COLLG 2A
European Legislation
COLLG 2A.1
Introduction
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Background and scope
COLLG 2A.1.1
See Notes
(1) This section summarises the scope
and content of the UCITS Directive as
amended ("the Directive") as it applies in the United
Kingdom. The Directive establishes a degree of harmonisation
of EEA States' laws governing:
(a) the activities of management companies;
(b) the UCITS they
manage; and
(2) The main topics governed by the
Directive and summarised in this section concern:
(a) the general scope of the Directive;
(c) investment and borrowing powers
and limits;
(d) information for investors,
(e) how the management
company passport works; and
(f)
marketing requirements.
(3) The Directive also covers other
topics which are not summarised in this section. These include:
(a) the ability to establish master-feeder UCITS, with the master
UCITS and feeder UCITS either
in the same or different EEA States;
and
(b) a procedure for the merger of UCITS where the UCITS involved
are established in different EEA States,
or market their units in an EEA State other than the one in which they
are established.
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General scope of the UCITS Directive
COLLG 2A.1.2
See Notes
(1) The Directive applies to any open-ended
collective investment undertaking that is established and authorised as a UCITS in an EEA
State, regardless of whether it is promoted in any other EEA State. However, the Directive applies
only to collective investment undertakings that are promoted to the general
public within the EEA, so collective
investment undertakings that are restricted in their promotion fall outside
the Directive's scope.
(2) Furthermore, the Directive does
not cover collective investment schemes that
are authorised in an EEA State with
different investment and borrowing powers to those covered by the Directive.
So, schemes that invest in
(for example) real property or commodities are
not within the Directive's scope.
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Obligations on the management company and depositary
COLLG 2A.1.3
See Notes
(1) The Directive assigns certain functions
and requirements to a management company and
a depositary. As a result, a UK firm which wishes to operate UCITS schemes or act as a depositary must
first seek authorisation from
the
FSA
. A UK
firm operating a UCITS scheme (a UKmanagement
company) is referred to as the authorised
fund manager (AFM).
(2) In addition, the Directive imposes
certain conduct of business and financial resources requirements on the UCITS management company.
(3) The Directive states that the depositary must be subject to 'public control'
and provide 'sufficient financial and professional guarantees'. The depositary is responsible for the safe keeping
of a UCITS' assets, and for
ensuring that the issue, sale, redemption and cancellation of units and
the calculation of the value of units are
effected in accordance with the law and constituting document of the UCITS.
(4) Two main principles govern the
relationship between the UCITS management
company and the depositary of
a UCITS. First, no single company
may act in both capacities. Second, they must act independently of each other
and, apart from management of a UCITS,
a UCITS management company cannot
engage in any activities other than:
(a) management of other collective
investment undertakings;
(b)
managing
investments; and
(c)
advising on investments and safeguarding
and administering investments, but in either case only where
it also has permission to manage investments.
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Investment and borrowing powers and limits
COLLG 2A.1.4
See Notes
(1) The Directive states the types
of assets a UCITS can invest
in. These include:
(c)
deposits;
(d)
derivatives and
forwards; and
(2) The UCITS
eligible assets Directive, which came into effect in July 2008,
clarifies the definition of terms used in the Directive by setting out criteria
for determining which types of transferable
securities, approved money-market
instruments and derivatives are
eligible to be held by a UCITS.
(3) Within this range of investment
assets there are some detailed spread and concentration rules in the Directive.
The main requirements can be summarised as follows:
(a) no more than 5% may be invested
in transferable securities or approved money-market instruments with one issuer - this can be raised to 10% but only
in respect of a maximum of 40% of the UCITS value;
(b) no more than 20% may be invested
in deposits with one body;
(c) 100% may be invested in other collective
investment undertakings provided:
(i) no more than 30% is invested in
total in units in collective investment undertakings which are not UCITS and then only in collective investment
undertakings that offer equivalent protection to investors;
(ii) the collective investment undertaking
being invested into is not permitted to invest more than 10% in other collective
investment undertakings; and
(iii) no more than 10% is invested in
any one UCITS (which may be
raised to 20% at the discretion of the Member State and
has been raised to 20% for UKUCITS), except where a feeder
UCITS is investing in a master
UCITS (see COLL 5.8 (Investment powers and borrowing limits for feeder UCITS));
(d) no more than 20% may be invested
in transferable securities and approved money-market instruments issued
by one group;
(e) no more than 20% may be invested
in any combination of transferable securities, approved money-market instruments, deposits, or OTC
derivatives from a single body; and
(f) no more than 5% may be invested
in OTC derivative exposure to
one counterparty, or 10% where the counterparty is an approved
bank.
(4) Where a UCITS has
the investment objective of replicating the composition of a qualifying index,
it may have an exposure of up to 20% in any issuer or
exceptionally up to 35% (but only for one issuer).
A qualifying index is one which has a sufficiently diversified composition,
is a representative benchmark for that market, and is published in an appropriate
manner.
(5) The management
company must employ a specific risk management process to monitor
the risk of all investment positions. Where derivatives are
to be used within a UCITS,
the management company must
notify details of this risk management process and any significant change
to it to its competent authority.
The exposure to all derivative transactions
must not exceed the current net asset value of the UCITS.
The underlying assets representing any derivative position
must be taken into account in applying the spread of limits above. This does
not apply in the case of any derivative which
is on a qualifying index.
(6) A UCITS may
borrow up to 10% in value of its assets, provided the borrowing is on a temporary
basis.
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Information to investors
COLLG 2A.1.5
See Notes
(1) The Directive sets out which documents must be made available or offered
to investors. The three main documentary requirements are:
(a) the prospectus;
(b) the key
investor information document; and
(c) the annual and half-yearly reports
and accounts.
(2) The full prospectus requirements
are included in Annex A of the Directive and provide detailed information
on the main parties involved in operating the UCITS,
the investment objectives and policy of the UCITS,
and general day-to-day operating matters such as dealing times and income
allocation.
(3) In addition to the prospectus, the management
company must publish a key
investor information document for each UCITS.
This is intended to be a standardised document used
for selling UCITS throughout
the EEA. It must be provided
to any prospective investor free of charge so that they can take investment
decisions on an informed basis. The required contents for the key investor information document are set
out in the KII Regulation,
which is directly applicable in each Member State.
(4) Reports and accounts must be prepared
on a half-yearly and annual basis and the latest report must be supplied to
investors free of charge. They must also be available at the place specified
in the prospectus. The required
contents for the report and accounts are set out in Schedule B of the Directive.
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The management company passport
COLLG 2A.1.6
See Notes
(1) Chapter III of the Directive provides
the framework for a UCITS management company to
provide services in another EEA State by
way of a branch or cross border services.
(2)
UK
firms which are UCITS management
companies can operate UCITS established
in other EEA states (see SUP 13 (Exercise
of passport rights by UK firms) and COLL 12 (Management company and product passports under
the UCITS Directive) for more information).
(3) A non-UK management
company may operate a UKUCITS by way of branch or cross border services in accordance with
the provision of Schedule 3 to the Act and
if so it is defined in the
Handbook as an EEA UCITS management company.
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Marketing requirements
COLLG 2A.1.7
See Notes
(1) Chapter XI of the Directive provides
the framework for a UCITS to
be marketed in another EEA State.
A UCITS is required to comply
with the marketing and advertising
rules in the relevant Host State (Article
91) and is also required to maintain facilities in the Host
State (Article 92).
(2) Certain documents must
be provided to the Host State regulator in
the relevant EEA State at the
same time as notification of the proposal to market there. Before a UCITS can begin marketing in
a Host State, it must submit
a notification letter to the Home State regulator,
together with the instrument constituting
the scheme, the prospectus, key investor information document and the
most recent annual and half-yearly reports. The Home
State regulator has ten working days in which to process the
notification and transmit it to the Host State
regulator. The UCITS may
begin accessing the market immediately following transmission of the notification
(Article 93).
(3) The relevant information and documents distributed in the Host State are required to be the same as
those that the UCITS provides
in its Home State. In addition,
the key investor information document must
be published in an official language of the Host
State or another language if approved by the relevant Host State regulator (Article 94). The other documents may either be translated in the
same way, or published in a language customary in the sphere of international
finance (English is accepted to be such a language).
(4) A UKUCITS may access the market in another EEA State using the procedure set out in
Schedule 3 to the Act.
(5) A UCITS from
another EEA State may access
the market in the United Kingdom in
accordance with the procedure set out in section 264 of the Act.
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