Europe's KID Rock: Writing Simply Likely to be Costly
July 30, 2010
Key Information Documents to be distributed by investment funds in Europe are likely to spell a lot more administrative and information system costs.
The KID documents replace a simpler prospectus now in use. The European Commission has just described the data format and content requirements for the new documents. Industry comment is being sought by Sept. 10.
Investment funds needing to comply with the Undertaking in Collective Investment in Transferable Securities IV directive will have to fill out the KID. Investment firms with funds which met previous UCITS requirements – aka UCITS III- will have a year after UCITS IV becomes effective to comply. Those which are start ups won’t which means they have to be ready by July 2011.That is when UCITS IV takes effect.
UCITS IV is the third incarnation of the European framework for investment funds under the banner of Undertaking in Collective Investment in Transferable Securities. The second version was never adopted. First passed in 1985, the overall objective of UCITS is to make it easier for fund managers to sell their investment products across the European borders.
Introduced in 2002, the current simplified prospectus has been widely criticized for being far too long, complex and not clear enough on investment costs and risks. There also have been varying disclosure requirements among the European Union’s 27 member states. The new KID is supposed to help investors understand just what they are buying and create a harmonized EU approach to information. The harmonized EU approach also includes more stringent requirements for risk metrics and reporting.
For investment funds, which think they have plenty of time to prepare, think again. A survey released last month by PricewaterhouseCoopers and the Brussels-based European Fund and Asset Management Association shows that 58 percent of investment funds have not considered the impact of the necessary changes to their systems and controls. “For those that have not considered the cost and time implications of these changes, this could result in some nasty surprises,” said Thierry Bondieu, a partner at PwC in Luxembourg. “Managers must start to adapt their operating systems and fast.”
The administrative cost of preparing a KID will range from 500 to 2500 euros, according to investment funds. But it could take anywhere from a few hours to more than 50 hours to find the needed data, depending on the type of investment fund, the number of individuals involved and the level of automation in place.
What will be cumbersome? Just how to write the document in a way that is both understandable to the investor and acceptable to regulators. Even though the KID will be either two or three pages in length, there is plenty of information that must be squeezed in. The “essential elements” are the identification of the investment fund, a short description of its objectives and policies; past-performance or performance scenarios; costs and associated charges and the risk-reward profile.
“The EC likely anticipates that it will take only one person to fill out the document but in all likelihood it will be a consensus by committee,” says Ronan Brennan, chief technology officer of data management software firm MoneyMate in Dublin. “However, the document must still read as well as it would if it were drafted by one person.”
