On March 29th 2019, ESMA released an updated version of Questions and Answers application of the Undertakings in Collective Investments in Transferable Securities Directive (“UCITS Q&A”). The UCITS Q&A modifies section II on the KIID for UCITS by adding additional clarifications on the benchmark disclosure obligations for UCITS.
The first modification relates to question 4b. ESMA clarified that the obligation to include a bar indicating the performance of a benchmark also applies in the cases where: (i) the comparator is not named a ‘benchmark’, but the objectives and investment policy makes it clear that it is a comparator the UCITS aims to outperform or (ii) where UCITS targets outperformance of the benchmark index over a period of time.
The second modification, a newly added question 4cbis, clarifies that in ensuring that a UCITS KIID is fair, clear and not misleading, the management company managing UCITS is obliged to ensure its consistency with other disclosures and communications made to investors, including the following:
I. any offering documents, marketing materials, and prospectus;
II. consistency across the distribution channels;
III. consistency across all investors.
The third modification relates to the newly added question 8a by means of which ESMA clarified that regardless of whether the UCITS has an index tracking objective or allows for discretionary choices the following must be disclosed:
I. In cases where the index tracking objective is used, ESMA recommends for the management companies to ensure that terms “passive” or “passively managed” in addition to index tracking are used. Furthermore, an index-tracking (passive) UCITS must disclose the index it is tracking and show performance against that index in the past performance section of the KIID.
II. In cases of actively managed UCITS (where the manager has discretion as to the composition of the UCITS portfolio), ESMA also recommends clear use of the terms ‘active’ or ‘actively managed’. ESMA further distinguished two types of actively managed UCITS:
- managed in a reference to a benchmark and obliged to disclose (in the KIID) the use of benchmark index, show past performance against the benchmark, indicate the degree of freedom against it and include the statement that it is actively managed.
- managed without a reference to a benchmark and obliged to disclose (in KIID) its own past performance, a statement that it is actively managed and that it is not managed by reference to a benchmark.
The fourth modification provides a new question 8b which clarifies the scope of Article 7(1)(d) of the Commission Regulation No. 583/2010 (“Regulation”) and cases where it can be considered that the UCITS are managed by reference to a benchmark or when it is implied. In that respect, ESMA provided a non-exhaustive list of examples which includes the following:
- the UCITS uses a benchmark index as a universe from which to select securities;
- performance fees are calculated based on performance against a reference benchmark index;
- the UCITS has an internal or external target to outperform a benchmark index;
- contracts between a management company and third parties, such as the investment management agreement covering delegation of investment management or between the management company and its directors and employees, state that the portfolio manager must seek to outperform a benchmark index;
- marketing issued by the UCITS management company to one or more investors or potential investors shows the performance of the fund compared with a benchmark index.
The fifth and final modification relates to the newly added question 8c which clarifies how the degree of freedom from the benchmark should be described for the purposes of Article 7(1)(d) of the Regulation. According to ESMA, investors should be provided with an indication of how actively managed the UCITS is, compared to its reference benchmark index. On that basis a UCITS management company should indicate in the KIID to what extent the target investments are part of the benchmark index or not and include a description of a level of deviation of the UCITS in regard to the benchmark index.
The clarifications in the UCITS Q&A should be reflected by UCITS management companies in the KIID as soon as practicable, or by the next KIID update following the publication of the UCITS Q&A.