On 29 March 2019, ESMA published an updated Question and Answer document regarding UCITS KIID (ESMA34-43-392). The document clarifies the UCITS KIID benchmark and past performance disclosures and adds new obligations.
The newly issued ESMA UCITS Q&A centers on two main points - benchmark disclosures, and past performance. However, there is an additional emphasis on consistency of client disclosures across regulatory and marketing documents.
Asset managers need to review their existing approach against the new specifications, to ensure ongoing consistency of their regulatory and marketing documentation.
The scope of when benchmark information needs to be disclosed has been widened considerable. Asset managers should review their current disclosure rules and question whether it is still in line following the ESMA clarifications.
1. Asset managers need to clearly indicate in the UCITS KIID whether the fund is managed actively or passively. The Q&A provides a decision tree showing disclosures needed in each case.
- This is generally in line with current practice, however, the disclosure details have been refined and will necessitate a review of current practice.
2. The scope of what is understood to mean ‘management with reference to a benchmark’ is clarified and extended. Any explicit or implicit definition of the portfolio composition, of performance objectives, or performance measures is considered a reason for disclosure. There is explicit mention that changes introduced during the life of a fund should be reflected in the disclosures.
- The Q&A here explicitly widens the scope of the application of benchmark disclosures to implicit benchmark references.
- The reference to changes during a fund lifecycle reflects the process engineering challenge that fund issuers increasingly face in managing consistent disclosures.
- The examples provided have wide-reaching impact on current practice. For example, reference to a benchmark outperformance in an Investment Management Agreement with an internal or external manager or between a Manco and directors or fund managers will lead to a benchmark disclosure on KIIDs.
3. The degree of freedom available within an actively managed fund and its benchmark should be disclosed. The disclosures should consider the elements of portfolio selection, level of deviation from the benchmark using quantitative and/or qualitative measures, as well as defined strategies of varying exposure on a benchmark.
- This requirement calls for a review of investment strategies and their descriptions, and the creation of guidelines for related disclosures. An interaction between investment teams, legal and compliance departments might be necessary.
ESMA Questions and Answers - Application of the UCITS Directive (29 March 2019)
Following from an expanded benchmark disclosure, past performance has to be published more frequently.
1. A fund that measures performance against an index without tracking the index, needs to show benchmark performance in the UCITS past performance chart. It needs to be clarified that the fund does not track the index.
- This is not new, but a re-statement of existing disclosure rules.
2. Whichever the name of the comparator, it needs to be treated the same in terms of disclosure (e.g. benchmark, index, LIBOR +3%)
- When using comparators that are not called benchmark, they nevertheless need to be disclosed and have comparative performance shown. The specific version of the benchmark must be clearly described.
3. If performance target is ‘index’ + 4.5% over 3 years, this target has to be annualised for the comparator performance disclosure.
CONSISTENCY OF BENCHMARK DISCLOSURE
The consistency requirement will have far-reaching consequences. It necessitates not only a review of the data used, but also the application of data across all disclosures, including, for the first time, online information. In addition, whenever past performance is shown, e.g. in marketing documents, the comparator benchmark will need to be disclosed as part of the fund strategy.
1. Measuring and displaying performance against a benchmark should be consistent across regulatory and marketing materials. Equally, the benchmark name should be communicated consistently.
- In the interest of providing clear information to investors, ESMA strongly stresses consistency. The Q&A indicate that the same information regarding benchmark name and performance should be disclosed across prospectus and KIID as well as across KIID and marketing documents.
2. Disclosures on online platforms need to be consistent in terms of benchmark name and performance.
- Asset managers have to ensure consistency of information in fund documentation and websites. This presents challenges of data management, defining the golden source of information, and designing processes that ensure consistency on an ongoing basis.
- In this context, managing data on external platforms is an interesting challenge. Asset managers should leverage prospectus data or create clear flows for feeding consistent information to data vendors.
3. Data needs to be consistent across investor types.
- Today, asset managers frequently provide bespoke reporting to institutional investors. In this, they sometimes use comparators for informative purposes that are not disclosed to retail investors via the UCITS KIID. ESMA indicates this generates a disbalance between investors, creates inconsistency and makes disclosures opaque.
TO DO LIST
Here is how you can approach your data and document review.
- Make a list of funds, fund identifiers, share class identifiers (where relevant, e.g. hedged or currency benchmark version), benchmark names, investment objective, investment policy
- Determine whether funds are active yes/no
- For active funds, determine if they are managed in reference to a benchmark
- Assess benchmark deviation level (quantitative, qualitative), assess degree of deviation
- List investment objective and policy wording in KIID and update where necessary
- Align investment policy and benchmark disclosures in prospectus, UCITS KIID, marketing material
- Ensure performance displayed in marketing material and on web platforms is consistent with UCITS KIIDs
- Create a policy on usage of benchmarks that documents how you determine that a reference to a benchmark is needed.
- Identify a systematic golden source for each data point (e.g. benchmark name sourced from prospectus, benchmark deviation level sourced from performance system, investment objective and policy sourced from compliance team)
- Determine communication channels to ensure that information on future changes will flow through the organisation efficiently
HOW WE CAN HELP
SEQVOIA will help you assess current status, manage changes, and establish and enforce consistency between your different legal, regulatory, and marketing disclosures. To learn more, request a demo now.