Undertakings in Collective Investments and Transferable Securities ("UCITS")

(i) Central Bank publishes the 23rd edition of the UCITS Q&As

On 5 July 2018, the Central Bank of Ireland ("Central Bank") published the twenty third edition of its "UCITS –Questions and Answers" ("UCITS Q&As"). The following question has been amended:

Question ID 1002: Provides that where a UCITS invests in a non-UCITS fund, the constitutional document of the non-UCITS must include a prohibition on investing more than 10% in other investment funds; and that the non-UCITS  must be  subject to requirements in its jurisdiction of domicile which are equivalent to certain UCITS investor protections. If this is not the case, the non-UCITS must have requirements of the same effect in its constitutional document or offering document.

Compliance with the revised UCITS Q&As shall be as soon as possible and no later than 5 October 2018.

A copy of the Twenty-Third edition of the UCITS Q&A is available here.

For a more detailed analysis please find a Dillon Eustace article on the topic here.

(ii) New application forms published for UCITS in Money Market Funds

Between 1 July 2018 and 30 September 2018, the Central Bank published four new application forms for Undertakings in Collective Investments in Transferable Securities ("UCITS") in Money Market Funds on its UCITS Checklist webpage. The forms added to each Checklist are as follows:

  • A cover page form (updated July 2018);
  • Information ORION form (updated August 2018);
  • Prospectus form (updated July 2018); and
  • Constitutional document form (updated July 2018).

Each of the UCITS forms can be found here.

(iii) Delegated Regulation clarifying depositaries' safe keeping obligations under UCITS Directive adopted and published

On 12 July 2018, a 'Delegated Regulation amending Delegated Regulation 2016/438 with regard to the safekeeping duties of depositaries' for UCITS funds ("New Delegated Regulation") was published by the European Commission.

The New Delegated Regulation amends Delegated Regulation 2016/438 to clarify the requirements set out in Article 16 of same along with Article 22a(3)(c) of the UCITS Directive 2009/65 (as amended by the UCITS V Directive 2014/91).

Under these articles where a depositary delegates the safe keeping function of UCITS clients' assets to a third party then the assets must also be segregated at the level of the delegate. However, the European Commission has noted that the application of these articles has varied across Member States hence triggering the need for amendments to be made via the New Delegated Regulation. The amended articles of Delegated Regulation 2016/438 are Articles 13(1)(c), 13(2), 15, 16, 17(2), 17(3) and 22(3)).

The New Delegated Regulation will now be considered by the European Parliament and the Council of the European Union. Once adopted the New Delegated Regulation will enter force twenty days after its publication in the Official Journal of the European Union and will apply eighteen months thereafter.

A copy of the New Delegated Regulation is available here.

(iv) Update to Q&A on the application of UCITS Directive

On 23 July 2018, the European Securities and Markets Authority ("ESMA") published an updated version of the 'Questions and Answers – Application of the UCITS Directive' ("Q&A") which is the first update since May 2018.

The update adds four new questions and answers to the document. The questions posed are:

  • Question 5b of Section I: Can netting and hedging arrangements be taken into account for the purposes of calculating issuer concentration limits pursuant to Article 52 of the UCITS Directive?

    The Q&A confirms that the only netting arrangements that can be taken into account are those within the meaning of CESR Guidelines on Risk Measurement and Calculation of Global Exposure when calculating the issuer concentration limits set down in Article 52 of the UCITS Directive (Regulation 70 under the Irish UCITS Regulations).
  • Question 6a of Section I: Is a UCITS permitted to invest in other UCITS or collective investment undertakings with different investment strategies or investment restrictions? The Q&A confirms that the prospectus of the UCITS should disclose, where applicable, that the target funds could have different investment strategies or restrictions to those applicable to the UCITS fund.
  • Question 7a of Section I: What are the supervisory responsibilities of competent authorities in host Member States when a UCITS management company provides investment services through a branch established in the host Member State?
    The Q&A sets down the supervisory responsibilities of competent authorities in host Member States where a UCITS management company provides MiFID investment services through a branch established in a host Member State.
  • Question 1 of Section X: According to Article 22(7) of the UCITS Directive the depositary (or any third party to which the custody function has been delegated) shall not reuse the assets they hold in custody for their own account. Does this provision imply that a depositary (or a delegated third party) should never act as counterparties in a transaction of assets that they hold in custody (including, but not limited to, transfer, pledge, sale and lending of those assets)?

    The Q&A confirms that a depositary (or delegated third party) is able to act as a counterparty in a transaction of assets that they hold in custody provided that:

    1. The four conditions set down in Article 22(7) (a) to (d) of the UCITS Directive are complied with;
    2. Conflicts of interests are properly managed; and
    3. The relevant transaction is conducted at an arms-length.

For further information please find a copy of the Q&A here.

(v) The European Economic and Social Committee Opinion on reducing barriers to cross-border distribution of investment funds

On 25 July 2018, the European Economic and Social Committee ("EESC") published an opinion on 'reducing barriers to cross-border distribution of investment funds' ("Opinion"). The EESC make assertions in the Opinion which include that it:

  • Supports efforts to have all key elements of the Capital Markets Union operational by 2019 noting the benefits to be gained from same to include the expansion in investment opportunities;
  • Provides that investor protection needs must be balanced with providing designers and distributors of investment products enough room for creativity;
  • Identifies marketing requirements, regulatory fees, notification procedures and administrative requirements at national level as the key regulatory barriers to cross border distribution of investment funds while noting that tax rule harmonization is another significant obstacle;
  • Provides that the root cause of the existing barriers is the lack of instruction from ESMA and not the existing regulations;
  • Supports the creation of an ESMA database; and
  • Recommends more detailed rules ensuring the qualifications and competence of investment service providers should be established.

On 18 September 2018, the European Commission adopted a proposal to the European Parliament and the European Council for a directive to amend certain provisions in Directive 2009/65/EC and Directive 2011/61/EU on cross-border distribution of collective investment funds.

The proposed directive aims to remove restrictions to the free movement of units and shares of collective investment funds in the European Union.

The Report is accessible here and a copy of the Opinion is available here.

(vi) ESMA's peer review on guidelines on ETFs and UCITS published

On 30 July 2018, ESMA published the Final Report of its peer review ("Peer Review") on the guidelines on exchange traded funds ("ETFs") and other UCITS issues' ("Guidelines").

The Peer Review was launched in September 2017 to assess the extent of compliance with the Guidelines and was conducted through on-site visits to the national competent authorities ("NCAs") of six Member States (including Ireland) and interacting with their stakeholders. The compliance level of each participating country is set out on page 11 of the Final Report which provides among other things that there were deficiencies in the supervision of UCITS engaging in efficient portfolio management techniques ("EPM").

The Final Report also sets out measures for NCAs to adopt including amending certain practices such as revising existing national exemptions to the Guidelines and providing more comprehensive internal supervisory guidance on costs, fees etc.

A follow up report will be made in twenty-four months' time to assess progress made.

A copy of the Final Report is available here and the accompanying press release is available here.

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