The Directive on Undertakings for Collective Investment in Transferable Securities (ucits) - Development and Key Practical Aspects

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UCITS – How it works

As demonstrated- UCITS Framework has a long history of amendments and further improvements, however the set in stone principles established back in the 1985 remains: these are: high level of investors protection, common EU sell and buy standards, professional portfolio management, high liquidity and risk diversifications. This section of the paper concentrates on the how the UCITS funds work in practice, what are the core principles and definition, domiciliation, what is the structure of funds, the key fund documentation required as well as financial reporting and tax treatment.

The main aims of the Directive as described by the European Commission are: to offer investors a wider choice of products at lower cost via the more efficient UCITS marker in the EU, provide better quality investor information, ensure more efficient fund supervision and to keep the EU investment sector competitive by continuously adjusting the rules to the marker developments. The Directive lay down the rules on summary information document to make it easier for the consumer to understand the product; a genuine European passport for UCITS management companies, which allows a management company located in one EU country to manage funds in other EU countries; marketing of UCITS in other countries, e.g. by simplifying administrative procedures; mergers of UCITS in other countries and a stronger supervision of UCITS and of the companies that manage them, e.g. through enhanced cooperation between national financial services supervisors.[6]

In more practical terms: Once a UCITS is established and authorized by the regulatory authority in its chosen country of domicile (an EU country only), it can then be marketed and distributed to all types of investors (both retail and institutional) throughout the European Economic Area (EEA) via the UCITS European passport. UCITS can also be sold outside the EEA subject to each individual country’s national regime. In fact, many UCITS are available for distribution in non-EU countries such as Switzerland, Hong Kong, Singapore, Taiwan, Chile, Peru, Bahrain, South Africa and Japan. In short, once an investment product is duly registered under UCITS, it can be distributed to a very large proportion of the global asset management market. UCITS must invest in only eligible assets. Core eligible assets include the following: Transferable securities admitted to or dealt in on a regulated market, Money market instruments, Deposits with credit institutions, Closed-ended funds, Open-ended funds, financial derivative instruments of which the underlying consists of eligible assets or interest rates and foreign exchange rates or currencies and financial indices. As mentioned, the key benefit obtained from UCITS registration is that once your fund has been approved by the regulatory authority in the country of domiciliation, distribution to all other countries in the EEA is relatively simplified and streamlined, and takes the form of a standardized notification procedure with the regulatory authorities for each of the countries of distribution. The level of interaction with the host country regulator and each EU country’s own interpretation of the UCITS directive, as well as the factors noted below, make the decision on where to domicile your UCITS often one of the first and most important determinations. [7]

When it comes to structure UCITS are structured as either stand-alone funds or multiple compartment funds. The legal structure that is chosen for a UCITS is one of the key decisions a company is required to make, and typically there are multiple options. The structures available for a UCITS, like with many of the other crucial decisions, are domicile-driven. Each country in the EU has its own types of vehicles, structures and solutions available to promoters looking to open UCITS. However, there are often similarities between offerings of the primary fund domiciles and there is certainly an option for either a corporate or partnership structure. As for the required documents under the directive: thw two key documents are the prospectus in one of the official languages of the country of domicile including all information necessary for investors to be able to make informed judgment, the second requires document established by UCTIS IV Directive is the KII documents that includes a pre-contractual information. The Directive also established main principles for the financial reporting and tax treatments. While outline and some specific requriments of annual ad semi-annual reports are left to be regulated under the local laws of country of domiciliation, the general UCITS requirements for financial reporting include the following: Audited Annual Report — must be filed with regulatory authority (and published) within four months of the fund’s year-end and available to investors in the manner specified in the prospectus as well as the KII document and an Unaudited Semi-Annual Report. UCITS are generally exempt from taxation at the fund level, with the exception of some registration duties or other small or nominal taxes due in the country of domiciliation. Withholding taxes on income will depend heavily on the country of domiciliation and the fund’s or investors’ ability to benefit from doubletax treaties in existence. In general, there is no withholding on distributions made from a UCITS to its investors. However, tax planning and consultation with tax professionals is paramount when deciding on both the domiciliation and structuring of a UCITS based on the target and expected investors. This is especially true given that some countries require shareholder tax reporting to investors residing in those jurisdictions during a given tax year. [8]

Conclusion

UCITS Directive has shown itself successful and efficient throughout the years, this is clearly demonstrated by the raising attractiveness of the UCITS funds and the money they are collecting as well as with the increasing scope of the aspect regulated by the Directive and how it seems to follow along the rising requirement of the financial markets. The further amendments of the Directive throughout the years demonstrate the common stance of both EU-institutions and members states on the proper regulation of the funds.

The reasons behind the success of this legislative framework could be the following: First the good timing of the initial proposal in 1985 that aligned with the first significant increase in the interest in the financial markets. The introduction of UCITS I in 1985, when the sector was not yet heavily regulated by the national laws increased chances of successful harmonisation at EU-level and the countries being able to successfully adjust their local legislation and later – further