EUROPE: CESR proposes requirements for management company passport and improved investor disclosures for UCITS

Wednesday October 28 2009

CESR has published its advice to the European Commission on two key elements of UCITS IV – the management company passport and on the key Investor document.

Background

CESR `s was mandated by the Commission to provide technical advice by 30 October 2009 on the possible implementing measures for UCITS IV. The Commission intends to adopt the implementing measures by July 2010, in view of the deadline for implementation of the UCITS Directive of July 2011.

CESR `s mandate falls into four parts:

Parts I: measures related to the Management Company Passport

Parts II: measures related to the key investor information

Part III: measures related to fund mergers, master-feeder structures and notification procedure

CESR published for consultation its draft advice on Part III of the mandate on 17 September 2009.The deadline for feedback is the 17th November and there is an Open Hearing on the 6th November.

In light of stakeholder feedback, CESR will finalise its advice for submission to the Commission by the end of 2009.

An overview of CESR `s advice in respect of Parts I and II is set out below.

CESR `s advice can be found at the above links.

CESR `s advice on the Management Company Passport

i) Organisational requirements and conflicts of interest

The advice seeks maximum alignment with the MiFID rules in this area and sets out technical advice on, inter alia, general organisational procedures and arrangements; internal control mechanisms, including responsibility of senior management and the remuneration policy; electronic data processing and record-keeping; and conflicts of interest.

ii) Rules of conduct

Again, seeking maximum alignment with the relevant MiFID provisions, the advice includes requirements applying to the direct sale of UCITS by management companies, as well as best execution, order handling and inducements.

iii) Measures to be taken by a depositary of a UCITS managed by a management company situated in another Member State

CESR `s advice in the area of depositaries focuses on the written agreement to be drawn up between the management company and the depositary. Although the mandate clarifies that the implementing measures cover only cross-border situations, the advice will extend in application to purely domestic arrangements.

iv) Risk management

UCITS management companies must employ a risk management process which enables it to monitor and measure at any time the risk of different positions and their contribution to the overall risk profile of the portfolio.

CESR here sets out advice which flows from its previous consultations on Risk Management Principles for UCITS and on UCITS & Derivatives Exposure Calculation.

Chapter 1 sets out more detailed requirements in relation to the adequacy of the risk management process. Chapter 2, meanwhile, relates to the requirements on risk measurement for the purposes of calculation of UCITS”global exposure. As expected, the terminology of “sophisticated” and “non-sophisticated” UCITS goes, VaR stays, and rightly or (in our view) wrongly counterparty exposure calculations are reduced to a simple P &L approach with no add-ons for future exposure.

v) Supervisory co-operation

CESR proposes two key elements of supervisory co-operation: i) on-the-spot verification and investigation; and ii) exchange of information between competent authorities.

Key Information Document (KID)

CESR `s advice on the Key Information Document (KID) follows over two years of work which has included extensive consultation with stakeholders. It will replace the current Simplified Prospectus.

The KID, will be 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 its advice published today, CESR therefore sets out a number of recommendations designed to ensure the KID fulfils such criteria.

Synthetic risk-reward indicator

CESR `s advice recommends the adoption of a synthetic risk and reward indicator accompanied by a narrative text. This text should cover the material risks not fully captured by the indicator.

On charges, CESR `s advice foresees the inclusion of a table setting out clearly the different elements of the charging structure (in percentage terms).

CESR `s advice is that presentation of past performance be based on use of a bar chart displaying up to ten years ` performance, where available. In addition, the proposal allows performance information to be displayed only where there is at least one calendar year `s data.

Structured UCITS

For structured UCITS, CESR proposes an alternative in the form of prospective scenarios. These scenarios are designed to illustrate the potential performance of the fund under a range of market conditions.