EUROPE: ESMA Updates UCITS FAQs

Friday May 28 2021

The European Securities and Markets Authority (ESMA) has updated the UCITS FAQs. The following question have been updated:

Performance reference period for the benchmark model

Question 3: Based on paragraph 40 of the Guidelines on performance fees, how should the performance reference period for the benchmark model be set?

Answer 3: Paragraph 40) of the guidelines recommends that:

1. any underperformance of the fund compared to the benchmark index should be clawed back before any performance fee becomes payable; and
2. the length of the performance reference period, if this is shorter than the whole life of the fund, should be set equal to at least 5 years

In order to comply with the above recommendations, it should be ensured that any underperformance is brought forward for a minimum period of 5 years before a performance fee becomes payable, i.e. fund managers should look back at the past 5 years for the purpose of compensating underperformances.

In case the fund has overperformed the benchmark index, the fund manager should be able to crystallise performance fees.

Performance reference period in case of funds’ mergers

Question 4: How should the performance reference period31 be set in case of a merger where the receiving UCITS is a newly established fund with no performance history and it is in effect a continuation of the merging UCITS?

Answer 4: In order to ensure that the merger is not conducted with the aim of resetting the performance reference period, in the case of a merger where the receiving UCITS is a newly established fund with no performance history and the competent authority of the receiving UCITS assesses that the merger does not substantially change the UCITS’ investment policy, the performance reference period of the merging UCITS should continue applying in the receiving UCITS.

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