The Chairman of CESR Expert Group on Investment Management, Mr Lamberto Cardia noted
‘This consultative paper, prepared by CESR in the first four months since it received this new area of responsibility reflects impressive progress, given in particular, that it represents a solution which has found unanimous support amongst CESR members. We hope this progress will be welcomed by asset managers who have been beset by significant Single Market barriers since 2002, due to uncertainties related to interpretations of the amending Directives. At the request of market participants, CESR has used its capacities under Level 3 (which includes own initiative actions to foster regulatory convergence) to develop tangible and pragmatic solutions which will foster convergence between regulatory practices. The guidelines will also ensure that the level of investor protection is both adequate and consistent EU wide, and this in turn should foster greater investor confidence.’
The first amending UCITS Directive (2001/107/EC) introduced harmonised rules on market access and operating conditions (e.g. capital requirements) as well as prudential safeguards to be respected by the UCITS management companies. This harmonisation allowed a European passport regime for management companies equivalent to that already enjoyed before by other financial operators (banks, investment firms, insurance companies). In addition, the Directive extended the scope of activity of a management company to individual portfolio management in addition to collective portfolio management.
The second amending Directive (2001/108/EC) focused essentially on the "product" (the investment fund). It extended the range of financial assets in which UCITS may invest. As a result, UCITS are now permitted to invest not only in listed shares and bonds as before, but also in bank deposits (cash funds), money market instruments, financial derivatives (i.e. standardised option and futures contracts dealt on regulated exchanges and over-the-counter derivatives) and in units of other collective investment undertakings (often known as "fund of funds"). The new rules also recognised investment management techniques successfully and widely employed such as "tracking" an index (i.e. investment in securities of different issuers provided for in a given index). The Directive also requires management companies to be adequately organized to manage the new risks entailed by the new range of investment products.
The purpose of the CESR guidelines is therefore to ensure that not only a consistent approach to these supervisory issues across Europe is put in place where these amending Directives create ambiguity, but also to ensure that the construction of this new ‘common EU-wide approach’ is developed in consultation with market participants and investors.
In particular, the guidelines seek to clarify
- Issues related to the marketing of funds and the simplified prospectus (e.g. in case the home Member State regulator has not yet issued detailed guidance on the simplified prospectus);
- Issues related to the scope of permissible activities of grandfathered management companies (e.g. with respect to the launching of “passportable” UCITS III funds);
- Issues related to UCITS launched after February 2002 which benefit from a “grace period” (e.g. smooth convergence to the new UCITS regime, coordinated approach to a transitional treatment by statements of conformity etc.); similar issues related to grandfathered UCITS I umbrella funds which have launched further sub-funds after February 2002;
- Practical questions related to the scope of the European passport and problems resulting from the relationship between the management company’s passport and the fund’s passport.
The guidelines under consultation do not constitute legislation but CESR members will undertake to introduce these guidelines in their day to day regulatory practices on a voluntary basis.
In relation to two key issues CESR draft guidelines propose that:
- A UCITS I umbrella fund, where the question has been whether an existing ‘grandfathered’ and
passported UCITS I umbrella fund can subsequently launch new UCITS I sub-funds, i.e. subfunds
applying the rules of the UCITS Directive 85/611/EEC prior to its amendments by the
Directive 2001/108/EC:
CESR proposes that existing grandfathered UCITS umbrella funds can launch sub-funds under the previous UCITS regime only until December 31, 2005 at the latest. This time limit will urge such UCITS I umbrella funds to adapt to the amended UCITS Directive within a realistic time frame. The Member State authorities (CESR members) will treat these requests for approval as a first priority. However, following this deadline the new rules adopted in February 2002 will apply. This would apply whether the umbrella fund was itself authorised before 13th February 2002 or between 13th February 2002 and 13th February 2004.
- Simplified prospectus requirements which were introduced by the amending UCITS legislation,
but resulted in different interpretations as to whether those funds which received a passport
under the obligations of the UCITS I, have to implement the new simplified prospectus or will
otherwise lose their registration:
CESR proposes that UCITS I funds (launched before 13th February 2004) should have a simplified prospectus available as soon as possible and no later than 30th September 2005. After this deadline, the guidelines propose that host Member States will not be obliged to accept the UCITS I funds and can require a simplified prospectus. In situations where the host State has existing legislation in place which requires the simplified prospectus and the home state has not yet required this, CESR recommends UCITS to provide additional interim information based directly on the Directive requirements on simplified prospectus.
CESR will host a hearing at CESR’s offices in Paris on 18 November for all interested parties wishing to express their views on the guidelines in person. To register for the open hearing please visit the CESR website (www.cesr-eu.org) and book a place under the heading “hearings”. Comments on the guidelines are also welcomed and can be submitted online via CESR’s website under the heading “consultations”.
