ESMA is developing a framework for UCITS share classes and has issued a discussion paper setting out high-level principles regarding share classes, focused on investor protection, which are supplemented by operational principles.
The UCITS IV Directive recognises that UCITS may offer different share classes to investors but does not set out what is permitted. In this context. ESMA had previously issued a discussion paper on UCITS share classes in December 2014 (the responses to which are helpfully summarised in Annex II to this discussion paper). ESMA also organised discussions and a roundtable with industry representatives, institutional investors and depositaries. The discussion paper sets out high-level principles regarding share classes, focused on investor protection with some operational principles. The key principles proposed are:
- Common investment objective: share classes of the same fund should have a common investment objective reflected by a common pool of assets (helpfully, ESMA regards currency risk hedging at share class level as compatible with this principle);
- Non-contagion: UCITS ManCos should implement appropriate procedures to mitigate and monitor the risk that features that are specific to one share class could have a potentially adverse impact on other share classes in the same fund and the paper sets out operational principles that should operate as a minimum;
- Pre-determination: all features of a share class should be pre-determined before it is set up;
- Transparency: Differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.
The paper highlights that share classes should never be set up to circumvent the rules of the UCITS Directive on diversification, derivative eligibility and liquidity and discusses the impact on existing share classes and transitional provisions.
The discussion paper closes to responses on 6 June 2016. ESMA anticipates taking further action on UCITS share classes by the end of 2016 (possibly in the form of an opinion under article 34 of the ESMA Regulation.