures and with the UCITS investment and diversification rules on a daily basis. The compliance team must present reports to the Board of Directors of the collective investment scheme on its activities, including details of any remedial action taken to correct deficiencies.
Q. Why it is important to have on-going supervision and oversight of UCITS collective investment schemes?
A. The investment manager of the UCITS fund is primarily responsible for the oversight of the collective investment scheme’s activities and the protection of investors’ interests. The depositary has a key role as this role is responsible for the safeguarding of the assets of the UCITS collective investment scheme. This separation of the management of the fund's assets from their ownership is the most fundamental element of investor protection provided by UCITS funds.
Moreover, the depositary has additional important monitoring functions, and must ensure that the sale, issue, repurchase and cancellation of the shares of the collective investment scheme are carried out in accordance with the law and regulations. It also oversees the collection and distribution of the scheme’s income from investments such as dividend and ensures that the Net Asset Value calculation is carried out according to the rules.
Q. What type of information is to be provided to investors under the UCITS standards of investor protection?
The UCITS Directive states that readily accessible, comprehensible and up-to-date information on the collective investment scheme must be available to all investors and potential investors. This is of utmost important since it can prevent potential investors from buying shares of a collective investment scheme which is not appropriate for their needs or risk profile.
A collective investment scheme which qualify as UCITS must publish a prospectus, annual and interim reports, and a Key Investor Information Document (“KIID”).
The prospectus is a formal legal document that provides a broad description of the collective investment scheme’s investment objectives and strategies, risks, valuation frequency and methodology, the terms and conditions for buying or selling shares, distribution policy, fees and expenses, and fund management.
The annual and interim reports provide details of the collective investment scheme’s investments and performance and includes commentary from the investment manager about developments over the financial period and the depository.
These reports provide investors with the information to help them judge whether the collective investment scheme is being managed in the way they have been promised and whether it is still appropriate for their investment needs. An independent audit of the accounts provides the assurance that the published numbers are accurate, hence providing the investors with peace of mind.
 “A type of investment scheme that involves collecting money from different investors and then combining all the money collected to fund the investment. A collective investment scheme may also be called a mutual fund. Similar to a mutual fund, a collective investment scheme provides almost absolute control of the investment to the company pooling and investing the money”. (investorwords.com)