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UCITS Update

2012年 12月 4日

UCITS IV Enhancement Process for Self-Managed Investment Companies

The Central Bank has now confirmed that UCITS organised as self-managed investment companies ("SMICs") will need to complete a UCITS IV enhancement process by 1 July  2013. For most SMICs, this will involve updating business plans and statements of responsibility.

In the context of the Central Bank’s Consultation Paper 50 engagement and prior to the implementation of the UCITS IV Directive in Ireland on 1 July 2011, the Central Bank indicated that a substantive review of the organisational requirements applicable to SMICs would follow the initial implementation of UCITS IV1.

This was founded on the basis of Recital (5) to the UCITS IV Management Company Directive2 which provides that the Directive’s rules on administrative procedures and internal control mechanisms should apply to both UCITS management companies and SMICs, taking into account the principle of proportionality.

The Central Bank's stated intention has been to complete this second phase "UCITS IV SMIC enhancement process" by 1 July 2013.

As you may be aware, there has been some debate on the substantive elements of this review. Initially, the Central Bank proposed to apply all the organisational requirements applicable to UCITS management companies (as contained chapter II of the UCITS IV Management Company Directive), to SMICs.  Following industry engagement, this position was reviewed and, most recently, the Central Bank indicated that certain key elements applicable to UCITS management companies would not apply to SMICs given the nature, scale and complexity of the business of a SMIC and the nature and range of services and activities undertaken in the course of that business. This is in line with Recital 5 of the UCITS IV Management Company Directive and the need to consider the principle of proportionality.

Specifically, the requirement to appoint a permanent compliance officer will not apply to SMICs, nor will the requirement to establish a permanent internal audit function.

However, a range of other obligations will apply to SMICs from 1 July 2013. These include obligations in relation to electronic data processing, accounting procedures, supervisory controls, personal transactions, recording of portfolio transactions, recordkeeping, recording of subscription and redemption orders and some additional general organisational requirements.

While not directly related to the introduction of UCITS IV, the Central Bank considers that SMIC boards may no longer operate a model of collective responsibility (whereby the board of directors of a SMIC are collectively responsible for the various UCITS management functions). The Central Bank has built this in to the UCITS IV SMIC enhancement process. From 1 July 2013, all SMIC boards will need to identify directors or other designated individuals in respect of each of the 10 UCITS management functions.

The Central Bank does not propose to review revised business plans and statements of responsibility for all SMICs that will be affected by this. Instead it proposes to accept self-certification filings on a phased basis, in advance of the 1 July 2013 deadline.

New SMICs, draft documentation for which is submitted to the Central Bank from 1 January 2013 onwards, will be required to adhere to the enhanced UCITS IV requirements from authorisation.

ESMA Opinion on UCITS Eligible Assets

The European Securities and Markets Association ("ESMA") issued a paper on 20 November 2012 the net effect of which will be to prohibit UCITS from investing in unregulated investment funds, via the so-called “trash bucket”, from 31 December 2013.

The paper (the "ESMA Opinion") was issued under the regulation providing for the establishment of ESMA3 (the "ESMA Regulation"). The purpose of the ESMA Opinion is to bring a common EU wide position on the interpretation of the scope of the trash bucket.

In a sense, it is welcome that ESMA has addressed one of the few remaining aspects of UCITS asset eligibility that was still operating differently in various EU member states. However some concerns have been raised in relation to two aspects of the ESMA Opinion.

The first concern relates to the form of the paper. This is framed as an Article 29 opinion and therefore issued to EU member state competent authorities with the aim of “building a supervisory culture and consistent supervisory practices” across the EU. As far as we understand, this is the first published Article 29 opinion ESMA has issued.

Arguably, it would have been more appropriate that a paper such as this would have been issued under Article 16 of the ESMA Regulation i.e. a guideline or recommendation issued “with a view to establishing consistent and effective supervisory practices” within the EU. However, guidelines/recommendations under Article 16 are required to comply with a range of due process measures that can be avoided for an Article 29 opinion including the following: an open public consultation; an opinion of the Securities and Markets Stakeholder Group; and a qualified majority approval (rather than a simple majority) of EU member states competent authorities, under the auspices of the ESMA Board of Supervisors.

This draws the (perhaps sceptical) conclusion that ESMA opted for the Article 29 route as a means of short-cutting the more onerous procedural requirements applying to an Article 16 guideline or recommendation.

The second concern relates to some of the potential unintended consequences of the ESMA Opinion.

The conclusion of the ESMA Opinion, supported by relatively brief analysis, operates on an interpretation of the UCITS IV Directive4 and an assumption that “transferable security” and “money market instrument” were terms intended to be mutually exclusive of “shares in collective investment schemes”. This position appears very questionable given (i) the UCITS Eligible Assets Directive5 (and terms retained explicitly in the Irish UCITS IV Regulations6) explicitly recognises that closed ended funds can meet the characteristics of, and thus be considered to be, transferable securities; and (ii) the accepted practice that exchange-traded shares/units in exchange traded funds ("ETFs") can also qualify to meet the transferable security characteristics – a classification relevant, and indeed necessary, in the context of certain US domiciled ETFs.

Despite these concerns and potential ambiguities, the Central Bank of Ireland can be expected to advocate compliance by Irish UCITS with the findings of the ESMA Opinion and endorse this position on a policy basis.  We have sought confirmation as to whether that will be formally communicated by the Central Bank or not - and whether the Central Bank may address the ambiguities relating to closed ended funds and ETFs.

UCITS are given until 31 December 2013 to bring their portfolios into compliance with the findings of the ESMA Opinion.

Please click here to access the EMSA Opinion.



1 Directive 2009/65/EC and supporting directives and regulations.

2 Commission Directive 2010/43/EU.

3 Article 29(1)(a) of Regulation 1095/2010.

Directive 2009/65/EC.

Directive 2007/16/EC.

S.I. 352/2011.


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