COLLG 2A.1 Introduction

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

1. (a)

   the activities of management companies;

2. (b)

   the UCITS they manage; and

3. (c)

   how units of the UCITS they manage are sold to the public.

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

1. (a)

   the general scope of the Directive;

2. (b)

   the obligations of the management company and the 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.

The Directive also covers other topics which are not summarised in this section. These include:

1. (a)

   the ability to establish master-feeder UCITS, with the master UCITS and feeder UCITS either in the same or different EEA States; and

2. (b)

   a procedure for the merger of UCITS where the UCITS involved are established in different EEA States, or market their units in an EEA State other than the one in which they are established.

The Directive applies to any open-ended collective investment undertaking that is established and authorised as a UCITS in an EEA State, regardless of whether it is promoted in any other EEA State. However, the Directive applies only to collective investment undertakings that are promoted to the general public within the EEA, so collective investment undertakings that are restricted in their promotion fall outside the Directive's scope.

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.

The Directive assigns certain functions and requirements to a management company and a depositary. As a result, a UK firm which wishes to operate UCITS schemes or act as a depositary must first seek authorisation from the FCA. A UK firm operating a UCITS scheme (a UK management company) is referred to as the authorised fund manager (AFM).

In addition, the Directive imposes certain conduct of business and financial resources requirements on the UCITS management company.

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 UCITS' assets, and for ensuring that the issue, sale, redemption and cancellation of units and the calculation of the value of units are effected in accordance with the law and constituting document of the UCITS.

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

1. (a)

   management of other collective investment undertakings;

2. (b)

   managing investments; and

3. (c)

   advising on investments and safeguarding and administering investments, but in either case only where it also has permission to manage investments.

The Directive states the types of assets a UCITS can invest in. These include:

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.

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.

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

1. (a)

   no more than 5% may be invested 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 UCITS value;

2. (b)

   no more than 20% may be invested in deposits with one body;

3. (c)

   100% may be invested in other collective investment undertakings provided:

   1. (i)

      no more than 30% is invested in total in units in collective investment undertakings which are not UCITS and then only in collective investment undertakings that offer equivalent protection to investors;

   2. (ii)

      the collective investment undertaking being invested into is not permitted to invest more than 10% in other collective investment undertakings; and

   3. (iii)

      no more than 10% is invested in any one UCITS (which may be raised to 20% at the discretion of the Member State and has been raised to 20% for UK UCITS), except where a feeder UCITS is investing in a master UCITS (see COLL 5.8 (Investment powers and borrowing limits for feeder UCITS));

4. (d)

   no more than 20% may be invested in transferable securities and approved money-market instruments issued by one group;

5. (e)

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

6. (f)

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

Where a UCITS 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.

The management company must employ a specific risk management process to monitor the risk of all investment positions. Where derivatives are to be used within a UCITS, the management company must notify details of this risk management process and any significant change to it to its competent authority. The exposure to all derivative transactions must not exceed the current net asset value of the UCITS. 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.

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

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

1. (a)

   the prospectus;

2. (b)

   the key investor information document; and

3. (c)

   the annual and half-yearly reports and accounts.

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

In addition to the prospectus, the management company must publish a key investor information document for each UCITS. This is intended to be a standardised document used for selling UCITS throughout the EEA. It must be provided to any prospective investor free of charge so that they can take investment decisions on an informed basis. The required contents for the key investor information document are set out in the KII Regulation, which is directly applicable in each Member State.

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. They must also be available at the place specified in the prospectus. The required contents for the report and accounts are set out in Schedule B of the Directive.

Chapter 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.

UK firms which are UCITS management companies can operate UCITS established in other EEA states (see SUP 13 (Exercise of passport rights by UK firms) and COLL 12 (Management company and product passports under the UCITS Directive) for more information).

A non-UK management company may operate a UK UCITS by way of branch or cross border services in accordance with the provision of Schedule 3 to the Act and if so it is defined in the FCA Handbook as an EEA UCITS management company.

Chapter XI of the Directive provides the framework for a UCITS to be marketed in another EEA State. A UCITS is required to comply with the marketing and advertising rules in the relevant Host State (Article 91) and is also required to maintain facilities in the Host State (Article 92).

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. Before a UCITS can begin marketing in a Host State, it must submit a notification letter to the Home State regulator, together with the instrument constituting the scheme, the prospectus, key investor information document and the most recent annual and half-yearly reports. The Home State regulator has ten working days in which to process the notification and transmit it to the Host State regulator. The UCITS may begin accessing the market immediately following transmission of the notification (Article 93).

The relevant information and documents distributed in the Host State are required to be the same as those that the UCITS provides in its Home State. In addition, the key investor information document must be published in an official language of the Host State or another language if approved by the relevant Host State regulator (Article 94). The other documents may either be translated in the same way, or published in a language customary in the sphere of international finance (English is accepted to be such a language).

A UK UCITS may access the market in another EEA State using the procedure set out in Schedule 3 to the Act.

A UCITS from another EEA State may access the market in the United Kingdom in accordance with the procedure set out in section 264 of the Act.