The European Council voted on 22 June, 2009 for the adoption of the UCITS IV Directive (the "Directive"), as already adopted by the European Parliament in plenary session on 13 January, 2009. The Directive has now been finally adopted in accordance with the codecision procedure, thus marking the end of the first step for the implementation of a European text.
The UCITS IV proposal containing amendments to the UCITS Directive 85/611/EC was first proposed by the EC on 16 July, 2008. This proposal did not take into account the management company passport which, after having been debated at CESR level, was reintroduced in December 2008.
According to the Lamfalussy process, there remains three levels before the transposition of the Directive shall be considered as fully completed among Member States. Similar to MiFID, the Directive provides that the details of certain provisions should be covered by Level 2 implementing measures to be adopted by the EC with a view to harmonising the implementation of the text. On 13 February, 2009 the EC submitted to CESR a provisional request for technical advices on the new UCITS Directive implementing measures.
The consultation paper that CESR published on 8 July, 2009 provides technical advice on the level 2 measures related to the UCITS management company passport. CESR's draft advice covers the organisational requirements that companies managing UCITS need to fulfil, and conflicts of interest those companies must avoid. The advice also includes details on the companies' rules of conduct, depositaries and risk management, as well as on supervisory cooperation. The majority of the suggestions made in the CESR Advices were carried through into the Commission Directive 2010/43/EU of 1 July 2010 implementing the UCITS IV Directive as regards organizational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company.
The final two steps of the Lamfalussy process will take place during and after the period of transposition of the Directive. Under level 3, CESR will be in charge of issuing interpretation recommendations to national authorities and under level 4 the EC will control and advise Member States as to a proper interpretation and application of the Directive. Member States will have until 1 July, 2011 to implement the text into national legislation.
The following is a summary of the key implications of the UCITS IV Directive:
Management Company Passport
The concept of a management company passport ("MCP") was first introduced in Directive 2001/107/EC (the "Man Co Directive"). The Man Co Directive introduced an authorisation framework for Man Cos which is similar to that applied to investment firms under MiFID imposing requirements relating to minimum capital, internal management control mechanisms, probity and experience of the directors and management and conduct of business rules.
These measures were intended to harmonise the authorisation process of Man Cos in all EU Member States which in theory would enable the MCP provided for in the Man Co Directive (as explained below) to operate effectively whereby a Man Co established in one Member State could be appointed as Man Co of UCITS schemes domiciled in other Member States.
However, despite the new authorisation process and the provision of a MCP contained in the Man Co Directive, the MCP has not worked under the existing legal framework. This failure was attributed to the fact that the definition of "UCITS Home Member State" in the Man Co Directive meant that it was not possible for a Man Co to passport its services in the context of UCITS funds established as unit trusts.
The Directive enables European funds created under the UCITS regime to be managed by a management company authorised and supervised in a Member State other than the home Member State of the Fund.
- Fund Mergers
The Directive establishes a unified regime for both cross-border and domestic mergers of Funds. Pursuant to the Directive, all Funds are entitled to merge regardless of their structure (corporate, unit trust, or contractual type of funds).
- Master Feeder Structure
The Directive sets out the first European regulation concerning the setting-up of master feeder funds. A feeder fund is defined in the Directive as a UCITS or a sub-fund thereof which has been approved to invest at least 85% of its assets in units of another fund. It can also set aside 15% of its assets to invest in derivative instruments or liquid assets etc. As far as the master fund is concerned, it cannot itself be a feeder fund, nor hold units of a feeder fund.
- Key Investor Information
The key investor information ("KII") shall replace the simplified prospectus which failed to provide investors with all basic information to enable them to make an informed investment choice. It is intended to be a short pre-contractual document written in a brief manner and in a non-technical language which shall provide easily understandable, fair, clear and not misleading information on the fund to contemplated or actual investors.
The European Commission has now published a Regulation 583/2010 implementing the UCITS IV Directive as regards the key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of the website (the "Commission Regulation").
On 1 July, CESR issued level 3 Guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the KII document. Such an indicator should be based on the volatility of the fund using weekly or monthly returns concerning the previous five years.
- Simplified Notification Procedure
A fund wishing to market its units in a Member State different than its country of incorporation will notify its supervisory authority of such project, through a notification procedure which will then be transferred by its home regulator to the competent supervisory authorities of the contemplated host country (new "regulator-to-regulator" procedure).
- Enhanced Cooperation between Supervisory Authorities
The proposed amendments to the Directive will result in increased cross-border operations necessitating a full and timely cooperation between supervisory authorities. The Directive encourages the exchange of information, harmonises the powers of the supervisory authorities and allows for the possibility of immediate verifications and investigations, consultation and mutual help mechanisms.
The enhance cooperation between supervisory authorities is expected to result in a more simplified Regulator-to-Regulator notification. This will permit a UCITS to begin marketing its units in another Member State (the "Host Member State") no later than 10 working days after the date of receipt of the required standard notification letter accompanied by complete documentation required in the application. It also greatly simplifies the documentation required, and significantly the only document which requires translation in the language of the Host Member State is the KII.
The notification procedures in the UCITS IV Directive have been broadly welcomed by the European funds industry as it is believed that they will improve administrative efficiency and facilitate more efficient marketing and reduce translation costs.
- UCITS IV – Management Company
- UCITS IV – Key Investor Information Document
- UCITS IV – Cross-Border Notifications
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
