European Funds May Gain Some Flexibility
March 12, 2001
The Council of the European Union will vote today on a proposed amendment to the 1985 UCITS Directive, the legislation which regulates the coordination of laws, regulations and administrative provisions relating to UCITS funds, or Undertakings for Collective Investment in Transferable Securities. If the amendment is adopted, it will have a substantial impact on funds and fund companies in Europe, providing fund companies with considerable flexibility in cross-border business, according to analysts.
The UCITS Directive has jurisdiction over most funds in Europe, but is technically restricted to those funds which promote the sale of their units to the public in the European Union and have the sole objective of investing in transferable securities, according to Claude Kremer, a partner at Arendt & Medernach of Luxembourg. That leaves out certain types of funds, such as money-market funds, according to Kremer, who is also chairman of the Luxembourg Investment Funds Association, a trade association.
In February 1993, European authorities began to discuss widening the scope of the 1985 directive. In June 1998, the European Parliament proposed two amendments and last June, they were approved by the European Commission. Subsequently, last October, the EU Council of Ministers voted to adopt the first proposal, but tabled the second for further discussion, and withheld the adoption of the first until the second could be voted on, so that they would be passed as a package,' said Kremer. Earlier this month, the European Community's permanent representatives committee reached an agreement on the text of the second proposal, which will be voted on today by the Council.
"The UCITS Directive has been very important in the building of cross-border trading in Europe, but has a number of failings," said Diana Mackay, a partner at European Fund Information Services of London, a mutual fund research and consulting firm. Mackay was also the founder and former managing director of Lipper Europe of London.
"There have been some gaps in the process, which people in the industry have been lobbying to fix for a long time," she said.
The first proposal would add funds of funds and money-market funds to those already regulated by the directive. UCITS would also be allowed to invest in other investment funds, deposits with credit institutions, and money market instruments, according to Kremer. The first proposal also would relax limits on index funds so that they would be able to invest up to 20 percent of their assets in the securities of a single issuer and up to 35 percent if justified by "exceptional market conditions," according to the ICI.
"Part one was simple," said Mackay. "That was the easy part. Part two is more complex and has required more discussion."
The second proposal introduces a European passport' that would allow mutual fund companies that are registered in one European country to sell throughout Europe without having to register in each country.
"So, as an authorized UCITS fund management group, you'll be able to establish your presence in one country and then get a sort of fast track access into other markets," said Mackay. "You won't be just relying on the fund products being authorized."
The proposal also would prohibit European Union member states from requiring fund companies to provide documents or items in addition to what is required in the Directive, according to the ICI. That would allow for a simplified prospectus that would only be altered from country to country in translation, according to the ICI.
Capital requirements and advisory delegation, two other issues of the proposal, have elicited the most controversy, according to Mackay.
"There has been a lot of political lobbying," said Mackay. "The primary issue of contention at the moment relates to capital adequacy."
For a management company to be authorized, there is an initial capital requirement of approximately US$46,400. The proposal would raise the minimum to about US$116,000, according to the ICI.
"Those countries that have a lot of small independent fund management groups are very unhappy about those requirements being so high," said Mackay. "It basically favors the banking and insurance industry."
The second issue relates to delegation of asset management and sub-advisory activity.
"The proposal is that fund management groups will not be allowed to delegate their investment management activity," said Mackay. "You could read into that that you couldn't issue sub-advisory mandates on your funds and that's an important platform for some companies."
It is not clear how the issue will be resolved, Mackay said. Most countries agree that unrestricted delegation should not be allowed and how the issue is resolved will probably come down to how one defines delegation, she said.
"It looks like the status quo will likely prevail," said Mackay. "In other words, those countries that currently allow sub-advisory activity will have scope to allow it within certain definitions, and those that currently don't allow it will maintain their restrictions and use tight definitions."
The amendments would have an enormous impact on mutual funds in Europe, vastly expanding cross-border traffic, among other things, according to Kremer.