The European Securities and Markets Authority (Esma) has published proposals on October 13 to deal with the fact that the majority of European Union member states have not yet approved legislation implementing the Ucits IV directive, even though the deadline to do so passed on July 1.
The European regulator says the proposals are designed to avoid difficulties, where this is possible, arising from the fact that in some cases the legislative framework for proper implementation of the directive, including cross-border regulatory measures, are not yet in place.
Without prejudice to any measures taken by the European Commission with regard to the late transposition of Ucits IV, Esma says it aims to "address the situation at an operational level in order to minimise, as far as possible, the impact on industry and investors" resulting from failing to bring the directive into national law, and is putting forward practical arrangements for cross-border operations involving one member state that has not yet transposed the directive.
According to PricewaterhouseCoopers, as of September 29 the EU member states that had not yet implemented the directive included Belgium, Finland, Greece, Hungary, Italy, Lithuania, Poland, Portugal, Romania and Spain.
Esma has identified a number of issues that could be handled by arrangements between regulators. Ucits management companies in a member state where the directive has passed into national law may not be able to benefit from the management company passport if the country where it wants to establish a fund has not transposed the directive.
Regulators in member states that have transposed the directive may have difficulties delivering notification of the marketing of Ucits established in their jurisdictions to their counterparts in countries that have not done so, while the regulator of a member state that has transposed the directive may receive a notification for marketing of a Ucits from its counterpart in a country that has not.
In addition, Esma notes that a management company in a member state where the directive has not been transposed cannot create a feeder fund to a master fund established in another EU jurisdiction, nor can it merge one of the Ucits it manages with a Ucits domiciled in another jurisdiction.
The European regulator notes that not all situations arising from failure to transpose the directive can be accommodated through practical arrangements that are "legally sound".
It says the practical arrangements proposed are based on the jurisprudence of the EU Court of Justice on the direct applicability of self-executing provisions contained in EU directives.
Ucits IV "unequivocally" gives Ucits management companies and investment companies the rights to market Ucits units on a cross–border basis and to provide services that for management companies include the management of collective portfolios on a cross-border basis, Esma says.
It argues that European primary law obliges member states to transpose directives into their national law, leaving them the choice of form and methods, and to create a legal framework in which "the rights and obligations arising from the directive can be recognised with sufficient clarity and certainty to enable citizens to invoke them."
In other words, member states have an obligation to reconcile their legislation with the objectives of a directive at the end of the transposition period. The European court has held that they are liable to pay damages where loss results from their failure to transpose a directive in whole or part.
Esma is proposing that regulators should not be able to refuse a valid notification for the marketing of a Ucits on their territory under the directive on the ground that their member state has not yet implemented the directive.
However, the regulator of a country that has not transposed the directive cannot deliver new notifications for the marketing of Ucits unless they can satisfy Esma that their national legislation, while not fully implementing Ucits IV, does at least comply with articles 12, 14, 15 and 51 of the directive – governing prudential provisions, rules of conduct, investor complaints and risk management – and where applicable their related implementing measures.
The regulator in the non-transposing country should also able to fulfil its obligations on access to documents under the directive. If these conditions are satisfied, notification can take place on a regulator-to-regulator basis as if both countries had transposed the directive, using a template that Esma will draw up.
Even if the legislation of the non-transposing member state does not comply with the articles in question, this procedure remains possible on condition that the management company and its home regulator certify that the management company complies with these provisions on a voluntary basis.
Esma says management companies in a member state that has implemented Ucits IV should be able to create a fund via the management company passport in a country where the directive has not been transposed, since it says the relevant provisions of the directive are of a self-executing nature. Any existing local rules to the contrary will not be valid.
However, management companies in a country that has not transposed the directive can make use of the passport only if its national legislation already materially complies with articles 12, 14, 15 and 51, and their regulators can provide the co-operation required by Article 101 and implementing measures in the case of remote management.
Esma considers the case of a merger between two Ucits established in the same member state that has not transposed the directive, where at least one Ucits is marketed in other EU countries.
Since the directive requires that both Ucits involved in a merger provide information to their investors, including those in different member states, the merger may take place where the national legislation of the non-transposing fund domicile nevertheless materially complies with the Ucits IV merger rules contained in articles 40, 41, 42, 43 and 45 and their implementing measures –otherwise not.
Due to the "inherent complexity of the operation", Esma believes that cross-border mergers involving Ucits established in different member states, one of which has not transposed the directive, are not possible on the sole basis of the direct applicability of the directive.
The European regulator also believes that master-feeder structures should not be permitted if one of the two member states in which the Ucits are established has not transposed the directive because this issue also cannot be addressed solely on the basis of the direct applicability of the directive.
Nor, it says, should master-feeder structures be permitted if both the proposed master and feeder Ucits are domiciled in a member state that has not transposed the directive and the proposed feeder Ucits is the subject of a notification of marketing in another member state.
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