The first UCITS Directive (Directive 85/611/EC) was adopted on 20 December 1985 and preceded by a long legislative process. Its aim was to facilitate cross-border offerings of investment funds to retail investors. The Directive therefore allowed any fund authorised as UCITS in its home country to market its units in other EU Member States by simply notifying the host Member State of the intention to market the fund’s units or shares on its territory, without having to go through a process of prior registration in each country of sale. Luxembourg was the first country to implement the Directive into national law. A long and steady development consisting in the creation of UCITS had started.
Rapidly though, the need for further adapting the Directive to developments on the financial markets and to expand its scope of application beyond pure transferable securities was felt. An amended proposed revision to the Directive was tabled in July 1994, but considering the reticence of certain Member States with regard to the inclusion of cash funds as well as the legal concerns shared by many industry players with regard to the liberalization of the depositary regime, no common position could be reached by the Council of Ministers of the EU. In early 1995, a compromise was found on limiting the extension of the Directive’s scope to fund of funds and master-feeder structures. But then no further progress could be made and the European Commission decided to simply abandon the “UCITS II” project. It actually never saw the light of the day.
On 17 July 1998, two new Commission proposals for a modification of the UCITS Directive were published, the so called “UCITS III” package. Although the industry favoured the adoption of a single Directive, two new Directives were finally adopted on 21 January 2002. Directive 2001/108/EC widened the investment possibilities of UCITS to include new instruments (money market instruments, units of other UCIs, bank deposits and financial derivatives), and eased investment restrictions for index tracker funds. Directive 2001/107/EC detailed minimum standards which a UCITS management company should comply with in terms of capital and risk control, rules of conduct and conditions relating to technical and human resources. Once again, Luxembourg was the first country to transpose the innovations into its national law.
Significant changes to the UCITS legislation were made by Directive 2009/65/EC. “UCITS IV” introduced a passport allowing a UCITS to be managed by a management company authorised and supervised in a Member State other than its home Member State. Moreover, it offered new opportunities for market consolidation and rationalisation of UCITS structures through the possibility of merging UCITS both on a domestic and cross-border basis. Another feature enabled the pooling of fund assets via master-feeder structures, where one or more feeder funds invest the cash received from its own investors in a master fund. The simplified prospectus was replaced by a key investor information document (KIID), which is designed to provide the investor with important information about the fund in a non-technical language. Last but not least, the notification procedure for the marketing of fund units or shares in another country was simplified by introducing a regulator-to-regulator approach.
On 28 August 2014, a directive aiming at introducing further amendments to the UCITS Directive, commonly referred to as “UCITS V”, was published in the Official Journal of the EU. It focuses on three areas:
- clarification of the depositary’s functions, including new rules on delegation of the safe-keeping of assets and harmonisation of the rules governing the depositary’s liability;
- introduction of rules on remuneration policies; and
- harmonisation of minimum administrative sanctions and measures for breaches of key provisions of the Directive.
Member States had to implement the new rules into national law by 18 March 2016.
Although UCITS V had not yet been adopted, the European Commission published in July 2012 another wide-ranging consultation paper concerning the future framework for investment funds. The consultation raised a series of issues and policy options aimed at maintaining investor confidence in money market funds. Moreover, an important focus was a UCITS fund manager's employment of so-called efficient portfolio management (EPM) techniques. EPM includes securities lending and repurchase transactions as well as the management of collateral that is received or granted to secure these transactions. The consultation also raised the more long-term policy challenge that arises in the area of investment funds: how to create a European investment culture where retail investors take a longer-term and strategic view when placing their savings with the providers of fund products and have access to products suited to this.
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