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UCITS Next Great Hope for U.S. Firms in Europe

NEW YORK - Days before the European Union celebrated the 10th anniversary of the Euro last week, Dechert LLP held a widely popular seminar here on the how-to's of Undertakings for Collective Investment Trusts, or UCITS, which have been growing at a rapid pace not only on the Continent, but also in Latin America, Asia and the Middle East.

UCITS essentially afford an investment firm a "passport" to register and market a UCIT, an investment vehicle structured much like a mutual fund, throughout the EU. Once registered in one sponsor state, other participants must honor the stamp of approval of that original nation, making it easier for investment firms to open shop throughout the region. That doesn't mean that regulators aren't strict about investment mandates, thresholds, limitations, boards and consumer protections, warned Dechert partners, who hailed from New York, Luxembourg, London and Munich.

They also advised asset management executives to be aware that nationalism among various European nations is still very strong, thus continuing to make local marketing and sales business ties, of utmost importance. Banks, still, control financial services sales channels, particularly as they have been among the first sponsors of UCITS. As well, most European regulators frown upon contracting outside fund administration firms, so this is an additional start-up costs asset management firms must consider when planning to launch a UCIT. That includes custodial banks, administration agents and other service providers.

But all told, it appears that the roughly $6 trillion held in UCITS-a full three quarters of the $8 trllion European fund industry-is as good a place as any for a U.S. asset management firm looking to expand into Europe, to start.

And UCITS are worth paying attention to, said George Mazin, a Dechert partner based in New York. "In the past 10 years, the global mutual fund industry has tripled," he said, and what is particularly interesting to note, is that "U.S. funds are slowly being eclipsed by a higher rate of growth outside of the U.S. In fact, U.S. mutual funds cannot compete with European UCIT funds in Latin America and Asia." Mazin said.

Today, more than 6,000 UCITS are sold throughout Europe cross-border, added Karen Anderberg, a London-based Dechert partner. "And because of the unexpected success of UCITS outside of Europe, particularly in Latin America, Asia and the Middle East, today there are five times the number of promoters than in 2000."

In Hong Kong, especially, 70% of the funds sold are UCITS.

Luxembourg Land-Ho

The two most popular places to register a UCIT or other type of investment vehicle, including a mutual fund, continues to be Luxembourg and Ireland, noted Marc Seinmetz, a Dechert partner out of the former, which, he said, continues to be the most widely registration locale by far because Luxembourg regulators make optional exchange listings much easier than in Ireland and other places.

"Luxembourg regulators, while flexible, also realize that reputation is everything," and so are rather strict on investor protections, Seinmetz added.

In fact, UCITS are becoming so de rigueur in Europe that regulators have different risk management standards for sophisticated UCITS, in which managers invest in derivatives and other complex instruments, and non-sophisticated UCITS, in which derivatives are used only for hedging.

Overall, speakers told the U.S. mutual fund and other asset management executives in attendance, UCITS may not sound like a very consumer-friendly term, but it is a strong brand in Europe.

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