EU UCIT Funds [EU]

UCITS

UCITS are undertakings for collective investment in transferable securities. UCITS are usually undertakings with the sole object of collective investment in transferable securities or other liquid financial assets, capital raised from the public and which operate on the principle of risk spreading, units of which are repurchased or redeemed out of the undertaker\’s assets.

They are effectively mutual funds which invest in baskets of securities collectively.  Units can generally be freely bought and sold. Capital is raised from the public. They operate on the principle of risk-spreading. The units are repurchased and redeemed out of the undertaking\’s assets.

The UCITs directive (and the attendant benefits) does not apply to “closed”  undertakings (share capital not redeemable on an ongoing basis). The directive does not apply to certain categories of collective investment undertaking which raise capital without promoting the sale of their units to the public in the EU undertaking; which may only be sold in third countries, or other categories of undertaking prescribed by regulations.

UCITS must be authorised by the authorities of the home state.  In order to comply, the investment company must comply with certain conditions The management company must be authorised for the management of the UCITS in its home state.UCITS may market their units in other member states subject to notification to the regulators.

UCITS may be constituted in a number of different ways under EU law.  In Ireland, it is possible to constitute them as trusts, investment partnerships, investment companies, contractual funds and collective asset management vehicles.

Investments

The investment of UCITS must comprise

• transferable securities and money market instruments dealt with in another EU market.
• units of authorised UCITS or other collective investments.
• deposits with credit institutions.
• financial derivative instruments, but only subject to conditions and limits

The directive sets out investment limits for each category of asset. Each particular fund is defined by and constrained by its particular funds rule.

A feeder UCITS is authorised to invest at least 85 percent of its capital in units in another UCITS or investment element of it.  It may hold up to 15 percent of its assets in:

• Liquid assets;
• Derivative instruments;
• Movable or immovable property.

The authorities of the home state of the feeder UCITS must give approval to invest in a master UCITS.

Information for Investors

There are requirements for prospectuses, half-yearly reports and annual reports to be furnished to investors.  Investment firms and management companies must publish a prospectus half-yearly report an annual report for each common funds which they manage.

An EU regulation from 2010 harmonises key investment information in respect of the investment policy objectives of UCITS.  There are rules regarding the presentation of the risk and award profile of the investment.  There is a format for presentation and explanation of charges incurred by investors. For each common fund that it manages, a management company is to draw a short form document containing key investor information.

Where they have carried out a subscription or redemption order for a unit-holder, management companies must send the unit-holder notice containing, in particular, the following information:

• the management company identification;
• the name of the unit-holder;
• the date and time of receipt of the order and method of payment;
• the date of execution;
• the UCITS identification;
• the number of units involved.

Management companies are not permitted to carry out a UCITS order in aggregate with an order of another UCITS or another client or with an order on their own account.

Manager of UCIT

The activities of management of a UCIT includes portfolio management, marketing and administration, legal and fund management accounting services, valuation, pricing, issuing, and redemption.  A management company must have certain paid-up capital and comply with organisational requirements and structures, in order to be authorised.

A management company established in one state may pursue activities in other states under the freedom to provide service or by the establishment of a branch.

An EU directive on procedures and rules of conduct for UCITS specifies requirements which management companies managing them and investment companies without a management company must comply with.  They must have a minimum capital.

Management companies are obliged to implement decision-making procedures and have the requisite structure to ensure that information is transmitted properly to the correct person.  They must implement appropriate internal controls.  They must maintain records of their business and organisation.

An investment company that is not designated as a management company may be authorised subject to various requirements including, in particular, an initial capital of at least €300,000.  Investment companies may not manage assets on behalf of third-party. They must provide a program of operations with the application for authorisation.

Investment companies may manage their own portfolio assets only and may not manage those of third parties.

The investment company\’s home state must provide prudential rules for investment companies that do not have a designated management company.

Requirement of Management Companies

The directive sets out the organisational requirements which management companies must comply with.  It sets out the rules of conduct as well as risk management and conflicts of interest issues. The directive applies to management companies which manage UCITS depositories and investment companies which do not have a designated management company.

Management companies must implement decision-making procedures and have the requisite organisational structure.  They must ensure that information is transmitted to the relevant parties in the required way.  They must implement internal controls and maintain records of its business and internal organisations.

Management companies must ensure the security, integrity and confidentiality of information.  They must have appropriate operational accounting procedures so that all the assets and liabilities of the UCITS can be identified at any time.  The accounting procedures must accord with the home state\’s accounting rules.

Senior management within management companies is responsible for general investment policies.  They must oversee the investment strategy for each UCITS.  They must ensure continuing compliance.  They must continuously assess the adequacy and effectiveness of measures and remedy any shortcomings.  They must advise and assist persons responsible for carrying out services and activities.  Persons must be designated to undertake compliance.

Risk Management

Management companies must maintain a risk management function which is independent of its operational unit.  It must implement risk management policy and procedures, ensure compliance with the risk limit system, provide advice to the board of directors in relation to identification of risks and support arrangements and procedures for valuation of derivatives.

Management companies must put in place a procedure to prevent certain persons performing personal transactions or advising another to perform a transaction divulging information which may influence the behaviour of persons in relation to the choice of transactions.  Particulars of transactions must be recorded in order to reconstitute if necessary details of the order. The records must be retained for five years.

Management companies must define potential situations and have an effective policy to manage conflicts of interest.  Conflicts of interest may arise where the management company

• may make a gain or avoid a loss at the expense of the UCITS
• where it has an interest in the outcome of a service provided to it
• the company has an incentive to favour the interests of one client over another;
• it carries out the same service for other clients.

Custodian

The assets of a UCIT must be entrusted to a depository. The depositary/custodian

• must ensure that the sale, purchase, and redemption and cancellation of units is effected in accordance with the fund rules and law;
• ensure that the value of units is  calculated in accordance with fund rules and law;
• carry out the instructions of the management company unless they conflict with the fund rules or law;
• ensure any consideration for transactions is paid within usual time limits;
• ensure the fund\’s income is applied in accordance with the fund rules and law.

Depositories are regulated and subject to requirements.  They must have a defined substantial level of capital. The UCIT must enter an agreement in relation to the services of the custodian.