Investment Funds - UCITS funds
UCITS is the acronym for “Undertaking for Collective Investment in Transferable Securities”. It refers to European Directive 85/611/EEC dated 20 December 1985, which set up a single regulatory regime across the European Union for open-ended funds investing in transferable securities such as shares and bonds, with a view to defining high levels of investor protection. This Directive regulates the organisation, management and oversight of such funds, and imposes rules concerning diversification, liquidity and use of leverage.
UCITS may be set up in an “umbrella” structure whereby various sub-funds are created to operate as distinct portfolios under one legal entity. Accordingly, a UCITS may have several sub-funds, each of which may pursue different policies and attract different investors. UCITS may take a contractual (“FCP”) or a corporate (“SICAV”) form. Investment funds that fulfil the requirements of the UCITS Directive can be freely marketed, under the European passport, throughout the European Union.
Although UCITS were initially intended only to be marketed across the European Union, the UCITS brand is now recognized as the only truly globally distributed investment fund product. As a result, an increasing number of asset managers are establishing UCITS funds with a clearly defined global distribution strategy.
A growing number of countries in Asia and Latin America have accepted UCITS as providing a stable, high quality, well-regulated investment product with significant levels of investor protection. And Luxembourg has successfully positioned itself as the global leader for cross-border distribution of investment funds, with the result that today more than 75% of UCITS funds distributed internationally are based in Luxembourg.
A factsheet summarising key steps to set up a UCITS fund in Luxembourg is available to download.
Moreover, the section “Legal and technical” includes detailed information on the legal and regulatory framework for UCITS funds.
Recent developments: UCITS IV
“UCITS IV”, and more precisely Directive 2009/65/EC provides the latest amendments to the UCITS legislation, which will have to be implemented into national law by 1 July 2011. The simplified prospectus will be replaced by the Key Information Document as from July 2011.
The European Commission provides an overview of the recent developments in the revision of the UCITS directive.
The new regime will introduce the following major legislative changes:
- Management Company Passport:
Pursuant to the current UCITS legislative framework, a UCITS, a management company and its depositary must be located in the same Member State. All activities related to collective portfolio management and administration of the UCITS are subject to the law of one Member State (i.e. the Member State in which the management company is situated) and accountable to a single enforcement authority.
The introduction of the management company passport under UCITS IV will allow a UCITS to be managed by a management company authorised and supervised in a Member State other than its home Member State
- Fund Mergers:
The directive foresees a regime for both cross-border and domestic mergers of UCITS, introducing a basic principle that all UCITS are entitled to merge regardless of their structure (e.g. corporate, unit trust or contractual).
The law of the merging UCITS home Member State shall entrust either a depositary or an independent auditor with validating the criteria adopted for the valuation of the assets and the liabilities on the merger date, the cash payment per unit and the calculation method of the exchange ratio as well as the actual exchange ratio determined at the merger date.
- Master-Feeder Structures:
In order to foster the efficient pooling of assets, the Directive allows for master-feeder structures.
A feeder UCITS is a UCITS or an investment compartment which invests at least 85% of its assets in units of another UCITS or an investment compartment of another UCITS.
A master UCITS is a UCITS or an investment compartment of a UCITS which must:
- have among its unit-holders at least one feeder UCITS;
- not be itself a feeder UCITS;
- not hold units of feeder UCITS.
- Key Investor Information:
The simplified prospectus will be replaced by a key investor information document (KID), which contains fair and clear information which is not misleading.
It shall provide information on the essential elements in respect of the UCITS concerned and clearly specify where and how to obtain additional information on the proposed investment. These essential elements shall be understandable by the investor without any reference to other documents.
The document should be written in a concise manner using non-technical language.
- Notification Procedure:
If a UCITS proposes to market its units in a Member State other than its home Member State, it shall first submit a notification letter to the competent authorities of its home Member State. The competent authorities of the UCITS home Member State shall transmit the complete documentation to the competent authorities of the Member State in which the UCITS proposes to market its units (so called regulator-to-regulator notification procedure).
Upon the (electronic) transmission of the documentation, the competent authorities of the UCITS home Member State shall immediately notify the UCITS that the transmission has taken place. The UCITS may access the market of the UCITS host Member State as of the date of this notification.
- Supervision:
The Directive encourages the exchange of information between supervisors, harmonises the powers of supervisors and allows for the possibility of on-the-spot verifications and investigation, consultation mechanisms and mutual-aid mechanisms for the imposition of penalties, in particular.