On 13 January 2009, the European Parliament approved a proposed reform of the UCITS directives. This new directive, commonly referred to as UCITS IV, is designed to make the UCITS market in the European Economic Area (“EEA”) less fragmented and to improve efficiency, especially in cross-border operations.

UCITS (undertakings for collective investment in transferable securities) are investment institutions formed under and governed by a harmonised set of European rules dealing with investor protection, (cost) transparency and which meet basic requirements on organisation, management and oversight of funds. If the UCITS is authorised by the competent authority of its home state, participations in the UCITS may be offered to the public in the EEA. Even states outside the EEA have accepted UCITS as relatively safe and comprehensible retail investment products. Since their inception in 1985, a large number of UCITS has been set up and successfully marketed to retail investors, and UCITS have become a key product in providing retail investment and savings solutions. In addition, UCITS have also become an important instrument for institutional investment structuring.

Nevertheless, there are still different national interpretations of the current UCITS rules. This lack of a level playing field has resulted in a more burdensome and costly distribution of UCITS than was the original aim of UCITS harmonisation and has impeded cross-border sales of UCITS products.

Significant changes

UCITS IV seeks to reduce the obstacles previously encountered when offering in other EEA states, by bringing about the following changes:

  • the administrative barriers to cross-border distribution of UCITS will be removed;
  • mergers between UCITS will be facilitated;
  • the use of "master-feeder" structures will be permitted, which will make the UCITS framework more attractive for creating funds for institutional investors, e.g. in the case of asset pooling;
  • the "Simplified Prospectus", which currently approaches the size and level of detail of the fund’s full prospectus, will be replaced by a "Key Investor Information" document. This new document will be a very concise, probably one page document tailored to the needs of typical retail investors. Due to its compactness, translations into the various required languages will cost significantly less than translating the present, sometimes very sizeable, Simplified Prospectuses;
  • national supervisory authorities will be stimulated to cooperate more closely to more effectively administer the supervision of UCITS and their distribution in the various EEA states.

Management Company Passport

Following consultation and further research prompted by CESR, UCITS IV also introduces a “management company passport", allowing UCITS authorised in one EEA state to be managed remotely by a management company established in another EEA state and authorised by that state's competent authority.

Implementation

Although formally UCITS IV has yet to be approved by the European Council, informal agreement has already been reached and UCITS IV will have to be implemented in the legislation of the member states by 1 July 2011.