On April 7, 2016, the ESMA published a discussion paper on the recognition of the different share classes offered by Undertakings for Collective Investments in Transferable Securities funds in different EU jurisdictions. ESMA identified in 2014 diverging national practices as to the types of share class permitted under the UCITS Directive. ESMA is seeking stakeholder’s views on its proposed framework for UCITS share classes throughout the European Union, in particular, whether and how share classes work under the ESMA principles. The paper describes the nature of the different share classes and establishes common principles which could form the basis of a regulatory framework for all share classes. Share classes, in the context of UCITS, are different types of units or shares belonging to the same UCITS. Share classes allow for customisation of investment and there is no legal segregation of assets between share classes. The main issue addressed in the report is that while the UCITS Directive covers funds, it stays silent on the definition and scope of share classes. As a consequence different jurisdictions have different standards and therefore some share classes can be set up in some jurisdictions but not in others.

The discussion paper outlines four principles which ESMA recommends are to be followed when recognizing share classes for UCITS. The first principle, the common investment objective, states that share classes of the same fund should have a common investment objective reflected by a common pool of assets. The second principle, non-contagion, provides that UCITS management companies should implement appropriate procedures to minimize risk features that are specific to one class of share which could potentially have an adverse impact on other share classes in the same fund. The third principle, predetermination, requires that all features of the share class should be predetermined before it is set up. The final principle, transparency, requires that all differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes. In addition to the principles outlined, ESMA states that share classes should never be set up to circumvent the rules of the UCITS Directive on diversification, derivative eligibility and liquidity. Responses to the discussion paper are due by June 6, 2016. ESMA will then consider the feedback that it receives on its consultation and will provide a response to the feedback by the end of 2016.

The discussion paper is available at: https://www.esma.europa.eu/sites/default/files/library/2016- 570_discussion_paper_on_ucits_share_classes_2016_0.pdf.