THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

HEREBY RECOMMENDS:

1.   As regards the investment information referred to in the second heading of Schedule C in Annex I to Directive 85/611/EEC it is recommended that Member States apply the following interpretations.

1.1.   Interpretation of ‘short definition of UCITS' objectives’

In the first indent, Member States are recommended to interpret ‘a short definition of UCITS' objectives’ as meaning the following information:

(a)	a concise and appropriate description of the outcomes sought for any investment in the UCITS;

(b)	a clear statement of any guarantees offered by third parties to protect investors and any restrictions on those guarantees;

(c)	a statement, where relevant, that the UCITS is intended to track an index/indices, and sufficient indications to enable investors both to identify the relevant index/indices and to understand the extent or degree of tracking pursued.

1.2.   Interpretation of ‘the unit trust's/common fund's or the investment company's investment policy’

In the second indent Member States are recommended to interpret ‘the unit trust's/common fund's or the investment company's investment policy’ as meaning the following information, provided it is material and relevant:

(a)	the main categories of eligible financial instruments which are the object of investment;

(b)	whether the UCITS has a particular strategy in relation to any industrial, geographic or other market sectors or specific classes of assets, e.g. investments in emerging countries' financial instruments;

(c)	where relevant, a warning that, whilst the actual portfolio composition is required to comply with the broad legal and statutory rules and limits, risk-concentration may occur in regard of certain tighter asset classes, economic and geographic sectors;

(d)	if the UCITS invests in bonds, an indication of whether they are corporate or government, their duration and the rating requirements;

(e)	if the UCITS uses financial derivative instruments, an indication of whether this is done in pursuit of the UCITS' objectives, or for hedging purposes only;

(f)	whether the UCITS' management style contemplates some reference to a benchmark; and in particular whether the UCITS has an ‘index tracking’ objective, with an indication of the strategy to be pursued to achieve this;

(g)	whether the UCITS' management style is based on a tactical asset allocation with high frequency portfolio adjustments.

1.3.   Joint presentation of the UCITS' objectives and investment policy

Home Member States are recommended to allow the information required under points 1.1 and 1.2 to be set out as a single item in the simplified prospectus (e.g. for the information on index tracking), provided that the information so combined does not lead to confusion of the objectives and policies of the UCITS. The order of the information items may be adapted to reflect the UCITS' specific investment objectives and policy.

1.4.   Interpretation of ‘a brief assessment of the fund's risk profile’

In the second indent, Member States are recommended to interpret ‘a brief assessment of the fund's risk profile’ as meaning the following information:

1.4.1.   Overall structure of the information provided;

(a)	a statement to the effect that the value of investments may fall as well as rise and that investors may get back less than they put in;

(b)	a statement that details of all the risks actually mentioned in the simplified prospectus may be found in the full prospectus;

(c)	a textual description of any risk investors have to face in relation to their investment, but only where such risk is relevant and material, based on risk impact and probability.

1.4.2.   Precisions regarding the textual description of risks

1.4.2.1.   Specific risks

The description referred to in point 1.4.1.(c) should include a brief and understandable explanation of any specific risk arising from particular investment policies or strategies or associated with specific markets or assets relevant to the UCITS such as:

(a)	the risk that the entire market of an asset class will decline thus affecting the prices and values of the assets (market risk);

(b)	the risk that an issuer or a counterparty will default (credit risk);

(c)	only where strictly relevant, the risk that a settlement in a transfer system does not take place as expected because a counterparty does not pay or deliver on time or as expected (settlement risk);

(d)	the risk that a position can not be liquidated in a timely manner at a reasonable price (liquidity risk);

(e)	the risk that the investment's value will be affected by changes in exchange rates (exchange or currency risk);

(f)	only where strictly relevant, the risk of loss of assets held in custody that could result from the insolvency, negligence or fraudulent action of the custodian or of a subcustodian (custody risk);

(g)	risks related to a concentration of assets or markets.

1.4.2.2.   Horizontal risk factors

The description referred to in point 1.4.1.(c) should also mention, where relevant and material, the following factors that may affect the product:

(a)	performance risk, including the variability of risk levels depending on individual fund selections, and the existence, absence of, or restrictions on any guarantees given by third parties;

(b)	risks to capital, including potential risk of erosion resulting from withdrawals/cancellations of units and distributions in excess of investment returns;

(c)	exposure to the performance of the provider/third-party guarantor, where investment in the product involves direct investment in the provider, rather than assets held by the provider;

(d)	inflexibility, both within the product (including early surrender risk) and constraints on switching to other providers;

(e)	inflation risk;

(f)	lack of certainty that environmental factors, such as a tax regime, will persist.

1.4.2.3.   Possible prioritisation of information disclosure

In order to avoid conveying a misleading image of the relevant risks, Member States are also recommended to consider requiring the presentation of the information items to prioritise, based on scale and materiality, the risks so as to better highlight the individual risk profile of the UCITS.

1.4.3.   Additional disclosure of a synthetic risk indicator

Where the UCITS has been set up at least one year before, home Member States are also invited to consider as a possible option requiring that the description referred to in point 1.4.1.(c) be supplemented by a synthetic indicator of risk in just one figure or word, based on the volatility of the UCITS' portfolio, in which case:

(a)	the volatility of the UCITS' portfolio should be intended as measuring the dispersion of the UCITS' return;

(b)	the UCITS' return should be calculated taking into account all the UCITS' net asset values (NAVs) of the period, e.g. daily NAVs where this is the normal frequency of NAV calculation as approved by the UCITS competent authorities, computed by assessing the UCITS assets on that same frequency.

1.5.   Interpretation of ‘historical performance of the unit trust/common fund/investment company (where applicable)’

In the third indent, Member States are recommended to interpret the ‘historical performance of the unit trust/common fund/investment company (where applicable)’ with ‘a warning that this is not an indicator of future performance’ as meaning the following information:

1.5.1   Disclosure of past performance:

(a)

the UCITS' past performance, as presented using a bar chart showing annual returns for the last 10 full consecutive years. If the UCITS has been in existence for fewer than 10 years but at least for a period of one year, it is recommended that the annual returns, calculated net of tax and charges, be given for as many years as are available;

(b)

if a UCITS is managed according to a benchmark or if its cost structure includes a performance fee depending on a benchmark, the information on the past performance of the UCITS should include a comparison with the past performance of the benchmark according to which the UCITS is managed or the performance fee is calculated. Member States are recommended to require that comparison to be achieved by representing the past performance of the benchmark and that of the UCITS on the same bar-chart and/or separately.

1.5.2.   Disclosure of cumulative (average) performance

Additionally, Member States are recommended to consider requiring disclosure, either of the cumulative performance, or the cumulative average performance of the fund over specific periods of time (such as on three, five and 10 years). In case they use either of these options, Member States are recommended to require also a comparison with the cumulative performance, or cumulative average performance (where relevant) of a benchmark, when comparison to a benchmark is required in accordance with point 1.5.1.(b).

1.5.3.   Exclusion of subscription and redemption fees, subject to appropriate disclosure

Taking into account existing regulatory standards, Member States are recommended to consider, whether or not to require subscription and redemption fees to be included in the calculation of the fund performance. However, Member States should require the exclusion of that information (where relevant) to be subject to an appropriate statement drawing attention to this fact. Member States are also recommended to encourage their competent authorities to ensure progressive convergence to standards aligned on best practice in performance calculation.

1.5.4.   Disclosure of a benchmark

Member States are also invited to consider as a possible option requiring disclosure of a benchmark for all UCITS authorised in their jurisdiction, regardless of the fact that the UCITS' investment objective does not explicitly refer to a benchmark.

2.   As regards the economic information referred to in the third heading of Schedule C in Annex I to Directive 85/611/EEC it is recommended that Member States apply the following interpretations:

2.1.   Interpretation of ‘tax regime’

In the first indent, Member States are recommended to interpret ‘tax regime’ as meaning the following information:

(a)	the tax regime applicable to the UCITS in its home Member State;

(b)

a statement which recalls that the regime of taxation of the income or capital gains received by individual investors depends on the tax law applicable to the personal situation of each individual investor and/or to the place where the capital is invested and that if investors are unclear as to their fiscal position, they should seek professional advice or information from local organisations, where available.

2.2   Interpretation of ‘entry and exit commissions’ and ‘other possible expenses or fees’

2.2.1.   Overall contents of the information provided

In the second and third indents, Member States are recommended to interpret the ‘entry and exit commissions’ of the fund and ‘other possible expenses or fees, distinguishing between those to be paid by the unit-holder and those to be paid out of the unit trust's/common fund's or the investment company's assets’ as meaning the following information:

(a)	disclosure of a total expense ratio (TER), calculated as indicated in Annex I, except for newly created UCITS where a TER cannot yet be calculated;

(b)	on an ex ante basis, disclosure of the expected cost structure, i.e. an indication of all costs available according to the list set forth in Annex I so as to provide investors, insofar as possible, with a reasonable estimate of expected costs;

(c)	all entry and exit commissions and other expenses directly paid by the investor;

(d)	an indication of all the other costs not included in the TER, including disclosure of transaction costs when these are deemed to be available by the home Member State competent authorities;

(e)	as an additional indicator of the importance of transaction costs, the portfolio turnover rate, calculated as shown in Annex II;

(f)	an indication of the existence of fee-sharing agreements and soft commissions.

The requirement set out in point (f) of the first paragraph should not be interpreted as a general validation of the compliance of any individual agreement or commission with Directive 85/611/EEC, and especially with Article 5f(1)(b) thereof, or with national regulations. Taking into account current market practice, Member States are therefore invited to require UCITS to consider how far existing fee-sharing agreements and comparable fee-arrangements are for the exclusive benefit of the UCITS.

Member States are recommended to provide for the simplified prospectus to make a reference to the full prospectus for detailed information on that kind of arrangements, which should allow any investor to understand to whom expenses are to be paid and how possible conflicts of interest will be resolved in his/her best interest. Member States are therefore recommended to ensure that the information provided in the simplified prospectus remains concise.

2.2.2.   Precisions on the notions of ‘fee-sharing agreements’ and ‘soft commissions’

2.2.2.1.   Identification of ‘fee-sharing agreements’

Member States are recommended to identify and classify as fee-sharing agreements those agreements whereby a party remunerated, either directly or indirectly, out of the assets of a UCITS agrees to split its remuneration with another party and which result in that other party meeting expenses through this fee-sharing agreement that should normally be met, either directly or indirectly, out of the assets of the UCITS.

Furthermore, Member States are recommended to consider the following as fee-sharing agreements within the meaning of the above paragraph:

(a)	fee-sharing agreements on transaction costs between a UCITS' management company and a broker whereby the broker agrees to split with the management company the transactions fees paid by the UCITS to the broker for processing transactions for the UCITS;

(b)

fee-sharing agreements in funds of funds between a UCITS management company and another fund (or its management company) whereby, if that UCITS invests in the fund, part of the fees charged to that UCITS (either directly – subscription/redemption fees – or indirectly – TER) because of this investment will be paid by the target fund (or its management company) to the UCITS management company.

2.2.2.2.   Identification of ‘soft commissions’

Member States are recommended to identify as soft commissions any economic benefit, other than clearing and execution services, that an asset manager receives in connection with the fund's payment of commissions on transactions that involve the fund's portfolio securities. Soft commissions are typically obtained from, or through, the executing broker.

2.2.3.   Presentation of TER and portfolio turnover rate

Member States are invited to allow both the TER and the portfolio turnover rate to be either included in or attached to the simplified prospectus in the same paper as information on past performance.

3.

The Member States are requested to inform the Commission, in so far as possible, by 30 September 2004 of any measures they have taken further to this recommendation and to inform it of the first results of its implementation, in as far as they are able, no later than 28 February 2005.

4.

This recommendation is addressed to the Member States.