UCITS

Strengthening global competitiveness of EU investment funds

Directive 2009/65/EC — rules relating to undertakings for collective investment in transferable securities (UCITS)

It lays down uniform rules on investment funds, allowing the cross-border offer of investment funds regulated at EU level.
It sets out the EU’s main regulations governing UCITS*.

KEY POINTS

The main aims of the directive are to:

offer investors a wider choice of product at lower cost through
a more efficient UCITS market in the EU;
better investor information;
more efficient funds supervision; and
keep the EU’s investment sector competitive by adjusting the rules to market developments.

In particular, this directive lays down rules on:

investor information via a standardised summary information document to make it easier for the consumer to understand the product;
a genuine European passport for UCITS management companies, which will allow a management company located in one EU country to manage funds in other EU countries;
marketing of UCITS in other countries, e.g. by simplifying administrative procedures;
mergers of UCITS in other countries;
stronger supervision of UCITS and of the companies that manage them, e.g. through enhanced cooperation between national financial services supervisors.

Directive 2009/65/EC is the fourth version of UCITS legislation, replacing UCITS Directive 85/611/EEC.

Directive 2009/65/EC was amended by Directive 2014/91/EU (UCITS V) which introduced new rules on UCITS depositaries (the asset-keeping entity), e.g. the entities eligible to assume this role, their tasks, delegation arrangements and the liability of depositaries.

It was also supplemented by Regulation (EU) 2016/438 which addresses non-market risks related to the depositaries’ activities. It covers aspects of depositaries’ duties such as:

safekeeping of UCITS assets;
oversight duties (e.g. checking that UCITS investments are consistent with their investment strategies as described in their rules and offering documents or ensuring that UCITS do not breach their investment restrictions); and
the liability for the assets.

Regulation (EU) 2016/438 also lays down specific due diligence requirements for insolvency protection of UCITS assets, as well as detailed independence requirements for managers and custodians of UCITS.

Directive 2009/65/EC is complemented with the requirements for UCITS assuming exposure to securitisation (Regulation (EU) 2017/2402).

It has applied since 7 December 2009 and had to become law in the EU countries by 30 June 2011.

BACKGROUND

For more information, see:

UCITS — Undertakings for collective investment in transferable securities (European Commission).
KEY TERMS

Undertakings for collective investment in transferable securities (UCITS): investment vehicles that pool investors’ capital and invest that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities.

DOCUMENT

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, 17.11.2009, pp. 32-96)

Successive amendments to Directive 2009/65/EC have been incorporated in the original text. This consolidated version is of documentary value only.

Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (OJ L 347, 28.12.2017, pp. 35-80)

Commission Delegated Regulation (EU) 2016/438 of 17 December 2015 supplementing Directive 2009/65/EC of the European Parliament and of the Council with regard to obligations of depositaries C/2015/9160 (OJ L 78, 24.3.2016, pp. 11-30)

Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions (OJ L 257, 28.8.2014, pp. 186-213)

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 (OJ L 176, 10.7.2010, pp. 1-15)

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 (OJ L 176, 10.7.2010, pp. 16-27)

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 (OJ L 176, 10.7.2010, pp. 42-61)

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 (OJ L 176, 10.7.2010, pp. 28-41)

UCITS: organisational requirements and rules of conduct

Directive 2010/43/EU implementing Directive 2009/65/EC as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company

It sets out implementing rules for management companies managing undertakings for collective investment in transferable securities (UCITS)*, as well as rules of conduct and fair treatment of UCITS in cases of conflicts of interest.

It also lays down requirements concerning the risk management process for UCITS.

It is one of a series of 4 implementing measures adopted together in 2010, the other 3 being:

Directive 2010/42/EU;
Regulation (EU) No 583/2010; and
Regulation (EU) No 584/2010.

Scope

The directive applies to:

UCITS management companies;
depositaries;
investment companies that have not designated a management company.

Administrative procedures and control mechanism

Management companies must:

implement decision-making procedures and a clear, documented organisational structure;
ensure that information is transmitted to the relevant persons* in the proper way;
implement appropriate internal control mechanisms;
implement and maintain internal reporting and communication of information;
maintain records of their business and internal organisation.
Management companies must safeguard the security, integrity and confidentiality of information. They implement transparent procedures for the handling of investors’ complaints.

They must put in place operational accounting procedures for the protection of unit-holders*. UCITS accounting must be kept in such a way that all assets and liabilities of the UCITS can be directly identified at all times. These procedures must be in accordance with the accounting rules of the UCITS’ home countries

Internal control mechanisms

The senior management of management companies:

is responsible for general investment policy for each managed UCITS and oversees the approval of investment strategies for each UCITS;
verifies that the general investment policy is properly implemented;
approves periodically the adequacy of the internal procedures for investment decisions;
approves periodically the risk management policy;
ensure permanent compliance function.

A permanent compliance function, with the necessary authority and access to all relevant information, is responsible for:

evaluating the adequacy and effectiveness of the measures, policies, procedures and actions taken to address any failures of the management company in complying with its obligations;
advising and assisting the persons responsible for carrying out services and activities to comply with the management company’s obligations.

Management companies must have a permanent, operationally independent risk management function. This function must:

implement the risk management policy and procedures;
ensure compliance with the UCITS risk limit system;
provide advice to the board of directors on the risk profile of each managed UCITS;
provide reports to the board of directors on the risk management process;
provide reports to the senior management regarding the current level of risk of its managed UCITS;
review and support the arrangements and procedures for the valuation of over-the-counter (OTC) derivatives.

Management companies must put in place a procedure to prevent certain relevant persons from:

performing a personal financial transaction or advising another person to perform such a transaction;
divulging information that might influence the behaviour of other persons as regards the choice of their transactions.

Management companies must ensure that a record is kept of each portfolio transaction to provide future information on the details of the order and the executed transaction.

The subscription and redemption orders* must also be centralised and recorded immediately. These records are then retained for at least 5 years.

Conflict of interests

The following situations may lead to conflicts of interest, where:

the management company or a relevant person, or a person directly or indirectly related to the company is likely to make a financial gain, or avoid a financial loss, at the expense of the UCITS;
the management company or that person has an interest in the outcome of a service provided to the UCITS or another client which does not share the interests of the UCITS;
the management company or that person has an incentive to favour the interest of another client;
the management company or that person carries out the same activities for the UCITS as for another client;
the management company or that person receives money, goods or services illegally.

Management companies are therefore obliged to define in writing an effective policy as regards conflict of interest, which preserves the independence of the relevant persons.

Rules of conduct

Management companies must:

act in the best interests of UCITS and their unit-holders;
meet the due diligence requirement;
notify the unit-holder in case of a subscription or redemption order, confirming execution of this order.
Regarding the due diligence requirements, they must:

ensure a high level of diligence in the monitoring of investments in the best interests of UCITS and the integrity of the market;
have adequate knowledge and understanding of the assets in which the UCITS are invested;
ensure that investment decisions are carried out in compliance with the investment strategy and risk limits of the UCITS;
perform analyses concerning the investment contribution to the UCITS portfolio.

Management companies must:

establish procedures which provide for fair execution of portfolio transactions on behalf of the UCITS;
not be permitted to carry out a UCITS order
in aggregate with an order of another UCITS or another client or
with an order on their own account.

Particulars of the agreement between a depositary and a management company

The ‘parties to the agreement’ must include in the agreement elements related to:

the procedures to be followed;
the exchange of information and obligations concerning confidentiality and money-laundering;
the appointment of third parties;
potential amendments and the termination of the agreement.

Risk management policy

Management companies must:

implement an effective and documented risk management policy including operational risks;
assess and review the effectiveness of the risk management policy and the level of compliance by the management company with the risk policy;
measure and manage at any time the risks which the UCITS they manage are, or might be, exposed to;
calculate the global exposure to risk of the UCITS at least once a day.

Counterparty risk exposure

Management companies must:

use the positive mark-to-market value of the over-the-counter derivative contract with the counterparty* when calculating the UCITS risk exposure to that counterparty;
reduce the UCITS exposure to a counterparty of an OTC derivative transaction through accepting a sufficiently liquid collateral that may be sold quickly without losing value.

BACKGROUND

Undertakings for the collective investment in transferable securities (UCITS) — Directive 2009/65/EC (European Commission).It has applied since 30 July 2010 and had to become law in the EU countries by 30 June 2011.

Depositary: an entity that is independent from the UCITS fund and the UCITS fund’s investment manager. Its role is to safeguard against fraud, book-keeping errors and conflicts of interest between the manager and the fund.

Unit-holder: any natural or legal person holding one or more units in a UCITS.

Relevant person: in a management company, it means a director, partner or equivalent, or manager of the management company, an employee of the management company, as well as any other natural person whose services are placed at the disposal and under the control of the management company and who is involved in providing collective portfolio management. It also covers an individual who is directly involved in providing services to the management company under delegation arrangements to third parties for the purpose of the management company providing collective portfolio management.
Subscription and redemption orders: orders by investors to subscribe to, or redeem their funds, from a UCITS.
Counterparty: a party to a financial transaction. Its role is to safeguard against fraud, book-keeping errors and conflicts of interest between the manager and the fund.

DOCUMENTS

Cross-border distribution of collective investment undertakings

Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings and amending Regulations (EU) No 345/2013, (EU) No 346/2013 and (EU) No 1286/2014

It has applied since 1 August 2019. Article 4(1) to (5) on marketing information, Article 5(1) and (2) on competent authority websites, and Articles 15 and 16 on amendments to previous legislation concerning pre-marketing of EuVECAs and EuSEFs apply from 2 August 2021.

It sets out uniform rules for national regulation concerning marketing requirements for collective investment undertakings (or ‘investment funds’) and on marketing communications addressed to investors, to improve market efficiency as part of establishing the EU’s capital markets union.

It also sets out a common approach to fees and charges levied on investment fund managers for their cross-border activities and proposes a central database on the cross-border marketing of collective investment undertakings.

KEY POINTS

The regulation applies to:

Alternative investment fund (AIF)* managers*;
Undertaking for collective investment in transferable securities (UCITS)* management companies, including any UCITS which has not designated a UCITS management company;
European venture capital fund (EuVECA)* managers; and
European social entrepreneurship fund (EuSEF)* managers.
Marketing communications

AIFMs, EuVECA, EuSEF and UCITS managers, as well as UCITS management companies, must ensure that all marketing communications addressed to investors are identifiable as such and describe the risks and rewards of purchasing units or shares of an AIF or units of a UCITS in an equally prominent manner. Marketing communications should:
be fair, clear and not misleading;
indicate that a prospectus exists and that key investor information is available, and specify where, how and in what language investors can obtain the prospectus and key information;
specify where, how and in what language investors can obtain a summary of investor rights, which will include, where appropriate, information on access to collective redress mechanisms at EU and national level in the event of litigation;
contain clear information indicating that the manager or the management company may decide to stop marketing its investment fund.

Competent authorities must keep their websites up to date with complete information on applicable national laws, regulations and administrative rules, including summaries, governing marketing requirements for AIFs and UCITS, in a language customary for international finance.

To verify compliance with this regulation and national rules on marketing requirements, competent authorities may require advance notice of marketing communications intended by UCITS management companies to be used directly or indirectly in their dealings with investors.

Fees and charges

Common principles regarding fees and charges levied by competent authorities on managers of collective investment undertakings for their cross-border activities must be consistent with the overall costs of the competent authority.
By 2 February 2022, The European Securities and Markets Authority (ESMA) will make publicly available on its website an interactive tool that provides an indicative calculation of the fees or charges.

Central database

The regulation also introduces a central database regarding the international marketing of AIFs and UCITS within the EU. ESMA must publish this database on its website by 2 February 2022, in a language customary for international finance.

Pre-marketing*

The regulation introduces rules on pre-marketing EuVECAs and EuSEFs from 2 August 2021, in line with those laid down for alternative investment funds in Directive (EU) 2019/1160. The rules are aimed at allowing managers to target investors by testing their appetite for upcoming investment opportunities or strategies through qualifying venture capital funds and qualifying social entrepreneurship funds.

Reporting

Competent authorities must report to ESMA on marketing communications by 31 March 2021 and every 2 years, outlining the number of requests for amendments of marketing communications, clearly distinguishing the most frequent breaches, and giving examples.

Evaluation

By 2 August 2024, the European Commission through public consultation and discussion with ESMA and competent authorities, will conduct an evaluation of the application of the regulation.

KEY TERMS

Alternative investment fund (AIF): a collective investment undertaking (investment fund) which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and not requiring authorisation under Article 5 of the UCITS Directive 2009/65/EC. They include EuVECA, EuSEF and ELTIF*.
Alternative investment fund manager (AIFM): legal person whose regular business is managing one or more AIFs.

Undertaking for collective investment in transferable securities (UCITS): 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.

European venture capital fund (EuVECA): a label introduced in Regulation (EU) No 345/2013 which allows managers to set up and market their funds across the EU using a single set of rules.
European social entrepreneurship fund (EuSEF): a label introduced in Regulation (EU) No 346/2013 which is designed to identify funds focusing on European social businesses, making it easier for them to attract investment.

Pre-marketing: providing information or communication on investment strategies or investment ideas by a manager of a qualifying venture capital fund to potential investors in the EU in order to test their interest in a qualifying venture capital fund which is not yet established.
European long-term investment fund (ELTIF): introduced in Regulation (EU) 2015/760 aimed at investment fund managers who want to provide long-term investment to institutional and private investors across Europe. They target specific types of projects which require long-term funding to develop successfully but struggle to get financing.

DOCUMENTS

Regulation (EU) 2019/1156 of the European Parliament and of the Council of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings and amending Regulations (EU) No 345/2013, (EU) No 346/2013 and (EU) No 1286/2014 (OJ L 188, 12.7.2019, pp. 55-66)

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions — Action plan on Building a Capital Markets Union (COM(2015) 468 final, 30.9.2015)

Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (OJ L 123, 19.5.2015, pp. 98-121)

Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (OJ L 352, 9.12.2014, pp. 1-23)

Successive amendments to Regulation (EU) No 1286/2014 have been incorporated into the original text. This consolidated version is of documentary value only.

Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank: An investment plan for Europe (COM(2014) 903 final, 26.11.2014)

Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds (OJ L 115, 25.4.2013, pp. 18-38)

Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds (OJ L 115, 25.4.2013, pp. 1-17)

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ L 174, 1.7.2011, pp. 1-73)

Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, pp. 84-119)