On January 30, the European Securities and Markets Authority issued an opinion on the minimum principles that management companies must apply when establishing different UCITS share classes. The opinion is aimed at ensuring a harmonised approach throughout the EU, where different national approaches have been observed up to now.

The opinion is addressed to national regulators including Luxembourg's Commission de Surveillance du Secteur Financier (CSSF), which has already endorsed it in a press release on February 13. The CSSF expects Luxembourg-domiciled UCITS management companies to take any necessary measures to comply with the transitional provisions set out in the opinion, and any new UCITS share classes created will have to comply with the principles. ESMA says share classes that are not compliant with the principles may continue to exist, but should close to investment from new investors within six months of the opinion's publication, that is, by July 30, 2017, and to additional investment from existing investors within 18 months of publication, by July 30, 2018.

ESMA sets out four principles regarding the establishment of UCITS share classes:

1. Common investment objective.

Multiple share classes of the same UCITS should have a common investment objective reflected by a common pool of assets. ESMA considers that hedging arrangements at share class level, apart from currency risk hedging, are not compatible with the requirement for a UCITS to have a common investment objective. Therefore strategies that seek to protect investors from certain types of risk should be set up as separate UCITS or sub-funds. The authority says this is because the use of derivative overlays for a particular share class could result in that share class having an individual risk profile and therefore an investment objective that is no longer in line with the objective of the UCITS or sub-fund.

2. Non-contagion.

UCITS management companies should implement procedures to minimise the risk that features specific to a single share class could have a potentially adverse impact on other share classes of the same UCITS or sub-fund. The risk of contagion or spill-over is particularly high where the UCITS concludes derivative contracts. In such cases these risks should be mitigated and monitored, and borne only by investors in the particular share class. Any administrative costs arising from the need for additional risk management should be borne only by investors in that share class.

3. Pre-determination.

All features of a particular share class should be pre-determined before the UCITS is established, including currency risk hedging.

4. Transparency.

Where there is a choice between two or more share classes, differences between them should be disclosed to investors through the UCITS prospectus. The management company should have an updated list of share classes readily available and implement appropriate stress tests.

The full text of the opinion may be accessed here.

Olivier Sciales
Chevalier & Sciales
Partner
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Email: oliviersciales@cs-avocats.lu
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