The Securities and Futures Commission in Hong Kong (the “SFC”) published 2 circulars dated 4 July 2014 which may require updates to the Product Key Fact Statements (“KFS”) and websites of current SFC authorised mutual funds, exchange traded funds (“ETFs”) and unlisted index funds by 4 January 2015. The new requirements aim to enhance transparency and disclosure requirements for SFC authorised retail funds in line with other major overseas jurisdictions.
2. Disclosure of Tracking Difference and Tracking Error("Circular 1")
Circular 1 requires the management company of SFC-authorised ETFs and, to the extent applicable, SFC-authorised unlisted index funds to disclose the following information in the KFS and on the website:
a. the tracking difference ("TD"), which is the return difference between an ETF and its underlying index over a certain period of time. This disclosure applies to SFC-authorised unlisted index funds only to the extent that it relates to the fund's offering documents; and
b. the tracking error ("TE"), which is the measurement of how consistently an ETF follows its index and is an indicator of the quality of replication. This disclosure is not applicable to SFC-authorised unlisted index funds.
TD Disclosure Requirements for Newly Listed ETFs and (if applicable) newly Approved Unlisted Index Funds
The TD is to be calculated with reference to the formula as set out in paragraph 5 of Circular 1. Upon the listing of the ETF on its primary listing market, the estimated annual TD should be disclosed on its website. After the ETF has been listed for at least a full month the actual TD and the actual cumulative TD since the ETF’s listing date are required to be presented on the ETF’s website within 5 business days of each month end. For newly approved unlisted index funds, the estimated annual TD should be calculated and disclosed in the KFS.
TD Disclosure Requirements for ETFs beyond the First year of Listing
The actual TD for the past 12 months shall be presented on the ETF's website and should be updated monthly on a rolling basis within 5 business days of each month end. If an ETF has been listed for more than one full calendar year, the actual TD should be presented for each of the last ten calendar years oreach of the calendar years since the ETF was listed (if less than 10 years).
The KFS should disclose the actual TD of the most recent calendar year.Managers need to update the actual TD for the most recent calendar year on the KFS as soon as practicable after the calendar year end and in any event, no later than four months after 31 December (i.e. before end of April of the following year).
TE Disclosure Requirements
ETFs are required to disclose their annual TE with reference to the formula set out in paragraph 16 of Circular 1. An ETF should disclose its annual TE on its website after one year of its listing. The annual TE for the past year as disclosed on the website should be updated monthly on a rolling basis, within 5 business days of each month end.
3. Disclosure of the Ongoing Charges Figure and Past Performance Information in the Product Key Facts Statements(“Circular 2”)
Circular 2 requires the management company of an SFC-authorised fund to disclose the fund's ongoing charges figure in its KFS, in accordance with the "Guidelines for the disclosure and calculation of the ongoing charges figure" which accompany Circular 2. This circular also requires the fund to disclose past performance information in its KFS and on its website, in accordance with the "Guidelines for the disclosure and calculation of past performance information” which accompany Circular 2.
Requirements for Calculation of the Ongoing Charges Figure
The ongoing charges figure should be calculated in accordance with the formula set out in the “Basis of Calculation” section of the ongoing charges figure guidelines. The figure represents the sum of the ongoing expenses chargeable to the fund expressed as a percentage of its average net asset value.
The ongoing expenses figure (generally payments deducted from the assets of the fund) should be calculated at least once a year based on the latest annual/interim financial statements. Any charges attributable to an umbrella fund as a whole should be apportioned among all of the sub-funds on the basis that it is fair to all investors. A separate ongoing charges figure should be calculated and disclosed for each share class with a different fee structure.
The ongoing charges figure should be updated annually as soon as practicable after the calendar year end and in any event, before the end of April of the following year. However, if the published ongoing expenses figure varies by 5% or more as a result of any material change or significant event, then the relevant KFS should be updated as soon as practicable.
Requirements for Calculation of the Past Performance Information
Past performance information refers to the return of the fund that was achieved in the respective calendar year, calculated based on the net asset value of the fund. The management company may designate a share class as the "representative share class" in the KFS. Only the past performance information relating to that "representative share class" needs to be disclosed in the KFS. The past performance information of the other share classes should be shown on the fund's website. The past performance information should cover the last 10 full calendar years if possible.
In the KFS the past performance information should be disclosed by way of bar chart and supplemented by the relevant statements. For disclosure on the fund's website, the past performance information can be disclosed by way of either bar chart or line chart and should be supplemented by the relevant statements and made available to investors upon request (if the fund does not maintain a website).
The past performance information needs to be updated annually at a minimum requirement and as soon as practicable after the calendar year end and in any event, before the end of April of the following year.
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David McEvoy, Product Manager, Black Rock Hong Kong email@example.com