Recent European investment reporting regulations: implications for the selfregulation. Dimitri Senik, CFA Switzerland 22 June 2006

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1 Recent European investment reporting regulations: implications for the selfregulation activities of RIPS EMEA Dimitri Senik, CFA Switzerland

2 Contents Recent European regulations in the area of investment reporting and communication Cooperation between RIPS EMEA and the European regulators European investment reporting regulations and RIPS EMEA initiatives Page 2

3 Recent European regulations in the area of investment reporting and communication Regulations in the EU concerning investment and performance reporting Mutual funds UCITS III Directive (effective from February 2004) EU Commission Recommendation 2004/383/EC on the use of financial derivative instruments for UCITS EU Commission Recommendation 2004/384/EC on some contents of the Simplified Prospectus Individual investment management clients Markets in Financial Instruments Directive (MiFID) (Directive 2004/39/EC) Level 1. Comes into force in November EU Commission Implementing Directive for MiFID (draft of February 2006) Level 2. Will be adopted in Committee of European Securities Regulators (CESR): technical advice papers European investment reporting regulations and RIPS EMEA initiatives Page 3

4 Recent European regulations in the area of investment reporting and communication MiFID: Level 1 regulations on investment reporting and communication Article 19(2): All information, including marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading. Article 19(3): Appropriate information shall be provided in a comprehensible form to clients or potential clients about: the investment firm and its services, financial instruments and proposed investment strategies; this should include appropriate guidance on and warnings of the risks associated with investments in those instruments or in respect of particular investment strategies. Article 19(8): The client must receive from the investment firm adequate reports on the service provided to its clients. These reports shall include, where applicable, the costs associated with the transactions and services undertaken on behalf of the client. European investment reporting regulations and RIPS EMEA initiatives Page 4

5 Recent European regulations in the area of investment reporting and communication MiFID Implementing Directive: Level 2 regulations on investment reporting and communication Article 27: Elaborates on the conditions with which information must comply in order to be fair, clear and not misleading, e.g. (4b) The information must include appropriate performance information which covers the immediately preceding 5 years, or the whole period for which the financial instrument has been offered if less than 5 years, but not less than one year. (4f) Where the indication is based on gross performance, the effect of commissions, fees or other charges must be disclosed. Paragraphs 5-6 define conditions with respect to presentation of simulated and predicted performance information European investment reporting regulations and RIPS EMEA initiatives Page 5

6 Recent European regulations in the area of investment reporting and communication MiFID Implementing Directive: Level 2 regulations on investment reporting and communication Article 30: Defines the information about the investment firm and its services for potential retail clients, e.g. specifically for portfolio management: (3a) Information on the method and frequency of valuation of the financial instruments in the client portfolio. (3c) Specification of any benchmark against which the performance of the client portfolio will be compared. (3e) The management objectives, the level of risk to be reflected in the manager s exercise of discretion, and any specific constraints on that discretion. European investment reporting regulations and RIPS EMEA initiatives Page 6

7 Recent European regulations in the area of client investment reporting and communication MiFID Implementing Directive: Level 2 regulations on investment reporting and communication Article 31: Elaborates on the information about financial instruments to be provided to existing or potential retail clients. Article 32: Elaborates on the information requirements concerning safeguarding of client financial instruments or client funds (particularly relevant for custodian banks). Article 33: Elaborates on the information requirements regarding costs of investment services and associated charges. European investment reporting regulations and RIPS EMEA initiatives Page 7

8 Recent European regulations in the area of client investment reporting and communication MiFID Implementing Directive: Level 2 regulations on investment reporting and communication Article 41: Defines reporting obligations in respect of portfolio management: (1) Investments firms providing portfolio management services will be required to provide clients with a periodic statement of the portfolio management activities. (2) This statement should include, for example: - (c) statement of the contents and the valuation of the portfolio, including details of each financial instrument held, its market value, etc., and the performance of the portfolio during the reporting period - (d) the total amount of fees and charges incurred, itemising at least total management fees and total costs associated with execution - (e) comparison of performance during the period with the investment benchmark (if any) agreed between the investment firm and the client; - (f-g) the total amount of dividends, interest, corporate actions and other payments received; - (h) information on individual transactions executed during the period; - etc. European investment reporting regulations and RIPS EMEA initiatives Page 8

9 Contents Recent European regulations in the area of investment reporting and communication Cooperation between RIPS EMEA and the European regulators European investment reporting regulations and RIPS EMEA initiatives Page 9

10 Cooperation between RIPS EMEA and the European regulators RIPS EMEA guidance issued Euro conversion guidelines: Suggested questions to ask prospective GIPS verification firms: Questionnaire for investors (on the GIPS compliance): Guidance for users of attribution analysis: Guidance on performance attribution presentation: Guidance for Recipients of Investment Reporting: European investment reporting regulations and RIPS EMEA initiatives Page 10

11 Cooperation between RIPS EMEA and the European regulators Questions to ask ourselves Have all issues in area of investment performance reporting already been addressed by the regulators? Should we expect additional Level 3 regulations in Europe? Will national regulators develop further regulations? Will current investment performance reporting (even GIPS compliant) satisfy the future MiFID requirements on provision of information to potential clients (e.g. on investment risk)? Do we know what is in the pipeline? Do we have contacts to the regulators and industry self-regulation organisations? Should RIPS EMEA be pro-active? European investment reporting regulations and RIPS EMEA initiatives Page 11

12 Cooperation between RIPS EMEA and the European regulators What can be done by RIPS EMEA Harmonise various investment and performance reporting standardisation and regulation initiatives in Europe Introduce GIPS to the regulators of the European countries Establish cooperation with various industry organisations Launch contacts to CESR and other European regulators Get involved in the working groups established by regulators Provide comments for new European regulations being put to public discussion Industry self-regulation: start pro-active discussions / deliver basis work in the areas which need regulation European investment reporting regulations and RIPS EMEA initiatives Page 12

13 Cooperation between RIPS EMEA and the European regulators Possible next steps Prepare an inventory of our available contacts with the European regulators and other industry self-regulation organisations Nominate a coordinator within RIPS EMEA to liaise with regulators and monitor regulatory activities Prepare a list of the current regulatory initiatives in Europe where RIPS EMEA could get involved Define a specific action plan for cooperation of RIPS EMEA with regulators Address investor needs Anticipate regulations European investment reporting regulations and RIPS EMEA initiatives Page 13

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