Asset managers should take note: March 2016 will be an important month in the European Union. More specifically, on March 18, 2016, the last amended version of the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive will go into effect, followed by its implementing regulations.
The UCITS Directive, along with the Alternative Investment Funds Managers Directive (AIFMD), in effect since July 21, 2011, is at the core of asset management regulations for the EU Member States. Conceived in 1985 to standardize all regulations applicable to investment funds (other than hedge funds) within the European Union, UCITS rules have drawn increasing attention since the 2008 crisis. Particularly, the focus has been on the need to keep investors better informed and protected and to further standardize the supervision of financial products and activities among the Member States’ supervisory authorities. These issues were addressed in the UCITS IV Directive 2009/65/EC, which, for instance, created the Key Investor Document (KID) that must be established for any UCITS. The UCITS IV also increased and simplified cooperation between Member States’ supervisory authorities. In the meantime, UCITS IV simplified its regime by permitting the funds to merge cross-border, be marketed cross-border, or become involved in cross-border master/feeder schemes.
The new version of the Directive, re-named UCITS V, aims to increase transparency for financial products to avoid such products being inappropriately sold to customers/investors. It aims to avoid new incidents such as the Madoff incident by implementing the safeguards that already exist in AIFMD. Concretely, the amendments concern three areas: first, defining the functions of the funds’ depositaries (mainly relating to tasks and liabilities, but also conditions for delegation); second, the introduction of new rules regarding funds’ staff remuneration policies; and finally, the standardization of administrative sanctions available to supervisory authorities for violations of the UCITS rules.
While the UCITS Directive, with its rules and obligations, places a burden on registered investment managers operating UCITS (as well as on service providers such as depositaries), it also represents an opportunity for investment managers attempting to collect significant amounts across multiple EU Member States. Since the UCITS IV Directive, investment managers can register in one Member State and market their funds across the whole EU territory with minimal procedures. As such, through the passport mechanism, an EU fund and/or manager registered and supervised in its native country is deemed to be compliant with the EU rules that also apply to the other Member States.
It should be noted that UCITS V and its pending implementing regulation will also be of interest to non-EU operators working with UCITS, especially those working for their depositaries under a delegation agreement, since the new rules may impact, for example, their liability or the scope of their functions, thus requiring amendments to the existing agreements.