UCITS are permitted to invest up to 100% of their assets in other open-ended collective investment schemes ("CIS") where those CIS are:
- other UCITS; or
- other EU or non-EU CIS the sole object of which is the collective investment in transferable securities and/or in other liquid financial assets of capital raised from the public and which operate on the principle of risk spreading and the units of which are at the request of holders, repurchased or redeemed, directly or indirectly out of those undertakings assets provided that:
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- such other CIS are authorised under laws which provide that they are subject to supervision considered by the Central Bank to be equivalent to that laid down in community law and that co-operation between authorities is sufficiently insured;
- the level of protection for unitholders in the other CIS is equivalent to that provided for investors in a UCITS and in particular that the rules on assets segregation, borrowing, lending and uncovered sales of transferable securities and money market instruments are equivalent to the requirements of the UCITS;
- the business of the other CIS is reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period; and
- no more than 10% of the UCITS or other CIS assets, whose acquisition is contemplated, can be, according to its rules or instruments of incorporation invested in aggregate in units of other UCITS or other open-ended CIS.
- Investment Restrictions
In addition to the restrictions on the types of non-UCITS CIS that a UCITS may invest in, there are four main investment restrictions which apply to UCITS investing in other CIS which are that:
- the maximum exposure to any one CIS may not exceed 20% of the net asset value of a UCITS (each sub-fund of an underlying umbrella CIS being regarded as a separate CIS for the purpose of applying this limit);
- the maximum aggregate investment in non-UCITS CIS may not exceed 30% of the net asset value of the UCITS;
- investment in a CIS which can itself invest more than 10% of net assets in other CIS is not permitted; and
- investment in a CIS must not result in the acquisition of more
than 25% of the units of any single CIS (or sub-fund of an umbrella
CIS).
- Acceptable Types of Non-UCITS CIS
In Guidance Note 2/03, the Central Bank has indicated it will permit investment by UCITS in the following categories of non-UCITS CIS:
- schemes established in Guernsey and authorised as Class A schemes;
- schemes established in Jersey as Recognised Funds;
- schemes established in the Isle of Man as Authorised Schemes;
- non-UCITS Retail CIS authorised by the Central Bank itself provided such CIS comply in all material respects with the provisions of the UCITS Notices;
- non-UCITS CIS authorised in a Member State of the EEA, the
United States, Jersey, Guernsey or the Isle of Man and which
comply, in all material respects with the provisions of the UCITS
Notices.
- Central Bank's consideration of "in all
material respects"
In this regard, the Central Bank's consideration of "all material respects", includes, inter alia, consideration of:
- the existence of an independent trustee/custodian with similar (to Irish trustee/custodians) duties and responsibilities in relation to both safekeeping and supervision;
- requirements for the spreading of investment risk, including concentration limits, ownership restrictions, leverage and borrowing restrictions, etc.;
- availability of pricing information and reporting requirements;
- redemption facilities and frequency;
- restrictions in relation to dealings by related parties.
- Other Jurisdictions Tests
As noted above, the Central Bank has indicated a number of jurisdictions and types of CIS which it considers to be acceptable for investment by a UCITS. Other jurisdictions and types of CIS may be considered by the Central Bank on submission to it and, in assessing any such submissions, the Central Bank has indicated in its Guidance Note that it will have regard to:
- memoranda of understanding (bi-lateral or multi-lateral), membership of an international organisation of regulators or other co-operative arrangements, (such as exchange of letters) to ensure satisfactory co-operation between the Central Bank and the competent authority of the relevant CIS;
- the management company of the target CIS, its rules and its choice of trustee have been approved by its own regulator;
- the CIS is authorised in an OECD jurisdiction.
- Central Bank's consideration of
"equivalence" for Non-UCITS CIS
As indicated above, in order for a non-UCITS to be an acceptable investment of a UCITS, the Central Bank needs to be satisfied that it is both authorised under a legislative regime which provides that it is subject to supervision considered by the Central Bank to be equivalent to that specified in community law and that the applicable regulatory regime is such that the level of protection for investors is equivalent to that provided for investors in a UCITS, that rules on segregation of assets, borrowing, lending and uncovered sales of transferable securities and money market instruments are equivalent to those laid down by the UCITS Directive.
In its Guidance Note 2/03, the Central Bank has indicated that it will use the following factors to guide its consideration as to whether such equivalence exists:
- rules guaranteeing the autonomy of the management of the CIS, and management in the exclusive interest of the unitholders;
- the existence of an independent trustee/custodian with similar duties and responsibilities in relation to both safekeeping and supervision. Where an independent trustee/custodian is not a requirement of local law, robust governance structures may provide a suitable alternative;
- availability of pricing information and reporting requirements;
- redemption facilities and frequency;
- restrictions in relation to dealings by related parties;
- the extent of asset segregation; and
- local requirements for borrowing, lending and uncovered sales
of transferable securities and money market instruments regarding
the portfolio of the CIS.
- Fees/Charges and Disclosures
Where a UCITS intends to invest more than 20% of its net assets in other CIS, its prospectus must disclose the maximum level of management fees that may be charged to the UCITS itself and to the underlying CIS. In other words, the aggregate management fees at both levels have to be disclosed. In addition, actual aggregate management fees at both levels have to be disclosed in the UCITS annual report.
In addition, where a UCITS invests in a linked CIS (where both the UCITS and CIS are managed, directly or indirectly by delegation by the same management company or where the management company of both the UCITS and underlying CIS are linked by common management or control or by a substantial direct or indirect holding), the manager of the underlying CIS is not permitted to charge subscription or redemption fees by account of the UCITS investment in it. - Cross Investment in UCITS umbrella funds
One sub-fund within a UCITS umbrella investment company type scheme is only permitted to invest in another sub-fund within the same umbrella where the umbrella scheme or its delegate (i.e. the administrator) has the systems capability to provide disclosure in relation to cross-holdings in accordance with industry adopted standards.
Where a sub-fund invests in one or more sub-funds of any umbrella UCITS, in addition to the requirements above in relation to investment by UCITS in a linked CIS, the investing sub-fund may not charge an annual management fee (or investment management fee) in respect of that portion of its assets invested in other sub-funds.
Additionally, investment may not be made in a sub-fund which itself holds units in other sub-funds within the same umbrella UCITS.
To read "A Guide to UCITS in Ireland" in full, please click here.
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.
