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History and background to the Ucits IV Directive

22 November 2010 by Olivier Sciales | Comments (0) |

The latest in the series of directives enacted by the European Union on Undertakings for Collective Investment in Transferable Securities (Ucits), known – slightly misleadingly – as Ucits IV, was approved by the European Parliament on July 13, 2009 and by the European Council under the designation of Directive 2009/65/EC. It will come into force on July 1, 2011.

Despite its name, Ucits IV is the third iteration of the Ucits legislation. The first directive was adopted in 1985, coming into force two years later, and was conceived as the first step toward the creation of a single European market by allowing retail funds registered in one member state to be marketed in any other EU country, subject to notification procedures and national marketing rules.

In practice the restrictions on eligible investments and marketing constraints, such as requirements to translate all documentation into local languages in order to receive approval for cross-border distribution, limited the impact of the legislation. A follow-up directive known as Ucits II that sought to resolve some of these issues ran into opposition from member states and was eventually abandoned in 1997.

The Ucits regime was eventually revised and updated by the Ucits III legislation, which was formally adopted in January 2002 and in fact consists of two directives. The Management Company Directive was designed to ease the cross-border marketing of Ucits funds, defining the scope of activities and rules of conduct of a management company and introducing the so-called ‘simplified prospectus’.

The Product Directive increased significantly the scope of eligible assets in which Ucits funds could invest, notably derivatives, as well as introducing new investment restriction rules, conditions for exposure calculation and risk management obligations. The changes introduced by the Product Directive, as well as the subsequent 2007 Commission directive on eligible assets, made it possible for Ucits funds to mimic hedge fund strategies by using derivatives to replicate short-selling techniques and to add (limited) leverage.

The Ucits IV Directive is widely described as a pierce of ‘housekeeping’ legislation because it aims to tidy up and improve existing provisions rather than introduce radical changes. Its main innovations are the creation of passport enabling cross-border provision of management services, rules to facilitate fund mergers, the authorisation of master-feeder structures under the Ucits regime, changes in supervisory co-operation arrangements and the introduction of the Key Investor Information Document to replace the largely unsuccessful simplified prospectus.

Posted on 22 November 2010 by Olivier Sciales | Comments (0)

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