Which Document GovernsEasy

The document a reader is shown and the document that decides what happens are almost never the same one. Every dispute in this subject is somebody discovering the order of those two too late.

5 min read · 974 words

The stack behind anything you can buy

• The contract. The prospectus, the terms and conditions, the master agreement, the fund's constitutional document. It is the product. Nothing that contradicts it survives.
• The regulated summary. A short document in a prescribed shape, required to be fair and not misleading, and required to be short — which is a real tension, and the reason it can be entirely accurate and still leave out the thing that decides your outcome. Reading a KID is that document's own playbook.
• The periodic report. A factsheet or a statement: what happened, on a date, computed by rules set elsewhere. It describes; it promises nothing.
• The marketing. A page, a brochure, a conversation. Constrained by law in most places and binding in almost none of them.
• The order is not a ranking of honesty. All four can be produced in good faith by people who agree with each other. It is a ranking of what a court, an administrator or a computer reads when the question becomes live.

Where the layers genuinely diverge

• Between a description and a definition. "Invests in short-dated high-quality debt" is a description; the contract says which instruments, of what remaining maturity, up to what proportion, and what happens when a holding stops qualifying. The second one is the fund.
• Between an intention and a permission. A document saying the manager "may" do something is not saying they will, and it is not saying they will not. Every permission is a thing that can happen without telling you, because it already told you.
• Between an outcome and a formula. A structured product's marketing says what it pays in the cases worth illustrating; the terms say what it pays in every case, including the ones nobody illustrated — which is precisely where a protected product loses money.
• Between a name and a mechanism. The label attaches to a document rather than to a payment on more products than anybody expects; what the wrapper changes is the general statement of it.

The four places discretion lives

None of these is improper and all four are necessary. What matters is that they exist, that they are exercisable by somebody who is not you, and that they are written in the layer nobody reads.

Reading the stack without reading all of it

• Find the governing document's name first. Every summary names it, usually in one line at the foot: the prospectus, the base prospectus and final terms, the agreement and its schedule. That line is the map.
• Then read four things and nothing else on a first pass. What is promised and by whom; what happens if that party fails; what may be done without asking you; and how you get out, at whose price. Those four answers change the product; the rest is detail.
• Search the contract for "may", "determine", "discretion" and "sole". This is not a trick — it is where the four powers above are written, and the number of hits is itself informative.
• Read the definitions section, which is the one nobody reads. A contract's ordinary-looking sentence is made of defined terms, and the definition is where the sentence's meaning actually is. Reading a prospectus and reading a credit agreement are the two worked examples on this site.
• And check the date and the version. A supplement can change the thing you read, and a base prospectus is completed by final terms that are a different file entirely.

Where this has already decided something

• A phrase in a bond's own terms, argued for years. The Argentine pari passu litigation turned on what one contractual clause required — a clause everybody had read and nobody had thought was the operative one.
• Lending documents that permitted more than their lenders assumed. The uptiering transactions of 2020 were run through the amendment mechanics of agreements the lenders had signed, which is a fact about the documents rather than about anybody's conduct.
• A fund whose dealing terms met an illiquid holding. Woodford in 2019 is what happens when the redemption promise in one layer and the assets described in another are answerable only in the third.
• The pattern in all three is the same and it is not deception: the binding layer said something the reading layer did not repeat, and nobody had cause to compare them until the day it mattered.

The general rule

Marketing describes, summaries prescribe a shape, reports record, and the contract decides. A reader who knows only the top of that stack knows what the product is meant to do, which is a different question from what it will do — and the second question is answered in a document that is always available, rarely read, and never shorter than it needs to be.