New Organisational Requirements for UCITS Management Companies under UCITS IV

Author:Mr Andrew Bates, Paula Kelleher, Karen Jennings, Breeda Cunningham and Andrew Lawless
Profession:Dillon Eustace


UCITS IV1 introduces significant changes for UCITS management companies which will need to be addressed well in advance of the end June 2011 start date. In particular, through the UCITS IV Implementing Directive2, new MiFID like organisational and internal control requirements, conflicts of interest requirements and risk management requirements will be applied to UCITS management companies. In addition, UCITS management companies will need to comply with new rules of conduct.

In advance of finalisation of a revised set of UCITS Notices and a revised Guidance Note 04/7, this paper outlines the key changes coming down the track and discusses the impact which they are expected to have on UCITS management companies and how they carry on and control their activities.

Note that the focus of this paper is on collective portfolio management not individual portfolio management.

Source and Rationale

The Implementing Directive of July 1, 2010 contains the level 2 measures relating to the organisational requirements for UCITS management companies under UCITS IV. The Implementing Directive must be introduced by Member States by end June 2011.

The new organisational, internal control and other requirements under the Implementing Directive seek to align the UCITS and MiFID regimes to a significant extent, with the aim of achieving equal standards between different financial sectors and, at a micro level, within asset management businesses.

Two key themes running through the Implementing Directive are the protection of the end investor and market integrity. When one considers the new rules of conduct in particular, it is clear that an examination will need to be made by management companies of existing class structures within UCITS schemes as well as looking at matters such as costs applied to UCITS to ensure that duties towards end investors are complied with. In other words, this is not simply a process for reorganising procedures and implementing new controls, it goes much further than that.

In many cases, the provisions of the Implementing Directive are quite prescriptive, setting out in considerable detail specific requirements, the controls that need to be put in place relating to those requirements and upon whom obligations are imposed. Whilst these provisions are quite focused on procedures and controls, it is important to remember that their purpose is ultimately to protect the end investors. That needs to be at the forefront of any consideration of how and why one changes one's procedures in light of the UCITS IV requirements.

The new requirements will impact all UCITS management companies, whether they operate on a fully delegated basis delegating out administration, investment management and distribution activities or whether they retain, for example, administration and delegate out investment management and distribution.

Self-managed investment companies are equally affected by these new requirements and all references in the Implementing Directive to management companies should be read as also being a reference to self-managed investment companies.

In addition, the new requirements will impact boards of UCITS management companies and of self-managed UCITS investment companies which currently operate on a collective responsibility basis as it is envisaged that it will now be a requirement within a UCITS business plan and organisational structure to name specific individuals as being responsible for specific duties.

Proportionality Principle and Delegation

The Implementing Directive recognises the principle of proportionality. In other words, the application of most (but not all) of the requirements of the Implementing Directive must be proportionate and must take into account the different nature, scale, and complexities of UCITS management companies.

Factors which may be relevant in determining the extent to which the proportionality principle should apply may include the number of UCITS managed, number of sub-funds within umbrellas, the extent of use of derivatives or of complex trading strategies, number of investors.

The Implementing Directive also recognises UCITS management companies should be able to delegate some of their activities to third parties provided proper due diligence checks are carried out to ensure the third party is qualified.

In many cases, therefore, UCITS management companies will seek to meet their obligations by ensuring that their delegates meet the requirements of the Implementing Directive. Ultimate responsibility for ensuring that they do so, however, rests with the management company.

This may require additional controls to be placed over delegates, reviews to be carried out of service provider contracts and reconsideration of reporting lines, access to information and capacity to verify.

General requirements

Article 4 of the Implementing Directive imposes general requirements on UCITS management companies to have adequate internal organisation and control mechanisms, clear reporting lines and assignment of responsibilities. Other requirements imposed are to protect confidentiality, the security and integrity of information and the requirement to ensure adequate business continuity policies. The principle of proportionality and the recognition of the ability to delegate, as highlighted above, are applicable.

Management companies will need to consider the proportionality principle and how it applies to their business. They will need to take into account the nature, scale and complexity of their business which will focus on the types and complexity of UCITS they manage, the number of UCITS and sub-funds they manage, the number of...

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