COLLG 2.1 Introduction

1. (1)

   This section summarises the scope and content of the UCITS Directive, as amended ("the Directive"). The Directive establishes a degree of harmonisation of EEA States' laws governing:

   1. (a)

      the activities of management companies;

   2. (b)

      the schemes they manage; and

   3. (c)

      how their schemes' units are sold to the public.

2. (2)

   The main topics governed by the Directive and summarised in this section concern:

   1. (a)

      the general scope of the Directive;

   2. (b)

      obligations of the UCITS management company and depositary;

   3. (c)

      investment and borrowing powers and limits;

   4. (d)

      information for investors,

   5. (e)

      how the management company passport works; and

   6. (f)

      marketing requirements.

1. (1)

   The Directive applies to any open-ended collective vehicle that is established and authorised in an EEA State and that falls within its scope, regardless of whether it is promoted in any other EEA State. However, the Directive applies only to schemes that promote to the general public within the EEA, so schemes that are restricted in their promotion fall outside the Directive's scope.

2. (2)

   Furthermore, the Directive does not cover collective investment schemes that are authorised in an EEA State with different investment and borrowing powers to those covered by the Directive. So, schemes that invest in (for example) real property or commodities are not within the Directive's scope.

1. (1)

   The Directive assigns certain functions and requirements to a management company and a depositary. As a result, the FSA has identified the authorised fund manager as the UCITS management company. So, a UK firm which wishes to operate UCITS schemes must first seek authorisation as a UCITS management company.

2. (2)

   In addition, the Directive imposes certain conduct of business and financial resources rules on the UCITS management company. These are set out in other parts of the Handbook, as listed in COLLG 5.1.7 G.

3. (3)

   The Directive states that the depositary must be subject to 'public control' and provide 'sufficient financial and professional guarantees'. The depositary is responsible for the safe keeping of a scheme's assets, and for ensuring that the issue sale, redemption and cancellation of units and calculation of the value of units are effected in accordance with the law and rules of the scheme.

4. (4)

   Two principal rules govern the relationship between the UCITS management company and the depositary of a scheme. First, no single company may act in both capacities. Second, they must act independently of each other and, apart from management of a UCITS scheme, a UCITS management company cannot engage in any activities other than:

   1. (a)

      management of other collective investment schemes;

   2. (b)

      managing investments; and

   3. (c)

      advising on investments and carrying out safeguarding and administration of collective investment scheme units, but in either case only where it also has permission to manage investments.

[not used]

1. (1)

   The Directive states the types of assets a scheme can invest in. These are:

   1. (a)

      transferable securities;

   2. (b)

      approved money-market instruments;

   3. (c)

      deposits;

   4. (d)

      derivatives and forwards; and

   5. (e)

      units in other collective investment schemes.

2. (1A)

   The UCITS eligible assets Directive, which came into effect in July 2008, clarifies the definition of terms used in the Directive by setting out criteria for determining which types of transferable securities, approved money-market instruments and derivatives are eligible to be held by a UCITS scheme.

3. (2)

   Within this range of investment assets there are some detailed spread and concentration rules. The main requirements can be summarised as:

   1. (a)

      no more than 5% in transferable securities or approved money-market instruments with one issuer - this can be raised to 10% but only in respect of a maximum of 40% of the scheme value;

   2. (b)

      no more than 20% in deposits with one body;

   3. (c)

      100% may be invested in other schemes provided:

      1. (i)

         they meet the requirements of the Directive, otherwise there is a limit of 30% in schemes offering equivalent protection to investors; and

      2. (ii)

         no more than 20% may be invested in any one scheme, provided the scheme being invested into limits investment in other schemes (by way of a provision in its instrument constituting the scheme) to no more than 10% of its value;

   4. (d)

      no more than 20% in transferable securities and approved money-market instruments within one group;

   5. (e)

      no more than 20% with a single body from any combination of transferable securities or approved money-market instruments, deposits, or OTC derivatives, and

   6. (f)

      no more than 5% OTC derivative exposure to one counterparty, or 10% where the counterparty is an approved bank.

4. (3)

   Where a scheme has the investment objective of replicating the composition of a qualifying index, it may have an exposure of up to 20% in any issuer or exceptionally up to 35% (but only for one issuer). A qualifying index is one which has a sufficiently diversified composition, is a representative benchmark for that market, and is published in an appropriate manner.

5. (4)

   The authorised fund manager must employ a specific risk management process to monitor the risk of all investment positions. Where derivatives are to be used within a scheme, the authorised fund manager must notify details of this risk management process and any significant change to it to the FSA. The exposure to all derivative transactions must not exceed the current net asset value of the scheme. The underlying assets representing any derivative position must be taken into account in applying the spread of limits above. This does not apply in the case of any derivative which is on a qualifying index.

6. (5)

   A scheme may borrow up to 10% in value of its assets, provided the borrowing is on a temporary basis.

1. (1)

   The Directive sets out which documents must be made available or offered to investors. The three main documentary requirements are:

   1. (a)

      the full prospectus,

   2. (b)

      the simplified prospectus; and

   3. (c)

      the annual and half-yearly reports and accounts.

2. (2)

   The full prospectus requirements are included in Annex A of the Directive and provide detailed information on the main parties involved in operating the scheme, the investment objectives and policy of the scheme, and general day-to-day operating matters such as dealing times and income allocation.

3. (3)

   In addition to the full prospectus, the management company must publish a simplified prospectus. This is intended to be a standardised document used for selling schemes that meet the requirements of the UCITS Directive throughout the EEA. It must be offered to any prospective investor free of charge before the conclusion of any contract for the purchase of units in the scheme. Most of the required contents for the simplified prospectus are set out in Schedule C of the Directive. A Recommendation (2004/384/EC) was issued in 2004 by the European Commission in relation to those requirements.

4. (4)

   Reports and accounts must be prepared on a half-yearly and annual basis and the latest report must be supplied to investors free of charge on request. They must also be available at the places specified in the full and simplified prospectuses. The required contents for the report and accounts are set out in Schedule B of the Directive.

1. (1)

   Section III of the Directive provides the framework for a UCITS management company to provide services in another EEA State by way of a branch or cross border services.

2. (2)

   UK firms which are UCITS management companies can operate in other EEA states similarly to MiFID firms. SUP 13 explains the process such firms need to follow to begin providing services in other EEA states.

3. (3)

   A non-UK management company is defined in the Handbook as an EEA UCITS management company. It will be a UCITS qualifier, and so be an authorised person under Schedule 5 to the Act, if it only carries out scheme management activity and activity in connection with the operation of the scheme. If the manager of such a scheme wishes to undertake the passported activities of managing investments (other than of collective investment schemes), advising on investments, or safeguarding and administering investments, as provided by Article 5(3) of the Directive, as well as scheme management activity, it will need to do so in accordance with an authorisation conferred by Schedule 3 to the Act and should refer to the procedures in SUP 13A and SUP 14 accordingly.

1. (1)

   Section VIII of the Directive provides the framework for a UCITS scheme to undertake marketing in another EEA State. A UCITS scheme is required to comply with the marketing and advertising rules in the relevant Host State (Article 44) and is also required to maintain facilities in the Host State (Article 45). The European Commission issued an Interpretative Communication in 2007 (COM (2007) 112) clarifying the respective powers of the Home State and Host State regulators in relation to marketing of UCITS schemes.

2. (2)

   Certain documents must be provided to the Host State regulator in the relevant EEA State at the same time as notification of the proposal to market there. The UCITS scheme may begin marketing two months following notification (Article 46) unless the Host State regulator objects within that period.

3. (3)

   The relevant information and documents distributed in the Host State are required to be the same as those that the UCITS scheme provides in its Home State. The documents must be published in an official language of the Host State or another language if approved by the relevant Host State regulator (Article 47). So, COLL 4.2 (Pre-sale notifications) and COLL 4.5 (Report and accounts) will apply.

4. (4)

   The publication of prices in the Host State is also required (Article 34). COLL 6.3.11 (Publication of prices) will be applicable in this case.