Blog: UCITS Directive - 2011

The first merger of an Irish authorised UCITS under the new UCITS IV merger regime was approved by the Central Bank of Ireland on 1 September and implemented on 21 October.

The merger involved the transfer of net assets from a sub-fund of an Irish unit trust to a sub-fund of a Luxembourg authorised SICAV. The Irish sub-fund will continue to exist until its liabilities have been discharged.

This method of merger, as opposed to the two other methods permitted under the Directive, being: (i) a dissolution without liquidation involving a transfer of all assets and liabilities from one UCITS to another, or (ii) a dissolution without liquidation involving a transfer from two or more UCITS of all assets and liabilities into a newly formed UCITS, is expected to be the most popular method employed owing to the ability to avoid having to merge the liabilities of the two funds.

Although the deadline for UCITS IV implementation was July of this year, many member states are yet to complete the transposition into domestic law.

To combat the repercussions that might arise from this state of affairs, the European Securities and Markets Authority (ESMA) has recently provided practical guidance on the situations in which UCITS can benefit from some of the Directive's changes despite late implementation by a relevant member state.

A key point raised by ESMA is that a host state regulator in a member state that has not yet implemented should not refuse notification from the home state of a new fund. Additionally, ESMA has set out the conditions for regulator to regulator notification from a home state where the Directive has not yet been implemented.

Although the full benefits of the Directive will only be enjoyed once all member states have implemented the Directive (which ESMA does not have the power to enforce), this is clearly useful guidance for UCITS looking to operate in the current two-tier system.

View the full text of ESMA’s opinion

Act 31/2011 (the Act), amending the Collective Investment Schemes Act 35/2003, was published in the Official Gazette of the Spanish State on 5 October 2011 in order to transpose UCITS IV into Spanish law.

Additional changes, providing for greater flexibility in the marketing of Spanish collective investment schemes (CISs) in other jurisdictions and in the marketing of foreign CISs within Spain, did not go as far as was hoped for.

Under the Act, units held in CISs may be included in the register of unitholders of the relevant management company. Such a register need only mention the unitholders’ tax identification numbers and the distributor through which units were purchased, with no need to report the clients’ names. However, the Act has not provided a satisfactory solution in the case of foreign investors, owing to the fact that a residency certificate must still be submitted to the relevant management company in order to benefit from the exemptions for non-residents.

Additionally, where a foreign UCITS would be distributed in Spain through more than one distributor, an entity must be appointed in Spain to keep a centralised register of all those persons who have acquired units in that UCITS through all distributors within the jurisdiction.

Before any transactions involving the subscription, redemption or transfer of units are effected, each Spanish distributor must report to this entity, and in doing so must identify each unitholder by their tax identification numbers.

The entity keeping the centralised register must: (i) charge withholding tax and pay this to the Spanish tax authority in line with the Spanish personal income tax, corporate income tax and non-resident income tax regulations; and (ii) inform the tax authority of transactions involving CIS units. The Act will therefore require foreign UCITS to implement a complex reporting system in order to centralise tax information.

The Investment Management Association has recently published a guide on the Key Investor Information Document (KIID), aimed squarely at investors:

http://www.investmentfunds.org.uk/assets/files/factsheets/KIIDfactsheet.pdf

Under UCITS IV the KIID was designed to replace the simplified prospectus. The main objective behind the move was to give potential investors a clearer, and shorter (in only two pages), breakdown of the principal points that a potential investor should be focussing on, addressing concerns that in many cases the simplified prospectus had become too large and unwieldy a document to satisfy its original purpose.

Further to publication of a draft version on 13 June 2011, The Undertakings for Collective Investment in Transferable Securities Regulations 2011 (the UCITS Regulations) were published in final form on the legislation.gov.uk website on 4 July 2011.

The UCITS Regulations came into force on Friday, 1 July 2011 and implement parts of the UCITS IV Directive (the Directive) into UK legislation by amending legislation including The Financial Services and Markets Act 2000 and the Open-Ended Investment Companies Regulations 2001.

The UCITS Regulations were accompanied by an explanatory memorandum, which contains a transposition table outlining the manner in which provisions of the Directive have been implemented.

Additionally, a final impact assessment has also been published.

Today is the deadline for EU member states to incorporate UCITS IV into their domestic legislation, and the UK, Luxembourg, Germany and Ireland have all confirmed that their respective legislative changes have been put in place.

However, as was widely predicted, several national legislatures have failed to do so - for reasons ranging from uncertain domestic political situations, to the existence of more pressing economic distractions. Belgium, France, Italy, Spain and Switzerland are all yet to incorporate the directive into their statute books.

Having already presented bills to their respective parliaments, Spain and Switzerland (the latter of whom expects to bring in the changes by 15 July) are further along the line than the others, who are yet to confirm the process that will provide for the transposition.

Should the implementation process stagnate, it could become increasingly difficult for policymakers to push ahead with the publishing of UCITS V before the end of the year.

HM Treasury has published a draft of The Undertakings for Collective Investment in Transferable Securities Regulations 2011. The Regulations implement the UCITS IV Directive into UK legislation and regulation. If approved by Parliament the Regulations will come into force on 1 July 2011.

The Treasury has also published a draft Explanatory Memorandum accompanying the draft Regulations. The Treasury expects the corresponding changes to the FSA rules to be published in the near future.

View Draft Statutory Instruments - Financial Services and Markets: The Undertakings for Collective Investment in Transferable Securities Regulations 2011, 13 June 2011

View HM Treasury - Undertakings for Collective Investment in Transferable Securities, 13 June 2011

Switzerland has implemented the UCITS III Directive to a great extent through the new Swiss Collective Investment Schemes Act.  Although the Swiss approach to the UCITS IV Directive is currently unclear as no official statement has been released on the subject, according to formal information released by the SFS Swiss Funds Association (SFA):

• work is being undertaken to allow UCITS registered in Switzerland to replace the Simplified Prospectus with the Key Information Document through amendments to the Swiss Collective Investment Schemes Ordinance (CISO);
• it is reported that a Key Information Document will also be introduced for certain categories of Swiss funds (with a possible transition period of 3 years); and
• the Federal Department of Finance (FDF) (the body in charge of proposing legal provisions) has informed the SFA that the amendments to CISO should become effective on 1 July 2011.

However the formal requirements which apply to the Key Information Document in Switzerland together with the filing requirements are still unclear.

May 2011

Introduction

Following parliamentary discussions on the implementation of the UCITS IV Directive, the implementation bill has been amended to allow for two changes to Dutch tax law.

Tax residency

First proposed change relates to the tax residency of UCITS. Based on the UCITS IV Directive, a fund manager resident in an EU Member State will be allowed to manage UCITS established and supervised in another Member State¹ (manager passport). Especially for a large fund manager that manage several UCITS that are not all based in the same Member State, this EU manager passport provides for economy of scale benefits and increased flexibility as it will no longer be required to establish a fund manager in each jurisdiction in which a UCITS is managed.

Current Dutch tax law provides that the place of residence of an entity will be considered taking into account all facts and circumstance. Place of effective management is an important factor in determining the place of tax residency. If a UCITS that is resident in another Member State is effectively managed by a fund manager resident in the Netherlands this could result in a double tax residency and subsequently double taxation for the UCITS.

The proposed change to the Dutch General Tax Act (Algemene Wet Rijksbelastingen) provides that a UCITS established and supervised in another Member State will not be (deemed) tax resident in the Netherlands even if the UCITS is effectively managed in the Netherlands by a Dutch fund manager.

The Dutch fund manager must receive and report an at arm’s length remuneration for its management activities from the UCITS established in another Member State. Only this remuneration received by the Dutch fund manager will be taxable in the Netherlands.

Relaxation Dutch fiscal investment institution (FBI) requirements for foreign feeder UCITS

UCITS are required to invest taking into account the principle of risk spreading. As of 1 July 2011 a UCITS is authorised to invest at least 85 per cent of its assets in another UCITS. This enables master-feeder structures. Also a master UCITS must adhere to the risk spreading principle, a feeder UCITS investing in a master UCITS therefore indirectly complies with this requirement. Multiple feeder UCITS may invest in one master UCITS.

Due to the beneficial Dutch tax treaty network, it is expected that a substantial number of Dutch master UCITS will take the form of a FBI (subject to tax but at the rate of 0 per cent). Under current Dutch tax law, one of the requirements for the application of the FBI regime is that the shares in the FBI cannot be held for 45 per cent or more by one other entity, unless that other entity is also a FBI or such other entity is not subject to taxation. If a foreign feeder UCITS is subject to taxation it cannot hold more 45 per cent or more in the Dutch master FBI. This is considered to be prohibitive.

In order to stimulate the use of the Dutch FBI regime for master-feeder structures, it is now proposed that foreign feeder UCITS’ may hold an interest larger than 45 per cent in Dutch FBI master UCITS’, without jeopardising the beneficial Dutch FBI regime applicable to the Dutch master UCITS.

It is proposed that the changes to Dutch tax law, together with further changes to regulatory laws implementing the UCITS IV Directive, become effective on 1 July 2011.

1. This includes the European Economic Area countries.

May 2011

The European Securities and Markets Authority (ESMA) has issued its Guidelines on risk measurement and the calculation of global exposure for certain types of structured UCITS. The guidelines supplement CESR’s guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS (Ref. CESR/10-788) published in July 2010.

Key areas in which ESMA has clarified its Guidelines include the following:

• Managers may use the standard commitment approach or VaR approach to calculate global exposure but that they may also adopt the alternative regime outlined in Box 1 of the Guidelines.
• Structured UCITS must be passively managed. However, managers will be able actively to manage their relationships with derivative counterparties and to change counterparties.
• ESMA has kept in place its initial proposal to limit the maturity of structured UCITS to 9 years.
• The maturity of structured UCITS shall be measured from the end of the offer period when the derivative is entered into.

View Guidelines to competent authorities and UCITS management companies on risk measurement and the calculation of global exposure for certain types of structured UCITS, 14 April 2011

April 2011

On 15 April 2011 the Luxembourg Commission de Surveillance du Secteur Financier (the CSSF) published a new circular setting out the main adaptations which each UCITS management company in Luxembourg subject to Chapter 13 of the law of 20 December 2002 on undertakings for collective investment will have to comply with. Such management companies will have to ensure compliance by 1 July 2011 in order to meet the requirements of Chapter 15 of the law of 17 December 2010 on undertakings for collective investment (the 2010 Law) and CSSF Regulation 10-4 implementing Commission Directive 2010/43/EU of 1 July 2010. Thereafter UCITS management companies will be subject to Chapter 15 of the 2010 Law which implements the requirements of the UCITS IV Directive into Luxembourg.

The Circular clarifies the adaptations which Chapter 13 management companies are required to undertake in terms of organisational requirements, conflicts of interest, rules of conduct and risk management. The new requirements shall apply to all UCITS management companies and apply to both the UCITS and non-UCITS funds which they manage. Self-managed SICAVs are only subject to a certain number of the applicable requirements.

Chapter 13 management companies and self managed SICAVs must update their application documents by 1 June 2011 by providing the documents and information set out in Appendix 1 to the CSSF Circular. Certain of the requirements can be met by simply providing a confirmation that the relevant new procedure is being complied with whereas for the other requirements, the applicable procedures and documents must be disclosed.

April 2011

The European Commission has delayed publication of the draft UCITS V Directive. Publication of the draft UCITS V Directive was originally scheduled to take place in July of this year however publication has been delayed to the latter part of 2011 as a result of the European Commission’s decision to include a new section on sanctions.

Similar sections on sanctions will be included in the revised Capital Requirements Directive, MiFID and the Market Abuse Directive as part of an EU initiative aimed at improving national sanctioning regimes in the financial services sector. The European Commission will launch a public consultation on the UCITS V sanctioning regime in the near future.

The primary focus of the UCITS V Directive is investor protection. The new directive is also expected to introduce remuneration and depositary measures in line with the Alternative Investment Fund Managers Directive.

March 2011

The AMF has published two guides relating to the key investor information document (KIID) required by the UCITS IV Directive.

The first guide is published to help asset management companies switch from the simplified prospectus to the KIID and the second to prepare the KIID itself.

The AMF’s guide on the switch from the simplified prospectus to the KIID sets out the scope of application, calendar and technicalities of the switch to the KIID format.

The AMF has decided to extend the KIID to non-UCITS mutual funds and real estate collective investment schemes that are accessible to retail investors, as well as UCITS-compliant products. The AMF believes that this will provide investors with clearer information and help them to compare different products.

The KIID is required for all applicable funds created on or after 1 July 2011. UCITS funds existing before this date have until 1 July 2012 to replace the simplified prospectus with the KIID, whilst the existing non-UCITS products mentioned above have until 1 July 2013.

The second guide deals the KIID’s preparation and contents. This guide also covers the "Note Détaillée" (detailed note) for collective investment schemes and reiterates positions expressed previously in the guide relating to the drafting of CIS prospectuses, which will be replaced by this new guide effective as from 1 July 2011.

View “Guide de passage du prospectus simplifié au document d’information clé pour l’investisseur” (158 KB pdf) (in French)

View “Guide des documents d’information des OPCVM et OPCI” (844 KB pdf) (in French)

March 2011

On 14 December 2010, the European Commission published a consultation paper on the undertakings for collective investment in transferable securities (UCITS) depository function and on UCITS managers’ remuneration.

The Commission has now published a summary of the feedback it received to this consultation. The summary states that the responses to the consultation revealed very wide support for the Commission's initiatives to improve investor protection and enhance fair competition between all UCITS fund providers.

With regard to the UCITS depository function, the responses highlighted several points of concern surrounding the clarification of UCITS depositary duties and liability regimes. These were:

• Alignment with the Alternative Investment Fund Managers Directive (AIFMD). The responses highlighted that the UCITS review should be conducted in accordance with the requirements of the AIFMD to enhance consistency. However, it should not be aligned entirely with the AIFMD, as UCITS investors addressed through fund passporting are mostly retail investors.
• Liability regime. The responses revealed a concern over the reference to 'force majeure', to allow a liability discharge of the UCITS depository, and the obligation to return 'lost' assets 'with no delay'. A majority of responses highlighted the fact that the key outstanding question is when an asset can be considered 'lost'.
• UCITS holders' rights. Respondents felt that the UCITS unit holders' and shareholders' rights should be clarified and aligned, regardless of the legal form of the UCITS fund.
• Supervision. The majority of respondents believe that the competencies of supervisors should be further harmonised and that competent national authorities should be allowed to enforce EU rules in an effective and harmonised manner.

With regard to the managers' remuneration policy, the majority of respondents stressed that the remuneration rules should be adjusted to be more suitable to the UCITS model.

The summary concludes by stating that the views the Commission has received will now feed into the impact assessment study that will be produced by the European Commission Directorate General Internal Market and Services when publishing its proposal for amendments to the UCITS Directive next July.

View Feedback on public consultation on the UCITS V, 17 February 2011

February 2011

Maples and Calder has confirmed that the implementing measures of the UCITS IV Directive will come into force in Ireland on 1 July 2011. On 17 February 2011 the Central Bank of Ireland (“CBI”) opened their consultation on UCITS IV and in particular the provisions regarding the Business Plans of Management Companies and Self-Managed Investment Companies.

Key dates

Existing Management Companies must file updated versions of their Business Plans with the CBI no later than 30 April 2011 in order that they be reviewed and considered by the CBI prior to the implementation date of 1 July 2011.

Business Plans

Existing Self-Managed Investment Companies will not be required to file their updated Business Plans. Instead self-managed investment companies must confirm in writing before 1 July 2011 that their Business Plans have been updated. The CBI may request Business Plans at a later stage for review and approval.

February 2011

The AFG, The Association Française de la Gestion Financière (the French Asset Management Association) has recently concluded a short consultation on proposed tax changes in order to attract “master funds” under the new UCITS IV rules.

Collective investment funds in France are split into two categories, SICAVs (Société d'Investissement à Capital Variable) and FCPs (Fonds commun de placement).

The AFG indicated that SICAVs are more difficult to market to foreign investors in practice. This is mainly due to the fact that the distribution of dividends by the SICAVs is currently subject to a 25 per cent withholding tax whereas distribution by a FCP is capped to the portion of the unit made up from French sourced dividend. Under the current system, payments made by French domiciled master funds to their foreign feeder funds under UCITS IV would therefore be subject to tax.

The AFG then proposed that SICAVs be able to separate their investment revenues for tax purposes by geographical origin and type. The withholding tax will apply only to the portion of the dividend made up from dividends from French equity investments, as it is already the case in respect of distribution made by a FCP. It also proposed that the simplified procedure which enables the foreign investor to benefit from the direct application of the provisions of the double taxation treaty entered into between France and its state of residence also apply in respect of distribution made by a SICAV.

The portion coming from foreign sources and French fixed-income sources, such as bonds and negotiable debt securities will be exempt from the withholding tax.

January 2011

The European Securities and Markets Authority has published the responses to the consultation published by the Committee of European Securities Regulators on guidelines on risk measurement and the calculation of global exposure for certain types of structured UCITS.

View Responses - Consultation on CESR’s Guidelines on Risk Measurement and the Calculation of Global Exposure for certain types of structured UCITS, 13 January 2011

January 2011

On 11 January 2011 the French regulator, the AMF (the autorité des marchés financiers) launched a one month consultation period to consider the proposals for transposition of the revised Undertakings for Collective Investment in Transferable Securities Directive (UCITS IV). The AMF has pledged to publish details of the legislation implementing ICITS IV into French law by the end of March 2011 with the new legislation coming into force on 1 July 2011.

France looks due to be the second member state to implement UCITS IV after Luxembourg which implemented UCITS IV on 1 January 2011.

View “Etat des lieux et perspectives de la régulation de la gestion d’actifs à l’occasion de la transposition de la directive OPCVM IV” (in French).

January 2011

The European Commission has launched a consultation on legislative changes to the UCITS depositary function and to the UCITS managers’ remuneration. The consultation will introduce remuneration and depository policies aligned with the alternative investment fund managers (AIFM) directive.

The consultation paper was published in December with the objective of publishing a draft UCITS V directive in July 2011, the same month UCITS IV Directive will have to be implemented into Member States’ national laws.

A central part of the consultation is reserved for the role of depositaries. The Commission is asking questions on how the duties of depositaries can be further clarified, including their eligibility and liability and how they can be effectively supervised in the EU. Furthermore, to curtail excessive risk-taking and to ensure that remuneration policies are consistently applied across the financial sector, it seeks comments on possible new rules on remuneration policies for UCITS managers.

Interested parties are invited to send their comments to the Commission by 31 January 2010.

View the Consultation Document, 14 December 2010.

The Committee of European Securities Regulators (CESR) has published a suite of documents that make up its guidance on the Key Investor Information Document (KII). The suite comprises:

• Guidelines - Selection and presentation of performance scenarios in the for structured UCITS. The guidelines cover the factors to be taken into account when choosing the scenarios, such as the features of the formula (e.g. a knock-out feature or a guarantee with a conditional floor) and on the link between the market conditions and the outcome for the investor. There is also guidance on how the scenarios themselves should be presented, including on the choice between using tables or graphs. Finally, the annex contains examples of performance scenarios using a table- or graph-based presentation.
• Guidelines - Transition from the simplified prospectus to the KII. The guidelines set out what CESR considers to be the appropriate approach that management companies should take during the transitional period when: (i) making alterations to an existing SP, (ii) launching a new UCITS or investment compartment (sub–fund), (iii) adding share classes, (iv) passporting a new or existing UCITS into another Member State and (v) undertaking a merger or setting up a master-feeder structure as allowed by the revised UCITS Directive.
• CESR’s guide to clear language and layout for the KII. This guide describes ways of meeting the regulatory objective for KII to achieve the clarity and simplicity of presentation that is required by retail investors. This guide is intended as a statement of good practice, and does not constitute binding guidance on UCITS or their management companies.
• CESR’s template for the KII. This template reflects the content of Commission Regulation (EU) 583/2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards 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 a website. It shows the type of contents and layout that UCITS management companies would be expected to follow for a standard UCITS.
• Feedback statement - CESR’s level 3 guidelines on the selection and presentation of performance scenarios in the KII for structured UCITS. In this document CESR gives feedback on the responses received to its earlier consultation on level 3 guidelines on the selection and presentation of performance scenarios in the KII for structured UCITS. The main changes made to the guidelines involve additional clarification on the circumstances in which the scenarios should be updated, as well as clarifying the link between the outcome from the investor’s perspective and the market conditions.

The guidelines will enter into force in line with the transposition deadline for the revised UCITS Directive (1 July 2011).

View publication of the set of guidance on the Key Investor Information Document, 20 December 2010

The FSA and HM Treasury have published a joint consultation paper dealing with the proposals for transposition of the revised Undertakings for Collective Investment in Transferable Securities Directive (UCITS IV).

Responses to this consultation paper must be received by 21 March 2011.

Luxembourg has become the first European Union Member State to transpose the UCITS IV directive into national law. Various provisions of the legislation will come into force as of 1 January 2011 following the approval of the new law by the Luxembourg Parliament on 16 December 2010.

Luxembourg’s implementation of UCITS IV comes ahead of France, the UK and Ireland. The UK is yet to publish a consultation paper on the directive. See Status of the implementation of the UCITS IV directive.

The legislation replaces the current law of 20 December 2002 on undertakings for collective investment, the legislation that implemented the UCITS III directive in Luxembourg.

In addition to transposing the UCITS IV directive into national law, the new legislation implements additional legal changes for both UCITS and non-UCITS funds as well as management companies.

From the date of entry into force of the new law, existing UCITS, and UCITS created between the date of entry into force of the new law and 1 July 2011, may choose to be subject to the new law or remain under the 2002 law until 1 July 2011 (exemptions apply in certain cases, such as closed-end UCITS). But from 1 July 2011, all UCITS will automatically become subject to the new legislation.

UCITS which choose to remain under the 2002 law will have until 1 July 2012 to replace their simplified prospectuses with a KII document. Those subject to the new legislation must produce a KII document. The legislator notes, however, that UCITS which choose to be subject to the new law may encounter practical difficulties in cross-border situations, such as with host Member States in which the UCITS is distributed which continue to apply the provisions of the previous regime. Similar transitional provisions are foreseen for management companies of UCITS.

All existing non-UCITS funds will be subject to the new law immediately. The same timescales apply to the management companies of these categories of funds; most other provisions of the legislation, including tax provisions, take effect on 1 January 2011.

December 2010

UK

The Financial Services Authority (the FSA) plans to issue a consultation paper before the end of 2010 regarding the implementation of the UCITS IV Directive.

HM Treasury is also expected to consult on implementing the UCITS IV Directive in 2010.

In his speech on 22 November 2010 Mark Hoban (Financial Secretary to the Treasury) announced that in order to help competitive UK firms take advantage of this opportunity, the UK would launch a new authorised fund regime for a tax transparent vehicle. In his speech Mr Hoban said that one of the key features of the UCITS IV Directive is the fact that it could see the widespread introduction of a master-feeder fund structure across Europe. However, as things currently stand, it is unlikely that firms will establish master funds in the UK due to our lack of a suitable tax-transparent vehicle. See “Speech by the Financial Secretary to the Treasury, Mark Hoban MP, to PricewaterhouseCoopers”, 22 November 2010.

France

For the implementation of the UCITS IV Directive, the Board of the Financial Markets Authority (AMF) set up an asset management stakeholders’ committee in November 2009. The committee’s report, based on stakeholder dialogue, sets out 14 recommendations linked to three major strategic principles:

1. Implement the directive literally into French law without adding national rules. In return, the AMF would work within ESMA to ensure pan-European harmonisation of investor protection.
2. Refocus asset management regulation on supervising fund distribution, in three ways:
   • strengthen supervision of the distribution of all French and foreign investment funds marketed in France;
   • ensure that distributors provide understandable information to investors both at the point of sale and throughout the investment period, notably in the event of a material change affecting the fund. The AMF could help the industry to provide the disclosures needed for investors to take informed decisions by preparing a standard letter that could form the template of the individual letters to be issued to investors in the event of a material change. Furthermore, to make it easier to compare information provided to investors, the report suggests extending the use of the Key Investor Information Document (KIID) to all funds marketed to retail investors in France, including those not subject to the directive;
   • revisit the distribution rules to clarify the distributor’s duties and make sure that the investor is properly supported from purchase to disposal of the investment.
3. Take steps to make French financial markets more competitive. The committee suggests three types of measures:
   • adopting the regulatory measures deemed necessary to encourage the asset management industry to set up and expand in France. These include simplifying French regulations for CIS and management companies to harmonise with those adopted by other Member States, while at the same time ensuring a high level of investor protection. Examples include simplifying the authorisation procedure for management companies and products, simplifying the regulatory classification of French funds, facilitating intra-group delegation of financial management and reviewing the rules on disclosing fund charges;
   • introducing technical solutions, such as a fund master file for the Paris market, order marking and direct orders, to lift the barriers to the international distribution of French funds;
   • taking steps to promote French regulations and funds abroad.

The Treasury and the AMF have commenced work on the implementation of the Directive following the recommendations of the committee. To enable the industry to benefit from the opportunities presented by the UCITS IV Directive at the earliest, the French rules will be put to consultation by the end of the year.

Germany

The Federal Ministry of Finance started a consultation of the "discussion draft" of the amended Investment Act (the Draft InvG). The Draft InvG contains the implementation of the new European Investment Funds Directive 2009/65/EC, as well as a partial implementation of the four implementation measures enacted in the course of the UCITS IV implementation. The following measures shall be implemented by the Draft InvG:

• Introduction of the possibility of cross-border collective portfolio management by extending the European Passport for management companies.
• Facilitation of cross-border fund mergers.
• Introduction of Master-Feeder-Structures.
• Introduction of "key investor information".
• Facilitation of the notification procedure mandatory for UCITS compliant investment funds prior to cross-border distribution.
• Improvement of co-operation of the authorities which are in charge of supervision and approval.

Ireland

The Department of Finance is in discussions with the Central Bank regarding a preliminary draft of the Irish Regulations transposing the UCITS IV Directive. Once the discussions conclude, the draft Regulations will be sent to Parliamentary Counsel for formal legal drafting. The Regulations are expected to be finalised on or around Easter 2011.

The Central Bank is in discussion with the Irish Funds Industry Association regarding the authorisation and supervision of Irish UCITS management companies and the Central Bank intends to provide for a full consultation once these discussions have concluded.

Italy

No consultation paper nor draft bill have yet been issued regarding the implementation of the UCITS IV Directive.

The asset management industry association (Assogestioni) has been assisting on the implementation of the UCITS IV Directive by establishing a task force group aiming at making suggestions to the Italian authorities and by regularly submitting comments in the context of the CESR consultations. In addition, industry operators have commented that a full implementation of the UCITS IV Directive will definitively require a radical change in the taxation applicable to Italian UCITS.

Luxemburg

Luxembourg deposited a bill with Luxembourg Parliament on 6 August 2010, in order to implement Level 1 provisions of the UCITS IV Directive into national law.

Beyond the minimum requirements imposed by the UCITS IV Directive in relation to the management company passport, the cross-border merger, the master-feeder structures or the key information document (KIID), Luxembourg aims to further modernise its legal and regulatory environment to meet the investment industry's needs. The bill as submitted to Luxembourg Parliament notably offers to asset managers the possibility to undertake cross-investment within the same investment vehicle. The bill further proposes to abolish the subscription tax for tracker funds.

The draft text provides for a transitory period according to which existing UCITS and management companies as well as UCITS and management companies created between the entering into force of the new law and 1 July 2011 have the choice until 1 July 2011 to either remain subject to the existing law dated 20 December 2002 on undertakings for collective investments or to convert to the new regime. It is worth mentioning that the creation of a new sub-fund within an existing UCITS will not challenge the option given to the fund, such option being exercised for the UCITS as a whole.

As from 1 July 2011, all UCITS and management companies will be subject to the new regime. However, in relation to the KIID, UCITS will have until 1 July 2012 to replace their simplified prospectus.

The Luxembourg fund industry is now working on the implementation of Level 2 measures adopted by the European Commission earlier this summer.

The Netherlands

The Dutch Ministry of Finance has published a consultation on the implementation of Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302) (UCITS IV). The Dutch Act on the Financial Supervision (Wft) shall be amended due to the implementation of UCITS IV. The proposed amendments to the Wft include simplifying the notification procedure, the introduction of a European passport for the manager of UCITS, simplifying (cross-border) mergers between UCITS, creating a legal framework for master-feeder structures and providing essential information for investors in financial leaflets. The first two proposed changes shall be further developed in the Decree on Market Access of Financial Undertakings pursuant to the Wft. The other proposed changes shall be further developed in the Decree on the Supervision of Conduct of Financial Enterprises pursuant to the Wft. A consultation on these amendments has not yet been published.

Further information on the consultation on the implementation of the UCITS-IV (in Dutch) can be found on the website of the Dutch Ministry of Finance.

December 2010

On 8 December 2010 the European Commission launched a consultation on the review of the Markets in Financial Instruments Directive (MiFID), which sets out significant changes to MiFID and includes proposals to strengthen investor-protection rules.

The consultation paper proposes to address the issue of the increasing number of sophisticated strategies found within UCITS-wrapped vehicles. In its review, the Commission is proposing a change to the way UCITS are classified under MiFID, in a move that would stop most complex UCITS funds from being sold freely to retail investors.

According to the Commission, UCITS funds may not now be “automatically" considered as "non-complex”. Under MiFID, non-complex products, such as UCITS funds, can be sold freely without the need to assess the investor’s knowledge and experience prior to sale.

In its consultation document, the Commission says: “A differentiation could also be introduced for UCITS […] in order to further refine the categories of instruments which may be subject to the execution only regime. The current framework, where UCITS are always classified as non-complex instruments, could evolve in order to take into account the adoption of complex portfolio management techniques in the management of some UCITS.”

The purpose of the consultation is to gather input from all stakeholders in order to inform the legislative proposals due in the spring of 2011. The deadline for replies is 2 February 2011.

Press release: Financial services: improving European rules for a more robust framework for all financial actors and instruments, 8 December 2010

Consultation paper: Consultation on the review of the Markets in Financial Instruments Directive (MiFID), 8 December 2010

November 2010

The Committee of European Securities Regulators (CESR) has published a Consultation Paper which sets out draft guidelines on risk measurement and the calculation of global exposure for certain types of structured UCITS.

Once the draft guidelines have been finalised they will be incorporated into the guidelines that CESR published in July on risk measurement and the calculation of the global exposure and counterparty risk.

In the Consultation Paper CESR proposes a specific approach to the application of the guidelines on the calculation of the global exposure for certain types of structured UCITS. The approach CESR proposes consists of the calculation, for each scenario to which investors can be exposed at any one time, of the global exposure using the commitment approach. Under this approach each scenario must comply at all times with the 100 per cent global exposure limit using the July CESR guidelines. CESR believes that the scope of this alternative approach should be clearly defined and has set out a list of criteria with which structured UCITS should comply with.

The deadline for comments on the Consultation Paper is 31 December 2010.

View Consultation on CESR’s guidelines on risk measurement and the calculation of global exposure for certain types of structured UCITS, 18 November 2010.

November 2010

A report published by Celent, a consultancy based in Boston, indicates that fund managers may achieve annual savings of €2 billion to €3 billion as a result of UCITS IV by making appropriate use of the master feeder structure provision. The report further suggests that the master feeder structure will save fund managers 10–15 per cent on operations and custody costs. For a summary of the report, please see UCITS IV: Implications for the Asset Management Industry in Europe.

London-based Alpha Financial Markets Consulting published similar findings in August 2010 suggesting savings of €2 billion to €3 billion a year by making full use of the master-feeder fund structure arrangements. However, the consultancy believes that those firms not actively investigating and planning for UCITS IV are likely to be both delaying financial benefit and potentially duplicating product development work, as product initiatives undertaken in isolation over the next 12 months are likely to require revisiting post adoption of UCITS IV. In their view, the winners are likely to be those organisations that develop a coherent product strategy and roadmap for the next 12 – 24 months, taking advantage of UCITS IV provisions, cost efficiencies, fee alignment and wider rationalisation. For further details, please see the press release by Alpha Financial Markets Consulting, August 2010: FTfm - UCITS IV offers huge savings.

However any cost saving may take some time. According to Michael Ferguson, asset management leader at Ernst & Young Luxemburg, the general consensus in the industry is that the use of some of the opportunities offered by UCITS IV - such as master feeder structures and the management company passport - will be slow. In his view, the real challenge will be around the implementation of compulsory measures such as producing and distributing the Key Investor Information (KII) document and upgrading management companies. The comments were made in Ernst & Young's annual guide “Investment Funds in Luxemburg - technical guide September 2010”, which can be downloaded at the Ernst & Young website Investment Funds in Luxembourg - 2010.

This reflects the main concerns expressed by the Investment Management Association (IMA) regarding the effectiveness of the UCITS IV fund mergers back in November 2009 in its response to a consultation paper published by the Committee of European Securities Regulators (CESR) relating to certain issues under UCITS IV. IMA noted that the information requirements on mergers are far too prescriptive and will overload investors. When the receiving fund is far larger that the merging fund, the costs of sending information to the receiving fund's shareholders could potentially hinder mergers. IMA further noted that tax issues can also act as barrier for cross-border fund mergers. Without clear European rules, a cross-border fund merger can result in a taxable event for the unit holder and therefore crystallise an unrealised gain. This can completely nullify the benefits of the UCITS IV fund merger provisions unless they are resolved by the European Commission with legislative action. Please see IMA's response to Consultation paper: technical advice on level 2 measures relating to mergers of UCITS, master feeder UCITS structures and cross-border notification of UCITS.

October 2010

A survey conducted in September 2010 by KNEIP, an independent service provider to the fund industry, asked 43 European fund managers and administrators their opinions on key trends, challenges and opportunities in the European fund industry with specific reference to UCITS IV and the Key Investor Information (KII) document. For an executive summary of the survey, please click here (pdf 224 KB).

Almost 70 per cent of the European fund managers and administrators surveyed believed a KII document would cost more than the existing simplified prospectus and 50 per cent of respondents expected the introduction of KII documents to increase production costs by between 10-20 per cent.

Further 75 per cent of respondents expressed concern about adequate distribution, with 35 per cent having worries about getting the KII document to the investors through the distribution network.

60 per cent of those questioned have doubts about meeting the 1 July 2011 deadline. However despite all these issues nearly 70 per cent of respondents think that the KII document will bring increased comparability of products and ease of understanding for investors.

For further details on the the timing and contents requirements for the KII document, please see our Countdown to UCITS IV briefing.

October 2010

The publication of the so-called level 2 measures to the UCITS-IV Directive on 10 July 2010, together with other guidelines since published by the CESR, means that it is already possible to identify the major changes required in each member state’s domestic legislation and to start project planning.

Countdown to UCITS IV is the first in a series of briefings that we will be publishing on technical issues arising from UCITS IV implementation and discusses issues that need to be planned for now in relation to developing the Key Investor Information document or KII, which presents some significant challenges.

View the full Countdown to UCITS IV briefing.

September 2010

An industry research report entitled Analysis of the tax implications of UCITS IV, published jointly on 15 September by the European Fund and Asset Management Association (EFAMA) and KPMG’s European Investment Management practice is a timely reminder of the significant tax complications that would currently prevent the industry taking maximum advantage of the efficiency measures introduced by UCITS IV.

The report makes a number of recommendations to resolve the tax barriers preventing an efficient single market:

Fund Mergers: certain Member States currently tax fund mergers at the investor level, which leads to a situation where investors would pay taxes on unrealised gains. In order to make UCITS IV a success, the report recommends that fund mergers should be carried out in a tax-neutral manner at the fund and investor level.

Management Company Passport: in certain Member States, the management of a fund cross border could lead to a fund becoming tax resident (and therefore liable for tax) in the Management Company’s state of residence. The report recommends that the fund should only be taxable in the country where the fund is established or registered, even if its Management Company is resident elsewhere.

Master-Feeder Fund Structure: certain Member States levy withholding taxes on cross-border dividend distributions to foreign feeders, or impose tax on redemptions in the country where the master fund is located. The report recommends that there should not be tax leakage between the master and feeder fund in order for the master–feeder structures to become a reality and offer investors a cost effective product.

September 2010

CESR published the following four consultation papers on 20 July 20 2010:

• Guidelines on the selection and presentation of performance scenarios in the Key Investor Information document (KII) for structured UCITS (CESR/10-530);
• Guidelines for clear language and layout (CESR/10-532);
• Guidelines for the transition of the simplified prospectus to the KII (CESR/10-672); and
• CESR’s template for the KII (CESR/10-794).

These consultations closed on 10 September 2010.

September 2010

The final version of the UCITS IV Directive was published in the official gazette of the EU on 17 November 2009. It is a framework directive whose general provisions are expanded upon by implementing measures contained in secondary legislation.

In accordance with this framework, the Commission has adopted four implementing measures, i.e. two regulations and two directives, which were all adopted on 01 July 2010 and published on 10 July 2010:

• Commission Regulation (EU) No. 583/2010 – concerning key investor information (KII Regulation);
• Commission Regulation (EU) No. 584/2010 – concerning distribution notification procedures and use of electronic filing (Notification Regulation) ;
• Commission Directive 2010/42/EU – concerning fund mergers, master feeder structures and notification procedures (Structure Directive); and
• Commission Directive 2010/43/EU – concerning conflicts of interest, conduct of business, risk management (Organisation Directive).

Both Regulations will have direct effect in EU member states as of 01 July 2011, unlike the Directives which must first be integrated into national law.

The KII Regulation is complemented by two guidelines which were published by the CESR on July 01, 2010. These are:

• “CESR’s guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document” (Costs Guidelines); and
• “CESR’s guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the Key Investor Information Document” (SRR Guidelines).

Further guidelines will follow, including those resulting from current consultations on the Key Investor Information document (KII).

The Committee of European Securities Regulators (CESR) has published four consultation papers on 20 July 2010 on the Key Investor Information (KII) document:

1. Consultation Paper - CESR’s template for the Key Investor Information document

The template reflects the content of Commission Regulation (EU) 583/2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards 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 a website. It shows the type of contents and layout that UCITS management companies would be expected to follow for a standard UCITS.

The deadline for comments on the consultation paper is 10 September 2010.

View Consultation Paper - CESR’s template for the Key Investor Information document, 20 July 2010

2. Consultation Paper - A guide to clear language and layout for the Key Investor information document

The guide is intended to help firms draft a KII by giving pointers to widely accepted good practice.

The deadline for comments on the consultation paper is 10 September 2010.

View Consultation Paper - A guide to clear language and layout for the Key Investor Information document, 20 July 2010

3. Consultation Paper - CESR’s guidelines for the transition from the Simplified Prospectus to the Key Investor Information document

The consultation paper considers some practical implications of Article 118(2) of the revised UCITS Directive (2009/65/EU), which allows UCITS management companies up to 30 June 2012 to implement KII as referred to in Article 78.

The draft guidelines produced by CESR set out what it considers to be the appropriate approach that management companies should take during the transitional period when:

• Making alterations to an existing simplified prospectus.
• Launching a new UCITS or investment compartment (sub-fund).
• Adding share classes.
• Passporting a new or existing UCITS into another Member State.
• Undertaking a merger or setting up a master-feeder structure as allowed by the revised UCITS Directive.

Overall, CESR takes a pragmatic view that in most circumstances the simplified prospectus can continue to be offered up until 30 June 2012, where the national law and regulation of the UCITS home State allows it. The exception to this is for new UCITS authorised after 30 June 2011, where the KII should be prepared from the outset. In addition, a UCITS that continues to use the SP after 1 July 2011 may adapt it to reflect the requirements of KII.

The deadline for comments on the consultation paper is 10 September 2010.

View Consultation Paper - CESR’s guidelines for the transition from the Simplified Prospectus to the Key Investor Information document, 20 July 2010

4. Consultation Paper - CESR’s Level 3 guidelines on the selection and presentation of performance scenarios in the Key Investor Information document for structured UCITS

The revised UCITS Directive (2009/65/EU), which must be implemented in all Member States by 1 July 2011, requires, for structured UCITS and other comparable UCITS, the use of prospective scenarios as presentation of past performance is not relevant. In order to ensure comparability between structured UCITS, the consistency in the choice of prospective scenarios and the format of the presentation of those scenarios, CESR has developed draft guidelines with a view to harmonising the selection and presentation of scenarios.

The deadline for comments on the consultation paper is 10 September 2010.

View Consultation Paper - CESR’s Level 3 guidelines on the selection and presentation of performance scenarios in the Key Investor Information document for structured UCITS, 20 July 2010

On 2 July 2010, the Committee of European Securities Regulators (CESR) published two guidelines relating to the Key Investor Information (KII) document:

1. CESR publishes guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document

On 2 July 2010, the Committee of European Securities Regulators published guidance on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document.

View CESR publishes guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document, 2 July 2010

2. CESR publishes guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the Key Investor Information Document

On 2 July 2010, the Committee of European Securities Regulators published guidance on the methodology for calculation of the synthetic risk and reward indicator in the Key Investor Information Document.

View CESR publishes guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the Key Investor Information Document, 2 July 2010

The Commission has adopted two directives and two regulations which implement the UCITS IV on 1 July 2010. Final texts of these implementing measures were published in the Official Journal on 10 July 2010. They comprise:

• Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards 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 a website.
• Commission Regulation (EU) No 584/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards the form and content of the standard notification letter and UCITS attestation, the use of electronic communication between competent authorities for the purpose of notification, and procedures for on-the-spot verifications and investigations and the exchange of information between competent authorities.
• Commission Directive 2010/42/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure.
• Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company.

View Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards 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 a website, 12 July 2010

View Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards 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 a website, 12 July 2010

View Commission Directive 2010/42/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure, 12 July 2010

View Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company, 12 July 2010

The purpose of this blog is to provide an update on the progress of the Directive until the deadline for implementation in all Member States in 01 July 2011. Accompanying our series of specialist briefings “Countdown to UCITS IV”, we will be providing updates and insight into the issues as they unfold.