Investment Funds 'Hot Topics' Roundtable: Burning Issues Affecting Investment Funds In Ireland

Author:Mr Andrew Bates
Profession:Dillon Eustace

This paper, whilst addressing a number of recent product

development issues specific to the Irish funds regulatory

regime for real estate funds and CCFs, has as its focus on what

I consider to be the main issue facing the Irish and broader

European funds industry; cross border distribution.

Although principally considering the position for UCITS, I

have also touched on the most recent proposals put forward as a

solution to the fragmented state of the European hedge funds


By way of background, it is thought that UCITS represent

approximately 70% of the Euro 5 trillion managed by the

European funds industry, with in excess of 30,000 UCITS having

being notified for sale in at least one other EU Member State

and with over 5,000 UCITS on offer in five or more Member

States. These statistics hide the fact that fund promoters

continue to experience frustration in effecting the

notifications required to passport a UCITS cross border.

For hedge funds, there has never been a harmonized regime

with the result being a significant divergence of structures,

authorization processes and marketing rules across Europe.

Latest industry recommendations, however, are for the removal

of barriers to cross border distribution, at least for the more

sophisticated investor market.

As one of the leading European domiciles for both UCITS and

hedge funds, Ireland is keenly interested in any developments

in these areas, with any removal of barriers being seen as

having only positive benefits for the Irish funds industry.

The last few months have seen publication of a number of

important reports and guidelines on cross border distribution,

with an expected White Paper on investment funds to be issued

by European Commission later this year.

  1. Cross-Border Distribution of UCITS The Way Forward

    Remains Unclear

    For "exporting" jurisdictions such as Ireland, the

    process, timing and costs involved in completing the

    notifications required to market a UCITS from one EU Member

    State into another remains one of the hottest funds related

    issues. It is worth noting that of the Euro 633 billion in

    Irish domiciled schemes as at end June, 2006, 79% or Euro 503

    billion is invested in UCITS products. Accordingly, whilst very

    much a broad European issue, the various outputs on the issue

    over the last 4 months have been of major relevance to


    In summary, following a two-stage consultation process, the

    CESR deliberations finalized in June, 2006 with the issue of a

    set of guidelines which unfortunately represent a failure to

    make any real progress in this area. This disappointment was,

    however, followed by the July, 2006 Expert Group Report on

    Market Efficiency which represented a breath of fresh air on

    the topic and made a series of simple but hugely pragmatic

    recommendations which, if ever implemented, would make a

    significant leap forward in creating a true single market for

    European investment funds.

    At the European Commission Hearing on Investment Funds

    (UCITS) in Brussels in October 2005, Charlie McCreevy, the

    European Commissioner for Internal Markets and Services made

    clear the need to take steps to ensure that the core objectives

    of the UCITS Directive are actually implemented stating

    "Making existing rules deliver is a must. But it must not

    blind us to some big questions about the longer-term

    challenges. Financial markets have not stood still since 1985

    or indeed 2001. Regulation needs to respond to these changes;

    to work with the grain of the markets. Otherwise, UCITS law

    risks becoming a straight-jacket rather than a


    Such sentiments may result in a positive reception for the

    Expert Group's report at Commission level, but based on

    past experience I am not holding my breath.


    The 1985 UCITS Directive (85/611/EEC) introduced the

    pan-European passport regime for what are referred to as

    "harmonized" undertakings for collective investment

    in transferable securities ("UCITS"). 2001 saw an

    overhaul of the UCITS regime, with new product and expanded

    management company opportunities being introduced by what are

    known as the UCITS III Directives.

    The passporting or cross border sales regime has as its

    foundation the concept of mutual recognition whereby a UCITS is

    only required to be authorized in one Member State (its

    "home Member State"), with the UCITS then

    being capable of being marketed into other EU Member States

    ("host Member States") without having to

    seek further authorization in those host Member States,

    provided certain notification requirements to the host Member

    State are fulfilled.

    Article 46 of the UCITS Directive requires a UCITS which

    wishes to market into another Member State to effect a

    notification to that host Member State which includes

    filing the following documentation with that notification:

    an attestation by the home Member State authority to the

    effect that the UCITS fulfils the conditions imposed by the


    the UCITS fund rules or its instruments of


    its full and simplified prospectus

    where appropriate, its latest annual report and any

    subsequent half-yearly report, and

    details of the arrangements made for the marketing of its

    units/shares in that other Member State.

    Additionally, Article 44 of the UCITS Directive provides

    that a UCITS which markets its units in another Member State

    must comply with the laws, regulations and administrative

    provisions in force in that State which do not fall within

    the field governed by the Directive. Essentially, this

    means that all of the requirements in relation to the

    authorization of UCITS, compliance with investment and leverage

    restrictions, corporate governance and ongoing supervision are

    exclusively within the remit of the home Member State whereas

    the principal item not governed by the Directive, marketing, is

    left with host Member State.

    The Frustrating Reality

    On the face of it, these notification and compliance with

    local marketing rules requirements seen relatively straight

    forward but in practice they have proved to be quite the


    Different rules apply in different jurisdictions as to the

    content of the notification, the translation of documentation

    into local languages, the filing process itself, the process to

    be followed in the case of umbrella schemes where not all

    sub-funds are to be sold cross-border and the layout of the

    annual/semiannual accounts where not all sub-funds are being

    sold cross-border, as well as the reality of queries from

    certain host Member States competent authorities on the UCITS

    structure itself (despite being a matter which is outside the

    host Member States competency) and even on the form of the

    attestation from the home Member State competent authorities.

    Additionally, the local marketing requirements differ from

    jurisdiction to jurisdiction. What was originally intended to

    be a process which would take no more than 2 months to complete

    has become for many fund groups a much more drawn out process,

    often taking 6 months and sometimes even longer. When

    multiplied by the number of jurisdictions into which a UCITS

    may wish to sell (it is not uncommon for a fund to wish to

    register in three or more Member States), one can appreciate

    the delays, costs and mounting frustration that promoters

    suffer in simply trying to get what is in itself a highly

    regulated product to market.

    CESR Guidelines A Lost Opportunity

    Following earlier failed attempts to overhaul the original

    UCITS regime, the UCITS III Directives significantly extended

    the investment strategies that could be pursued by UCITS and

    the authorisation capacity and passporting for their management

    companies. Unfortunately, the process for effecting

    cross-border notifications was not materially amended and all

    the ambiguities and potential for delays remain in place.

    Following the introduction of UCITS III, the initial areas

    of focus for the industry and regulators were the actual

    conversion process itself (the requirement to convert all

    existing UCITS I product to the new UCITS III regime) and, in

    the face of objections by certain EU Member States to new UCITS

    III products approved by other Member States (despite not being

    an area within their competency), the achievement of a common

    understanding of the meanings and new capacities provided by

    the UCITS III Product Directive. Since these issues have now

    largely been addressed, the most recent focus has been on the

    UCITS passport itself (for the fund, not the management


    Following a two step consultation process ending in May of

    this year, the Committee of European Securities Regulators

    (CESR) issued a set of guidelines entitled "CESR's

    Guidelines to Simplify the Notification Procedure of a

    UCITS". In summary, the CESR Guidelines recommended as


    (i) Notification Letter: CESR recommended a standardized

    notification letter which could be submitted in a language

    common in the sphere of international finance or in the or one

    of the official languages of the host Member State, if not

    contrary to the domestic legislation or regulations of the host

    Member State. CESR members also agreed to facilitate electronic

    filing of documents. On the face of it, this appeared positive

    but where local legal or regulatory provisions would require to

    be amended to facilitate such a standardized notification

    letter or the language in which it issues, the benefits of this

    recommendation are lost. No positive action is required.

    (ii) Areas of Competency: CESR has restated the principle

    that a host Member State cannot use any reasons other than

    non-compliance of marketing arrangements to refuse the

    passporting notification made. In other words, divergent

    interpretations as to whether a UCITS complies with the

    Directive in the first place cannot be used as a blocking

    mechanism. This, unfortunately, has not stopped certain Member

    States blocking notifications on grounds which do not relate to

    marketing arrangements, although it is recognised that the CESR

    deliberations on the UCITS...

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