COLLG 2.1 Introduction
Background and scope
- (1)
This section summarises the scope and content of the UCITS Directive, as amended. The Directive establishes a degree of harmonisation of EEA states' laws governing:
- (2)
The main topics governed by the Directive and summarised in this section concern:
- (a)
the general scope of the Directive;
- (b)
obligations of the management company and depositary;
- (c)
investment and borrowing powerlimits;
- (d)
information for investors,
- (e)
how the management passport works; and
- (f)
marketing requirements.
- (a)
General scope of the UCITS Directive
- (1)
The Directive is only relevant to open-ended collective vehicles that promote to the general public, so schemes that are restricted in their promotion fall outside the Directive's scope. Furthermore, the Directive applies to any collective investment scheme falling within its scope, regardless of whether it is promoted in other EEA States.
- (2)
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, investment in real property andcommodities are not within the Directive's scope.
Obligations on the management company and depositary
- (1)
The UCITS Directive identifies the management company and depositary and assigns certain requirements to each. For management companies, the Directive lists the types of activities such firms undertake. As a result, the FSA has identified the authorised fund manager as the UCITS management company. So, a UK firm which wishes to operate a UCITS scheme must first seek authorisation as a UCITS management company.
- (2)
In addition, the Directive imposes certain conduct of business and financial resources rules on the management company. The conduct of business rules are very similar to the rules placed on ISD firms and can be found in COB. The financial resources rules can be found in IPRU(INV) 7, and are different to those for ISD firms.
- (3)
For depositaries, the Directive states they must be subject to 'Public control' and provide 'sufficient financial and professional guarantees'. Depositaries are responsible for the safe keeping of a scheme's assets and for ensuring that sales, redemptions, cancellation and issue of units and calculation of the value of units are effected in accordance with the law and rules of the scheme.
- (4)
Two principal rules govern the relationship between a management company and the depositaryof a scheme. Firstly, no single company may act in both capacities. Secondly, they must act independently of each other and, apart from management of a UCITS scheme, a UCITS management company cannot engage in any activities other than:
- (a)
management of other collective investment schemes;
- (b)
managing investments, and
- (c)
advising on investments and carrying out safeguarding and administering collective investment scheme units where it has permission to manage investments.
- (a)
Investment and borrowing power limits
- (1)
The Directive states the types of assets a scheme can invest in. These are:
- (a)
- (b)
money market investments;
- (c)
- (d)
derivatives and forwards; and
- (e)
units in other collective investment schemes.
- (2)
Within this range of investment assets there are some detailed spread and concentration rules. The main requirements can be summarised as:
- (a)
no more than 5% in transferable securities or money market instruments with one issuer. This can be raised to 10% but only in respect of a maximum 40% of the scheme value;
- (b)
no more than 20% in deposits with one body;
- (c)
100% may be invested in other schemes provided:
- (i)
they meet the requirements of the UCITS Directive, otherwise there is a limit of 30% in schemes offering equivalent protection to investors; and
- (ii)
no more than 20% may be invested in any one scheme, provided the scheme being invested into limits investment in other schemes (by way of a provision in its instruments constituting the scheme) to no more than 10% of its value;
- (i)
- (d)
no more than 20% in transferable securities and money market instruments within one group,
- (e)
no more than 20% with a single body from any combination of transferable securities or money market instruments, deposits, or OTC derivatives, and
- (f)
no more than 5% OTC derivative exposure to one counterparty, or 10% where the counterparty is an EEA credit institution or is subject to equivalent prudential supervision.
- (a)
- (3)
Where a scheme 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.
- (4)
Where derivatives are to be used within a scheme, a specific risk management system must be employed by the scheme operator to monitor the risk of all derivative positions. Details of this risk management systemand any significant change to it must be sent to the FSA by the authorised fund manager. The exposure to all derivative transactions must not exceed the current net asset value of the scheme. 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.
Information to investors
- (1)
The Directive sets out which documents must be made available or offered to investors. The three main documentary requirements are:
- (a)
the full prospectus,
- (b)
the simplified prospectus,and
- (c)
report and accounts.
- (a)
- (2)
The full prospectus requirements are covered in Annex A of the Directive and provide detailed information on the main parties involved in operating the scheme, the investment objectives and policy of the scheme and general day-to-day operating matters such as dealing times and income allocation.
- (3)
In addition to the full prospectus, the management company must publish a marketing document (the "simplified prospectus").This must be offered to any prospective investor free of charge before the conclusion of any contract for the purchase of units in that scheme. Most of the required contents for the simplified prospectusare set out in Schedule C of the Directive. Schedule C sets maximum rather than minimum requirements and is intended to provide a standardised document to be used for selling schemes that meet the requirements of the UCITS Directive throughout the EEA.
- (4)
Report and accounts must be prepared on a half yearly and annual basis and the latest report must be supplied to investors free of charge on request. They must also be available at the places specified in the full and simplified prospectus. The required contents for the report and accounts are set out in Schedule B of the Directive.
The management passport
- (1)
Section III of the UCITS Directive provides the framework for a management company to provide services by way of a branch or cross border services in another EEA state.
- (2)
UK firms which are UCITS management companies can operate in other EEA states similar to ISD firms. SUP 13 will be of particular relevance and explains the process such firms need to follow to provide services in other EEA states.
- (3)
Non-UK management companies are defined in the Handbook asEEA UCITS management companies. The manager will be a UCITS qualifier, and so be an authorised person under Schedule 5 to the Act, if it carries out scheme management activity and activity in connection with the operation of the scheme only. If the manager of such a scheme wishes to undertake the passported activities of managing investment (other than of a collective investment scheme), investment advice or safekeeping and administration of investments, as provided by article5(3) of the UCITS Directive, as well as scheme management activity, it will need to do so in accordance with an authorisation conferred by Schedule 3 to the Act and should refer to the procedures in SUP 13A and SUP 14 accordingly.
Marketing requirements (for UK firms)
- (1)
Section VIII of the UCITS Directive provides the framework for a UCITS scheme to undertake marketing in another EEA State. A UCITS scheme is required to comply with the marketing and advertising rules in the relevant Host State (Article 44). And is also required to maintain facilities in the Host State (Article 45).
- (2)
Certain documents must be provided to the overseas regulator in the relevant EEA State. The documents have to be provided at the same time as notification of the proposal to market there. The UCITS scheme may begin marketing two months following notification (Article 46) unless the Host State objects within that period.
- (3)
The relevant information and documents distributed in the Host State are required to be the same as those that the UCITS scheme provides in its Home State. The documents must be published in an official language of the Host State or another language if approved by the relevant overseas regulator (Article 47). So, COLL 4.2 (Pre-sale notifications) and COLL 4.5 (Report and accounts) will apply.
- (4)
If the UCITS scheme is being marketed in another EEA State, the publication of prices in the Host State is required (Article 34). COLL 6.3.11 (Publication of prices) will be applicable in this case.