UCITS IV - Newsletter
UCITS* IV was adopted by the European Parliament on 13 January 2009. The directive regulates the framework for securities funds. The directive is to be implemented by 30 June 2011 and will enter into force on 1 July 2012. It will replace the current UCITS directive from 1985 and any subsequent amendments.
* Undertakings for Collective Investment in Transferable Securities
The most important changes in UCITS IV are:
UCITS funds can be merged domestically and across borders
UCITS funds can be established with master-feeder structures
UCITS funds and the associated management company may each have their
own home country
A new standardised Key Investor Information Document (KID) will replace
the simplified prospectus
A simplified notification procedure and improved cooperation between the
supervisory authorities in the respective member states
Merger of UCITS funds
The directive will allow the merger of UCITS funds on a cross-border basis and internally within a member state, and it stipulates procedural rules for the execution of mergers.
The directive’s merger rules will apply when two or more existing UCITS funds from different member states are merged, and when two or more UCITS funds from the same country are merged to form a new UCITS fund in another member state. Moreover, the rules will apply to internal mergers where one of the UCITS funds involved can market its units on a cross-border basis.
In accordance with the directive, the merger techniques shall be based on the following:
Overdragende UCITS-fond overfører alle eiendeler og forpliktelser til et eksisterende overtakende UCITS-fond, som utsteder aksjer eller andeler og et eventuelt begrenset vederlag i penger til overdragende UCITS-fonds andelseiere. The merging UCITS fund will be dissolved.
The merging UCITS fund will transfer all of its assets and liabilities to a newly established UCITS fund. The receiving UCITS fund will issue shares or units and possibly a limited cash payment to the unit holders in the merging UCITS fund. The merging UCITS fund will be dissolved.
The merging UCITS fund will transfer its net assets to a receiving UCITS fund that already exists or is created. The merging UCITS fund will continue to exist until all of its obligations have been met in full.
The supervisory authorities in the merging UCITS fund’s home country shall approve the merger. The merging UCITS fund shall ensure that the supervisory authorities receive the required information, including a merger plan, prospectus and KID from the merging UCITS fund, statements from the UCITS funds’ respective custodians and information to unit holders in the UCITS funds.
The directive contains detailed rules concerning the disclosure of information to the unit holders in the UCITS funds in the event of a merger.
In Norway the Financial Supervisory Authority of Norway has accepted the merger of securities funds for many years, but the Ministry of Finance decided that there was no legal authority for such a practice in 2007. New provisions concerning the merger of securities funds in Section 4-14 of the Norwegian Securities Funds Act, added by Act no. 48 of 19 June 2009, reintroduces the right to merge. This still applies nevertheless only to Norwegian securities funds. It has not yet been determined when these provisions will enter into force.
Master-Feeder structures
The directive will allow fund structures with a directly invested UCITS fund (master) and one or more UCITS funds that primarily invest in the master (feeders). The master and feeder may have different managers and be registered in different member states.
The directive stipulates conditions for the right to operate with master-feeder structures. The master itself cannot be a feeder or invest in feeders. Feeders must invest at least 85% of their assets in the master, while the remaining percentage may be invested in liquid assets and derivatives used for hedging purposes. Feeders must receive approval from the supervisory authority in their home country prior to investing in the master. In addition, the master and feeders must enter into an agreement that ensures the feeder access to the documentation and information that is required so that the feeder can operate in accordance with the directive. The feeder is obligated, for example, to monitor the activities of the master. Such an agreement can be replaced by internal business practice rules if the feeder and master are managed by the same management company.
The status of a UCITS fund as a feeder must be stated explicitly in the prospectus for the UCITS fund. The prospectus must also contain information on the master’s and feeder’s investment aim and strategy, a summary of the agreement between the master and feeder, as well as the cost and tax implications of the structure.
The master’s and feeder’s respective custodians and auditors shall enter into an agreement on information sharing, so that they can efficiently fulfil their obligations to the UCITS funds.
The master shall immediately notify the supervisory authorities in its home country of the identity of any UCITS funds that invest in the master’s shares or units.
Master-feeder structures have been permitted in accordance with Norwegian law for a long time by the Financial Supervisory Authority of Norway granting exemptions from the requirement in the Securities Funds Act that a maximum of 20 per cent of the securities fund’s assets can be invested in the same securities fund. Such securities funds have, however, not had the status of a UCITS fund, and they have thus not benefitted from direct marketing rights in other EEA states.
Management companies can manage UCITS funds established in other member states
The directive will allow a management company to manage UCITS funds that have been established in a member state other than the management company’s state. The change will be made by allowing UCITS funds and the associated management company to have different home states within the EEA area.
The change is relevant to the jurisdictions that have organised their funds industry with securities funds and associated management companies, such as the situation is in Norway. The current UCITS directive stipulates that UCITS funds and their associated managers must have the same home country. As a consequence of these rules, if it was desired that a UCITS fund be managed by a manager in another jurisdiction, the UCITS fund’s national manager had to outsource the management to the other company. In accordance with the new rules, a UCITS fund will be able to appoint a management company from another EEA country directly in the articles of association.
The management company shall be approved as the manager of the UCITS fund by the supervisory authority in the UCITS fund’s home country. The UCITS fund’s home supervisory authority may, however, not stipulate as a condition for approval that the management company shall change its home country to the UCITS fund’s home country. The supervisory authority shall have confirmation of the custodian and a summary of any outsourcing agreements.
Key Investor Information Document (KID)
The directive replaces the simplified prospectus with a document referred to as the Key Investor Information Document (KID). The aim of the KID is to give the investors an informed basis for investment decisions, and it should contain the information required on the UCITS fund so that the nature of the product and the associated risk can be understood.
As a minimum the document shall contain a description of the UCITS fund’s investment aim and strategy, as well as information on the UCITS fund’s historical return, costs and risk profile. In addition, it shall be clearly indicated where and how additional information can be obtained.
The information in the document shall be presented in a standardised format with a concise and non-technical language, so that the information is readily accessible to the average investor. The information must be correct, clear and not misleading, and it must be consistent with the relevant parts of the UCITS fund’s full prospectus.
The KID must be available to investors free of charge on the management company’s website.
Conclusion
UCITS IV appears to facilitate greater internationalisation of the securities fund industry by expanding the opportunities to operate in multiple jurisdictions. With regard to the cross-border merger of UCITS funds, however, it is uncertain whether there will be many such mergers, unless other relevant regulations, such as the tax regulations, make such mergers more attractive.
For existing securities funds it is assumed that the rules will not entail any need for regulatory adaptation beyond the adaptation of the information content for the KID.
For more information, contact Kjersti T. Trøbråten
Date: 01/11/2009