14 March 2011

UCITS IV: The Key Investor Information

The Luxembourg law dated 17 December 2010 (the “UCITS Law”) having implemented the provisions of the directive 2009/65/EC dated 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (the “UCITS IV Directive”) has transposed in Luxembourg law the new obligation for investment companies and common funds to draw up a short document containing key information for investors. That document will be referred to as the “Key Investor Information” or “KII” and will be implemented as from 1st July 2011.

The KII has for purpose to replace the simplified prospectus. It shall include information about the essential characteristics of a UCIT, i.e. the identification of the UCIT, its investment objectives and investment policy, the risk profile (including appropriate warnings in relation to the risks associated with investments in such UCIT), the past performances and potential rewards (whether returns can be expected in the form of capital growth, payment of income or a combination of both) and the costs. The KII will have to be provided in a comprehensive wording (non technical language) and in the appropriate language (in one of the Luxembourg official languages in the Grand Duchy of Luxembourg or in English language) to investors in order to allow investors to understand the nature and the risks of the investment product.

This compulsory document will be established in addition to the prospectus of the UCITS and will have to be provided to final investors in UCITS. According to the provisions of the UCITS Law, the KII shall constitute pre-contractual information given to investors, and shall be fair, clear and not misleading. Such information shall be provided to investors in good time before the proposed subscription of units in such UCIT. Such information shall also be provided by UCITS to product manufacturers and intermediaries selling or advising investors on potential investments in such UCITS, with the obligation to continue this information to investors. The KII shall be provided to investors free of charge, in a durable medium or by means of a website and a paper copy shall be delivered to the investor on request.

Finally the UCITS Law provides that the essential elements of key investor information shall be kept up to date. Such KII and any update of the KII shall be notified to the CSSF.
 

KII: Information standardised at a European level

The UCITS IV Directive specifies that KII related to all European based UCITS shall be drawn up in a common format allowing for comparison between UCITS and shall be presented in a way that is likely to be understood by retail investors.
The format of the KII aims to ensure the comparability of information contained in the KII about investment opportunities in various UCITS of a similar nature. In order to ensure this objective of comparability, the Committee of European Securities Regulators (“CESR”, which has been replaced by the European Securities and Markets Authority or “ESMA”, since 1st January 2011), issued in July and December 2010 several guidelines having for purpose to harmonize the content of the KII of European UCITS.
The “CESR Guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the Key Investor Information Document” and the “CESR Guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document” published on 1st July 2010 have for purpose to provide a set of methodological elements that are necessary to calculate these indicators published on the KII.
These indicators will be calculated on the basis of a methodology which will be applicable to all types of UCITS, enabling a classification of all UCITS into the same risk and reward scale, according to the same criteria, and allowing a comparison as regards costs in each UCIT. These measures are considered by the EU Commission as central and it has been considered that this calculation methodology should become compulsory. The ESMA will have the power to adopt these guidelines as compulsory technical standard in a near future.
CESR has completed these guidelines on 20 December 2010, with:

• The «CESR’s guide to clear language and layout for the Key Investor Information document»:The aim of these new guidelines is to ensure that KII will be readily understandable by retail investors. The principle is that KII shall be written in a clear and plain language. Technical references will have to be explained. The designing and structure of the KII shall underline the various information that it contains, notably information concerning the risk and reward indicators, the costs and the past performance.
• The «CESR Guidelines on the Selection and presentation of performance scenarios in the Key Investor Information document (KII) for structured UCITS»: These guidelines have also for purpose to ensure the comparability between structured UCITS, by implementing a common and easily understandable format of presentation of performance scenarios.
• The «CESR’s template for the Key Investor Information document»: This template summarizes the main content of a KII and includes the principles developed by CESR in its other guidelines. In principle, the KII will be made of maximum two A4 pages (three for structured UCITS). The CESR’s template shows the type of content that is expected for standards UCITS, and will of course be amended on a case by case basis.
• The «CESR Guidelines on the Transition from the Simplified Prospectus to the Key Investor Information document»: Last, as the KII has for purpose to replace the existing simplified prospectus, CESR issued practical guidelines to ensure a smooth transition from existing simplified prospectuses to KII, and the coexistence of these two types of documents between a transitional period that will expire in all EU Member States on 30 June 2012.