A Better Grasp of Non-financial Risks

The European Fund Management Industry Needs a Better Grasp of Non-financial Risks — December 2010

Appendices

price of the units of a UCITS must be laid down in the law, in the fund rules or in the investment company's instruments of incorporation” (EC 2008). The valuation is usually done by an independent valuator. The valuator’s role is delegated (as in France, where the activity is unregulated) or the valuator is a party independent of the investment firm and indispensable (as in Luxembourg, by law, and in Ireland, by custom). The depositary usually validates the valuation method. The registrar (of registered funds): The registry makes it possible to know the unit-holders and their rights. The registrar tracks and executes all transactions involving units of or shares in the UCITS. He or she enters in his or her books transactions in the unit-holders’ accounts if the UCITS has opted for a nominal registry: new unit- or shareholders are registered and outgoing ones are removed; securities transactions on the liabilities side and the payment of distributions are centralised. The transfer agent/ centralisateur : UCITS-compliant funds are open-ended; any investor may purchase or redeem units or shares at each date on which net asset value is established. The fragmentation of the distribution network for pooled funds means that purchase and redemption orders will have to be centralised. The transfer agent or centralisateur collects all such orders, timestamps them (all orders must be recorded before a cut-off time and date defined in the prospectus). As soon as the transfer agent or centralisateur is informed of the final net asset value, he or she converts the number of units into monetary amounts or the amounts into a

number of units. The centralisateur ’s role is especially important when transactions involving pooled funds are settled by such central depositories as Euroclear. Distributors In EU regulations, distributors are bound mainly by the market in financial instruments directive (MiFID). 47 Distributors and financial advisors are responsible for marketing and distributing products that conform to the investor’s profile, above all when the investor is a retail investor who is assumed to have limited knowledge of the financial markets. For retail investors, financial services providers (here, distributors) subject to MiFID must evaluate the client’s expertise in the relevant investment field, assess the client’s needs, and establish whether the product or investment service provided is appropriate for the client. To a certain extent, the distributor may also be required to make the assumption that corporate treasurers may not have full knowledge of certain strategies, but banks generally believe their responsibilities to corporate treasurers are not quite as great. In all cases, the distributor must provide all relevant information about the products being sold. Becauseno informationonnon- financial risks is explicitly required in the KID of UCITS funds, and because MiFID has not defined a format for communicating on non-financial risks, distributors are largely uninformed of non-financial risks. Distributors may find it very difficult to be transparent on non-financial risks, but the failure to require this transparency makes it easy for them to avoid blame for not providing it. End-investors, however, may complain about inappropriate risks in their funds. It may be in part for this

47 - In countries such as France, distributors must be licensed not only for the investment services they provide but also for the reception and transmission of orders.

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An EDHEC-Risk Institute Publication