The term “undertaking for collective investment in transferable securities” (UCITS) should not require much explanation, it speaks for itself: It is an undertaking for collective investment (or “investment fund”) which invests in securities, i.e. in stocks, bonds, stocks and bonds, short term treasury instruments and cash.
If we pay special attention to this type of fund, it is not for its investments in securities, but because “UCITS” is the name of an investment fund category that is strictly regulated in the European Union (EU).
Like any investment product intended for the general public, an investment fund must be authorized and is constantly monitored by the financial sector supervisory authorities of the country in which it is to be offered to investors. However, the legal provisions and regulations to be observed by investment funds in order to have this authorization used to be very different from one country to another, which often prevented savers from investing in a foreign UCI and investment funds from being sold abroad.
To remedy this situation, the European Commission drafted a Directive laying down a number of rules to be observed by the UCI. The aim was twofold:
- to create a true European single market for investment funds which allows a fund to offer its shares in all EU member countries and investors to freely invest in the fund of their choice, regardless of its country of origin;
- to offer a high level of investor protection.
This first European investment funds Directive entered into force in 1985. It was exclusively focused on the “undertakings for collective investment in transferable securities”, and especially on those that are offered to retail investors.
The Directive requires the fund
- as the name suggests, to exclusively invest in listed securities,
- to be an “open” fund (allowing investors at any time to withdraw their money and to leave the fund), and
- to distribute its investments across a large number of different securities in order to reduce the risks associated with the various investments.
“UCITS” has become a quality label
Investment funds are not obliged to comply with the EU regulation. Funds that are only aimed at a handful of institutional investors are automatically excluded from its scope, as well as those who invest in a very limited number of securities of a very specific sector such as biotechnology for example.
Investment funds intended to be offered to a large number of investors, however, definitively have an incentive to comply with the EU rules. Indeed, in doing so, they receive a “European passport” that allows them to sell their shares throughout the European Union once they have received approval by the supervisory authority of their EU member country of origin. The fact that the fund no longer needs to obtain a license in each single country greatly reduces both the formalities, costs and time required to access foreign markets.
In addition, the fact that UCITS funds are strictly regulated and monitored and therefore provide a high level of investor protection is a powerful marketing argument. Thanks to this investor protection, the term “UCITS” has become a quality label recognized and appreciated both by regulators and by the investment community far beyond the borders of the EU.