EUROPE: CESR consults on Key Information Document (KID) disclosures for UCITS

Monday March 16 2009

In March 2007, the European Commission set out its proposals for a series of targeted enhancements to the UCITS Directive (UCITS IV). One of these proposals was to replace the Simplified Prospectus (SP) for UCITS with Key Investor Information (KII) disclosures. The KII is intended to be a concise and focused presentation of the information that it is important for a prospective investor in a UCITS fund to have, covering largely the same general areas as the SP.

The European Commission requested CESR’s assistance in developing the KII disclosures. In its February 2008 advice, CESR identified a number of technical issues arising from its work that merited further consideration. The issues identified fell under three of the broad disclosure headings which make up the KID:

i) risk and reward;

ii) past performance and

iii) charges.

The work was to cover a wide spectrum of issues, ranging from development of a harmonised calculation methodology for an SRRI to treatment of past performance information for years in which the fund did not exist.

This consultation paper sets out CESR’s proposed approach on the technical issues.

CESR plans to consult on the full package of its advice on the KID in summer 2009.

Background

KII disclosures are supposed to replace the Simplified Prospectus.

The SP, the concept of which was introduced by the UCITS Management Directive (2001/107/EC) in 2002, is widely seen as having failed to achieve its objectives. In particular, there is considered to be a continuing lack of transparency about UCITS, especially their costs and risks; the information given in the SP is not easily understood and used by the average retail investor; the SP is too lengthy and technical; its production is costy and time-consuming; SPs often exceed the Directive requirements; their content is not consistent in all Member States; and they do not assist comparisons between funds, particularly when cross-border sales are involved.

Since the Commission published its proposals for enhancements to the UCITS Directive (UCITS IV), significant progress has been made on the legislative process and a near-final version of the recast Directive was adopted by the European Parliament on 13 January 2009. Articles 78 to 82 of that version contain the provisions on KII. In particular, Article 78(2) states:

* Key investor information shall include appropriate product information about the essential characteristics of the UCITS concerned, 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 European Commission requested CESR’s assistance on developing KII disclosures in April 2007. The first output of CESR’s work was a set of advice that was submitted to the Commission in February 2008 (Ref. CESR/08-087). This followed a two-month public consultation held in late 2007, which included the organisation of an open hearing at CESR’s premises in Paris. CESR received a significant amount of feedback to the consultation from external stakeholders, including retail investors’ representatives.

The Commission used CESR’s advice as the basis for the investor testing exercise it has been carrying out since March 2008, the second (and final) phase of which is due for completion by end-May 2009. CESR has also been closely involved in both the design and roll-out of the testing process. In the February 2008 advice, CESR identified a number of technical issues arising from its work that merited further consideration. This consultation paper sets out CESR’s proposed approach on the technical issues. Early results from the Commission’s testing have informed CESR’s views on some aspects.

Click on the above link to download the consultation paper.