ESMA has today published a discussion paper (the “Discussion Paper”) setting out its views on what constitutes a share class, including how to distinguish share classes from compartments of UCITS, and possible approaches to the permissible extent of differentiation between share classes.

The context for the Discussion Paper is the identification by ESMA of diverging national practices as to the types of share class that are permitted, ranging from very simple share classes (eg, with different levels of fees) to much more sophisticated share classes (eg, with potentially different investment strategies) and ESMA’s consideration of the need for a common understanding of what constitutes a share class of UCITS and of the ways in which share classes may differ from each other.

A key principle which ESMA identifies is that share classes of the same UCITS should have the same investment strategy.

In view of this, ESMA sets out a non-exhaustive list of types of share class which would be permissible, as follows:

  • share classes that differ according to the maximum or minimum investment amounts, or values of holdings allowed to be retained;
  • share classes that differ in terms of the type of investor (eg, institutional investors v retail investors);
  • share classes that differ according to the types of charges and fees that may be levied and their amount (on-going charges, subscription and redemption fees, performance-related fee);
  • share classes that differ according to the currency in which they are denominated;
  • share classes that differ according to the allocation of revenues to investors (by capitalisation or distribution, either subject to or exempt from withholding tax);
  • share classes that differ according to their characteristics: registered or bearer;
  • share classes that differ in terms of voting rights; and
  • share classes that provide currency hedging when share classes are denominated in different currencies from the base currency.

ESMA is of the view that currency hedging at the level of a share class could be considered as compatible with the principle of common investment strategy, provided the currency hedging does not adversely impact on the shareholders of the other share classes of the UCITS and that the costs of the hedging are borne only by the shareholders of the hedged share class.

A non-exhaustive list of non-permissible share classes envisaged by ESMA is also proposed, including share classes:

  • exposed to different pools of underlying assets;
  • exposed to the same pool of assets but with different levels of capital protection and / or payoff;
  • where the same underlying portfolio is swapped against different portfolios of assets;
  • offering differing degrees of protection against some market risks such as interest rate risk or volatility risk; and
  • which differ in terms of leverage.

With respect to interest rate hedging performed at share class level, ESMA states its view that this does not comply with the overarching principle identified the Discussion Paper that share classes should have a common investment strategy, as it modifies the investment strategy of the share class.

The Discussion Paper sets out fourteen questions for stakeholders to consider, including whether respondents agree whether ESMA should develop a common position on what constitutes a UCITS share class and how share classes may differ from each other. The deadline for comments is 27 March 2015.

Comments

Matheson have been anticipating this development, and it will form the basis of our Roundtable Event in the New Year. This will take place in London and the US in early 2015, and we will be in touch with you in relation to this.

ESMA's Discussion Paper may be accessed here.