Explanatory Memorandum to COM(2008)458 - Coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2008)458 - Coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in ... |
|---|---|
| source | COM(2008)458  |
| date | 16-07-2008 |
The UCITS Directive i adopted in 1985 aimed to offer greater business and investment opportunities for both industry and investors by integrating the EU market for investments funds. The Directive has been key to the development of European investment funds. In June 2007, UCITS assets under management amounted to € 6tr. UCITS represent about 75% of the EU investment fund market. Strong in-built investor protection safeguards have also achieved UCITS broad recognition beyond EU borders.
Despite this positive evolution, it became evident over the years that the Directive was excessively constraining and prevented fund managers from fully exploiting their development possibilities. Amendments in 2001 enlarged the investment powers available to UCITS but did not tackle bottlenecks to industry efficiency. Important missed opportunities have been identified. Estimated potential annual savings amount to several billion euros.
In 2005, the Commission Green Paper on investment funds i launched a public debate on the need for EU level action (and its scope). One year later, the White Paper on investment funds i announced, among other measures, a set of targeted modifications to the UCITS Directive.
This proposal has two objectives. One is to codify the successive changes introduced to the UCITS Directive since 1985. The other is to translate the measures announced in the White Paper into concrete legislative provisions.
Contents
- 2. Consultation of the stakeholders and interested parties
- 2.1. Consultation of the stakeholders and interested parties
- Year Consultation on Content Time limits Responses feedback
- 2.2. Impact assessment
- 2.2.1. The Management Company Passport
- 2.2.2. Expected benefits
- 3. Additional information
- 3.1. Simplification
- Issue Existing obligations Simplification measures Anticipated benefits and beneficiaries
- 3.2. Recast and repeal of existing legislation
- 4. legal basis
- 5. Comments on the articles
- 5.1. New rules on mergers
- 5.1.1. Principle, authorisation and approval (Chapter VI section 1)
- 5.1.2. Third party control, information of unit-holders and other unit-holders' rights (Chapter VI section 2)
- 5.1.3. Costs and entry into effect (Chapter VI Section 3)
- 5.2. New rules on a master/feeder structure (Chapter VIII of the Directive)
- 5.3. New rules on Key Investor Information
- 5.3.1. Some general improvement on disclosure rules and marketing communications
- 5.3.2. Key investor information (Section 3)
- 5.4. Simplification and improvement of the rules on notification
- 5.4.1. Improved market access for UCITS
- 5.4.2. Clarification of responsibilities between the competent authorities
- 5.4.3. Improved communication and co-operation between competent authorities
- 5.4.4. Methods of distribution of obligatory disclosures in the host Member States
- 5.5. Rules aimed at strengthening supervisory cooperation
Throughout the whole process of revision of the UCITS framework Commission Services have maintained a regular dialogue with stakeholders. The objective was to gather the views from different sides of the fund market (investors, industry and public authorities) in order to design solutions that would effectively address the concerns and expectations of all interested parties.
That dialogue took place through a variety of channels including two expert groups, three open hearings, two workshops on the simplified prospectus and four public consultations (described in the table below).
Asset Management expert group report Recommended list of actions in the area of investment funds 06/05 – 10/ Published in Nov.
Green Paper Analysis of the UCITS framework and questionnaire on possible solutions 12/07 – 15/ Published on 13/02/
Market Efficiency expert group report Recommendations on the main features of five proposed efficiency measures 04/07 – 20/ Published on 16/11/
Exposure draft Possible drafting of the UCITS Directive new legal provisions 22/03 – 15/ Published on 07/09/
In 2004, the Expert Group on Asset Management identified a clear need to improve the efficiency of the European market for investment funds. Subsequent work has therefore concentrated on singling out the areas in which EU level action was required and on determining the scope of that action. Extensive consultation with all stakeholders has substantially contributed to the prioritisation and design of the possible solutions.
These solutions have been analysed at two stages. A first impact assessment was carried out in 2006 ahead of the White Paper on investment funds. That first impact assessment identified the areas requiring changes to the UCITS Directive. A second impact assessment has been developed in preparation of the draft legislative proposal.
The impact assessment analyses two types of legislative changes: those aiming to enhance the working of existing provisions (namely in relation to the notification procedure, the management company passport and the simplified prospectus); and those aiming to introduce new single market freedoms (by creating a facilitating framework for fund mergers and asset pooling). The guiding principles of this analysis have been market efficiency and investor protection. Particular attention has been given to the need to reduce administrative burdens.
The Commission recognises the value a Management Company Passport could provide in terms of efficiency and greater flexibility to conduct its business for the European industry. However, the impact assessment work has highlighted certain difficulties in giving effect to the Management Company Passport (possibility for a fund manager to manage/administer a fund domiciled in another Member State). Intensive preparatory work by Commission services on this point has revealed so far that:
– Risks: It is necessary to distinguish the business functions and related rules which should belong in the Member State of the manager and that of the fund. Failure to do so risks creating regulatory conflict, overlap or supervisory gaps which could threaten the interests of funds investors;
– Enforcement: Problems in allocating responsibilities between different supervisors could hamper the effective enforcement of rules, in particular in the case of cross-border management of contractual funds – which account for the majority of funds and the only fund type in many Member States;
– Cost: Multiple reporting lines and accountability to different supervisors/actors risk generating high compliance costs which could outweigh the expected capital savings from the passport.
It is therefore necessary to seek advice from CESR on how best to address the supervisory and risk management issues. CESR will be invited to provide advice that will help the Commission to develop provisions permitting the introduction of a management company passport under conditions that are consistent with high level of investor protection. In that regard CESR will be invited to advise the Commission by 1 November 2008 on the structure and principles which could guide potential future amendments to the UCITS directive which may be needed to give effect to the UCITS management company passport. Following that advice the Commission will come forward with an appropriate proposal in time to allow for its adoption during the current legislature.
The economic savings to be expected from the proposed measures take the form of both static costs savings for industry and investors and dynamic benefits linked to increased competition and productivity gains. Direct annual benefits amount to several euro billion. Greater flexibility to organise and conduct the fund business and simplified procedures should create new business opportunities and, increase the fund industry's competitiveness. A more integrated investment fund market will also offer the European investor an enlarged choice of better performing funds. Over the long run, these positive effects will contribute to the enhanced economic efficiency and competitiveness and thus give effect to the Lisbon strategy goals in this important sector.
The proposal forms part of the Commission's simplification rolling programme. It delivers on the commitment made by the Commission to codify the acquis in the area of financial services i. Concretely, the proposed amendments have two objectives: a) the introduction of new freedoms in order to improve the efficiency and integration of the UCITS Internal Market and b) to streamline the working of current provisions regarding the cross-border marketing of UCITS and disclosure obligations.
The harmonisation of the merger procedure sought by the new provisions will considerably reduce the administrative burden actually borne by fund promoters wishing to merger funds across borders. It will remove the need to comply with different sets of national requirements and thus lead to a considerable reduction of the delays and costs associated with the merger process. Both fund industry (directly) and investors (indirectly) should benefit from this harmonised procedure. In addition, recommendations in relation to both fund mergers and asset pooling aim at rationalising to a maximum the proposed framework by clearly identifying the respective responsibilities of industry and competent authorities.
As regards, to amendments to existing provisions the table below provides a summarised overview of the main simplification effects.
Notification procedure UCITS wishing to be marketed in another MS need to notify this intention to that MS' competent authorities. This includes the submission of a number of documents. The competent authorities of the host MS have 2 months to approve the marketing into its territory of the foreign UCITS. Notification file: content harmonised Host MS: no power to ask for additional documents or request changes Reduction of delays (marketing immediately after notification)Simpler translation requirementsElectronic transmission Industry: more business opportunities; less costsInvestors: more choice, less costsSingle Market: more integration and competition
Simplified prospectus Obligation to provide a simplified prospectus explaining the investment characteristics to the investor prior to his/her subscription into the fund. Content harmonised (only change admitted: translation)Short and simple documentLiability clarifiedPossibility of using electronic delivery Industry: less costsInvestors: more protection, less costsSingle Market: more integration and competition
The proposal takes the form of a recast version of the 1985 Directive and of its subsequent amendments i. It follows the ‘re-casting technique’ (Inter-institutional Agreement 2002/C 77/01) which enables substantive amendments to existing legislation while codifying other provisions which remain untouched in their substance. Articles or parts of articles which have become obsolete have been deleted. All changes are clearly marked in the text. New and substantial amendments to the UCITS legislative framework are clearly identified as such.
The numerous amendments to 1985 UCITS Directive have considerably increased the complexity of the UCITS legislative framework. The current acquis is made of 9 directives amounting to around 100 pages in the Official Journal.
While facilitating the exercise of their Internal Market freedoms by the UCITS, this acquis imposes several important obligations on them in particular regarding investor disclosure and the type of investments in which the UCITS can engage. The UCITS acquis also imposes significant obligations on the Member States competent authorities, in particular in terms of authorization procedures and on-going supervision of the UCITS. It is therefore crucial that the legislative framework remains up-to-date and easily accessible and understandable by the stakeholders. A recast UCITS Directive will constitute an essential progress in this respect.
The proposal is based on Article 47 i of the Treaty, which is the legal basis to adopt Community measures aimed at achieving an Internal Market in financial services. The chosen instrument is a Directive as this is the most appropriate legal instrument to achieve the objectives while keeping a certain margin of manoeuvre for Member States. The proposed new provisions do not go beyond what it is necessary and proportionate to achieve the objectives pursued.
The Directive confers extended implementing powers on the Commission in line with the Lamfalussy approach which has been extended to the UCITS Directive by Directive 2005/1 i. The scope of these implementing powers is defined in each relevant article. They will be used to further define the principles set out in this Directive as to enhance harmonisation and supervisory convergence.
In exercising these implementing powers, the Commission will be assisted by the European Securities Committee. The measures to be adopted by the Commission will be subject to the regulatory procedure and to the regulatory procedure with scrutiny laid down in Articles 5, 5(a) i to i, and 7 of Decision 1999/468/EC. They will be developed on the basis of mandates given by the Commission to the Committee of European Securities Regulators (CESR) i.
The following comments detail the substantial changes introduced by the recast of the UCITS Directive. The following Articles remain substantially unchanged: 1 i,1 i, 1(3)(a), 1 i to 1 i, 2(1)(a) to (d), 2(1)(g) to (m), 2(1)(o), 2(1)(p), 2 i to i, 3, 5 i, 5 i to i, 6 to 15, 16 i to i, 16 i, 16 i, 17, 18, 19 i, 19(3)(b), 19(3)(c), 20 to 33, 45(1)(a) to (h), 45 i, 46 to 48, 49 i, 49 i, 50, 51 i first subparagraph points (a) to (c), 51 i second subparagraph, 52, 63 i, 65 i, 65 i, 68, 71, 78 i except 78(1)(b), 78(2)(a) except second indent, 79, 80, 82, 83 i except 83(1)(b), 83 i, 84 except 84(b), 97 to 99, 100, 101, 102 i, 102 i, 103 i, 104, 106, 107, 108, 109 and Annexes II, III and IV. In order to correct a material error in the English version of the Directive, and taking into account Article 1 i, it is necessary to change all subsequent mentions of unit trusts by mentions of common funds. It is also necessary to correct material errors in the Latvian, Bulgarian, French, Spanish and Italian version of the Directive.
The proposal offers the possibility for UCITS to achieve greater economies of scale by introducing into the UCITS Directive a legal framework for both national and cross-border mergers. Different types of mergers will be possible based on existing national rules and practices including those known in common law Member States (scheme of amalgamation/arrangement).
Article 35 provides for the basic principle that all UCITS (and investment compartments thereof), irrespective of their legal form, are entitled to merge. This new merger regime, including its safeguards for investors, will cover both cross-border mergers and domestic mergers (the latter may impact on investors based in other Member States).
Article 36 sets up the principle of prior authorisation of the merger (to be issued within 30 days), by the competent authorities of the merging UCITS (i.e. the entity which ceases to exist), before its presentation to unit-holders. During that process, they will have to assess the potential impact of the merger on the unit-holders of both the merging UCITS and the receiving UCITS. The competent authorities of the receiving UCITS have to be informed of the decision reached in this respect. This should allow them to check whether the required disclosure to investors of the receiving UCITS is made in conformity with the Directive.
If the merger involves more than one merging UCITS and such UCITS are domiciled in different Member States, the competent authorities of each merging UCITS will need to approve the merger, in close cooperation with each other.
Article 37 provides for the obligation to draw up draft terms of merger (including a minimum set of compulsory provisions), in the same terms, for each of the UCITS involved in the merger.
5.1.2. Third party control, information of unit-holders and other unit-holders' rights (Chapter VI section 2)
Article 38 provides that the depositaries of the merging UCITS and the receiving UCITS should review the common draft terms of merger on their conformity with the relevant provisions of the Directive and their respective constitutional documents. The role of the depositaries is however not to verify whether the proposed merger is in the interest of the investors.
Article 39 provides that an independent auditor should validate the criteria used for valuating the assets and liabilities of the funds involved in the merger and for calculating the exchange ratio.
Article 40 foresees that the merging UCITS should provide appropriate and accurate information on the proposed merger to its/their unit-holders so as to enable them to make an informed decision on the impact of the proposed merger on their investment. Should the competent authorities of the merging UCITS decide that the proposed merger may impact on the unit-holders of the receiving UCITS, the latter will also be requested to provide similar information to its unit-holders. This Article also defines basic principles of investor disclosure to the unit-holders of the merging UCITS and the receiving UCITS; details of which will be developed through implementing measures. For investor protection reasons, a provision specifies the language in which the information is provided to investors situated in the Member States where a UCITS has been notified to market its units.
Article 41 confirms that approval by unit-holders is only required if provided for by national law. If so, a maximum threshold/ceiling of 75% of the votes cast by unit-holders is foreseen.
Article 42 foresees the right of unit-holders (of both the merging UCITS and the receiving UCITS) to redeem units or shares without costs prior to the merger, as from the moment the UCITS have informed them of the proposed merger.
Article 43 ensures investor protection by clarifying that the responsibility for the costs of the merger should not lie with the unit-holders of the merging and/or receiving UCITS. Such costs should be borne by the manager/fund promoter.
Article 44 provides that a merger takes effect once the transfer of assets and/or liabilities (depending on the merger technique used) and the exchange of units have taken place. It confirms the role and responsibility of the depositaries of both the merging UCITS and the receiving UCITS to carry out the actual transfer of assets/liabilities. Investors and other third parties should then be informed that the merger has taken effect. Completion of the merger is to be publicized.
The introduction into the UCITS Directive of the possibility to set up master-feeder structures will open new business opportunities for UCITS managers. It will allow them to rationalise and increase the efficiency of their investment policy.
A master-feeder-structure is characterised by the feeder UCITS' investment of all or almost all of its assets in one other UCITS, the master UCITS. Article 53 i sets a minimum of 85% of the assets to be invested in a master UCITS. It also prevents feeders UCITS from investing in more than one (master) UCITS. The remaining 15% should allow the feeder UCITS to hold ancillary liquid assets. The feeder UCITS may hold no other assets than those mentioned in Article 53 i and i.
A master UCITS is a UCITS which pursuant to Article 53 i has at least one feeder UCITS as investor. To avoid opaque cascade structures, the master UCITS may neither itself be a feeder UCITS nor invest into a feeder UCITS.
Article 54 i provides that the specific investment policy of a feeder UCITS needs to be approved by the competent authorities of the feeder UCITS' home Member State. The approval is subject to the conditions set out in Chapter VIII. No additional condition or document may be required.
Article 55 requires the feeder UCITS and the master UCITS to enter into a legally binding agreement. Such agreement shall enable the feeder UCITS to accomplish its duties.
If the feeder UCITS and the master UCITS have different depositaries i or auditors, Articles 56 and 57 require the latter to enter into an information-sharing agreement.
Article 58 ensures that both the prospectus and the key investor information of the feeder UCITS disclose the fact that the UCITS is a feeder of a given master and explain the specificities of this two-layer investment.
Article 59 sets up the requirements for a conversion of an existing UCITS into a feeder UCITS. To protect unit-holders, converting UCITS have to inform all unit-holders in advance. All unit-holders are entitled to re-purchase or to redeem the units of the feeder UCITS free of charge within 30 days.
Pursuant to Article 60 i the feeder UCITS must act in the best interests of its investors and therefore has to monitor effectively the master UCITS.
Article 60 i deals with retrocession arrangements and requires, where applicable, that all kinds of commissions obtained from the master UCITS or its management company is paid into the feeder UCITS' assets.
Article 61 i prevents the master UCITS from charging the feeder UCITS subscription and redemption fees.
These new provisions aim at simplifying the content and conditions under which information is given to potential investors in UCITS. The objective is to enable retail investors to take a well-informed investment decision. For that purpose, the Directive replaces the previous obligation to offer a simplified prospectus, free of charge to subscribers before the conclusion of the contract, by the concept of key investor information. To reduce costs, the new provisions also seek to ensure that the key investor information can be used without modifications all across the Internal Market.
Articles 64 to 70 set out the rules applicable to the information to be provided at any time, on request, to investors (prospectus, annual and half-yearly reports).
Article 72 sets the principle that the information contained in marketing communications should be fair, clear and not misleading. It should also be consistent with the information contained in the obligatory disclosures (eg. key investor information) provided for by the UCITS Directive.
Article 73 requires the investment company or the management company (where applicable) to draw up a short document containing key investor information that will be valid in all Member States. Rules regarding the delivery of the key investor information are set by Article 75 (which distinguishes between direct and indirect sales).
Key investor information should provide information about the essential characteristics of the proposed investment and specify how/where investors can obtain additional information on the proposed investment and certain practical elements. More specific rules (ex. format and content of key investor information) will be adopted through implementing measures.
To effectively assist retail investors in their decision, key investor information should be short and concise, use clear and comprehensible wording, and be presented in an understandable format. It should be fair, clear and not misleading (article 74) and, therefore, consistent with the relevant parts of the prospectus.
Article 74 also clarifies that the key investor information constitutes pre-contractual information only. No civil liability should be attached to any person solely on its basis, unless such information is misleading, inaccurate or inconsistent with the prospectus.
The current UCITS Directive sets out common rules which allow a UCITS authorised and supervised in one Member State to market its units in any other Member State. Before a UCITS starts marketing its units, it must complete a notification procedure. The current procedure has become burdensome and time consuming for fund promoters. Current delays between the moment of the notification and the actual marketing of the UCITS are a serious disadvantage when compared with other financial products for retail investors, which are often subject to less strict information or investor protection requirements.
To tackle that problem, Article 88 proposes a new streamlined procedure based on a regulator-to-regulator communication. Under the new rules, a UCITS wishing to market its units in another Member State will file a notification letter with its home competent authorities. This letter will have a harmonised content and will mainly describe the arrangements made for marketing the UCITS in the Member State concerned. Several documents will be attached to that letter (fund rules, key investor information). After verification of the completeness of the file, the competent authorities of the home Member State will automatically transmit it to the host Member State authority together with an attestation confirming that the UCITS fulfils its obligations under the Directive. The competent authorities of the host Member State will not be entitled to review, challenge or discuss the merits of the UCITS authorisation granted in the home Member State.
The amendments underline the fundamental principle according to which it is not possible for the host Member State to challenge the exclusive responsibility of the home Member State over the fields governed by the Directive.
In order to facilitate direct and immediate access to the market of another Member State, the control of compliance of the marketing arrangements with the rules applicable in a host Member State will take place on an on-going basis, but only after the UCITS has placed its units on the market of a host Member State. The Directive also seeks to enhance transparency regarding local marketing rules (obligation on Member States to publish on their websites all applicable marketing rules).
The new notification procedure requires improved communication between competent authorities in order to be successful. Therefore, electronic transmission of information about UCITS and their marketing arrangements is foreseen. This should allow host authorities to better prepare for on-going monitoring of compliance with marketing rules. UCITS will however be obliged to directly inform the host authorities of any amendments to their marketing arrangements. In this field, several detailed rules will be adopted through implementing measures.
Article 89 introduces a new language regime, whereby UCITS must translate only the key investor information in the local language. It is up to the UCITS to decide whether other obligatory disclosures are to be translated into the language of the host Member State or in a language customary in the sphere of international finance. Investors will be aware in which language the prospectus and the annual or half-yearly reports are available because this will be specified in the key investor information. The translation (under the sole responsibility of the UCITS) of documents other than the key investor information into the language of a host Member State will therefore be a market driven decision (in line with the language regime of the Prospectus Directive).
Successful implementation of the provisions introduced by this proposal cannot compromise on the high level of investor protection offered by the UCITS Directive. Therefore, the proposed adjustments are complemented by measures which enhance the existing mechanisms for supervisory cooperation and provide additional tools for supervisors to allow them to discharge their duties efficiently. These measures are largely inspired by provisions already in force in other financial services directives.
85/611/EEC (adapted)