Amended proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)

(presented by the Commission pursuant to Article 250 (2) of the EC Treaty)

EXPLANATORY MEMORANDUM

1. Overview of the Procedure

On 17 July 1998 the Commission submitted a proposal for a European Parliament and Council Directive amending Directive 85/611/EEC [1] on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) [2] COM(1998) 449 final - 98/0243(COD) for adoption by the co-decision procedure laid down in Article 251 of the Treaty establishing the European Community.

[1] OJ L 375, 31.12.1985, p. 3.

[2] OJ C 280, 09.09.1998, p. 6.

The Economic and Social Committee delivered its opinion at its 361st plenary session (meeting of 24 and 25 February 1999) [3]. At t he request of the Council, the European Central Bank delivered its opinion on 16 March 1999 [4].

[3] OJ C 116, 28.04.1999, p. 44.

[4] OJ C 285, 07.10.1999, p. 9.

On 17 February 2000, the European Parliament adopted 23 amendments at its first reading [5], the Commission giving its position on each amendment.

[5] A5-25/00, PE 288.702

The Council working party on financial services (UCITS) held a number of meetings under the Austrian Presidency during the second half of 1998 and these have continued under the German, Finnish and Portuguese Presidencies. Certain points of this proposal were discussed by the Permanent Representatives Committee on 26 November 1999 in Brussels.

The Commission has made two types of amendments in this amended proposal. Firstly, in response to the first reading by the European Parliament, a number of new provisions have been accepted, some with adapted wording. The majority of these serve either to remove ambiguities or to elaborate further on the ideas of the original proposal. In addition, there are some new ideas which expand on the original text but do not change the fundamental principles. Secondly, the Commission has made some rewording and editing changes to ensure consistency between this text and other applicable Community legislation and to ensure internal consistency within the text itself. These amendments also take into account some issues raised during the discussions in the Council Working Group. Finally, it takes into account some deliberations of the Economic and Social Committee.

The comments on the amendments refer either to the numbering of the Articles of Directive 85/611/EEC or the new numbering contained in the Commission's initial proposal.

2. Comments on the amendments

(a) Key changes

Over-the-counter (OTC) derivatives:

The Commission initial proposal allowed investments in standardised derivatives traded on regulated markets, but excluded over-the-counter (OTC) instruments on prudential grounds. However, Parliament by an overwhelming majority, the Economic and Social Committee and also the Council Working Group strongly insist on the inclusion of OTC derivatives in the text of the Directive. Given developments in financial markets, the Commission's amended proposal now includes OTC derivatives whilst fully ensuring that prudential concerns are covered, e.g. through a consistent set of provisions including a ceiling for OTC derivatives as proposed by the Parliament.

Index tracking funds:

Because of the weighting of some stocks in a few European indices, the Commission's initial proposal contained a single issuer limit of 35 %. The Parliament proposed to lower that limit and to extend the provision to debt securities indices. Both issues are included in the Commission's amended proposal.

Investments in bank deposits:

The initial Commission's proposal included, in a very general way bank deposits as an eligible type of investment. The Parliament expressed its concern in regard to liquidity and counter-party risk of these deposits. The Commission's amended proposal includes the requirements proposed by the Parliament.

Investments in units of non-harmonised funds:

Harmonised funds are fully compliant with Directive 85/611/EEC which introduces the acronym 'undertakings for collective investment in transferable securities' - in short 'UCITS' - for this type of European funds. Non-harmonised funds may be either European funds which are covered by national legislation in a Member States, but which are not covered by the Directive (i.e. not harmonised) or all funds from non-Member States.

Directive 85/611/EEC allowed for a 5 % investment in units of harmonised or non-harmonised funds, the latter being required to comply with some basic requirements, such as to be open-ended and to invest in transferable securities (i.e. to be similar to the scope of harmonised funds (UCITS) under the Directive).

In order to introduce the 'fund-of-funds' concept into the Directive (i.e. a harmonised fund (UCITS) that invests in the units of several other funds), the Commission proposed in its initial proposal that the 5 % threshold should be lifted. Consequently, under the Commission's initial proposal a harmonised fund (UCITS) would have had the possibility to invest all of its assets in a number of non-harmonised funds. However, the European Parliament called for a more cautious 30 % limit for investments of harmonised funds (UCITS) into the units of non-harmonised funds. The amended proposal accepts this view and integrates the 30 % threshold.

(b) Citation

The citation of Articles of the Treaty has been amended according to the new numbering provided for by the Amsterdam Treaty.

(c) Recitals

Recital 2

This recital refers to the changes in the first indent of Article 1 (2). It expands it to clarify the nature and conformity of securities lending and index tracking in regard to and with the sole objective of a UCITS which is to invest the assets in eligible instruments. This is explained in more detail in the comments to Article 1 (2).

Recital 3

This recital has been slightly adapted to reflect the changes in wording in Article 1 (8), i.e. the integration of certain money market instruments in the overall definition of transferable securities. As proposed by the Economic and Social Committee, the wording on money market instruments has been modified in order to make it clear that these instruments mentioned within the definition of transferable securities are traded on regulated markets.

Recital 4

This recital has been amended to take into account the deletion of 'classes of' transferable instruments contained in amendment 1. As money market instruments which are traded on regulated markets are now covered within the definition of 'transferable securities', the money market instruments which are dealt in on the money markets are covered in Article 1 (8) to which this recital refers to. The second part of amendment 1 is contained in Recital 5.

Recital 5

This recital has been newly introduced because the second part of amendment 1 it is not related to Article 19 (1) (i) but to Article 19 (1) (a) and should therefore be separated.

Recital 6

This Recital has been amended by amendment 2 which reflects the changes in Article 19 (1) (e). The first and last whereas clauses have been adapted to properly reflect the clear distinction made in Parliament's amendments between 'units of UCITS' meaning harmonised funds and 'units of other collective investment undertakings' referring to non-harmonised funds.

Recital 7

This Recital integrates amendment 3 which refers to Recital 6 in the Commission's initial proposal.

Recital 9

Amendments 36 and 45 on Article 22 were concerned with exposure, also in the form of deposits, to one single counter-party and also to a group. This notion of the group has therefore been included in this Recital.

Recital 10

The Recital has to be amended because of the inclusion of OTC financial derivatives as eligible assets and because of the change in regard to safeguard clauses.

Recital 11

This Recital integrates amendment 4 and changes the text further to reflect the possibility to replicate debt securities indices as proposed by amendment 18. Furthermore, the Recital clarifies the possibility to use appropriate derivatives to replicate an index and notes that a UCITS can use a part of the assets to ensure the index based portfolio against downward movement of the index or certain securities included therein, if so provided for in the investment objectives of the UCITS as disclosed in the prospectus.

Recitals 12 and 13

This and the following Recital had to be fully amended in regard to the inclusion of OTC derivatives as proposed by the Parliament. The initial Recitals were entirely based on the concept of including only standardised derivatives. Therefore, they had to be adapted to reflect the wording of the new Articles 19 (1) (g) and (h) and 24b. The new text explains the underlying principles.

Recital 14

Connected to the deletion of Article 21 (1) and (2) and the explanations given there, the provision on securities lending had to be slightly amended to clarify that securities lending may not be applied to the whole portfolio at all times, but is a technique which may be used on a limited basis to improve returns. Additionally, it is necessary to clarify that collateral given may not be used for other purposes, such as investment.

Recital 15

This Recital integrates amendment 5 subject to an adaptation of the text to distinguish between 'UCITS and/or other collective investment undertakings' as introduced in amendment 2.

Recital 17

This recital is entirely based on amendment 6.

Recital 21

The recital is related to the changes in Article 53a which were introduced by the Council decision on Comitology of 17 July 1999. Since that decision was taken well after the proposal of the Commission was put forward, the initial text did not cover it.

Recital 22

This recital takes duly into account the wish of the European Parliament for a codification of the text (amendment 7 to the first proposal and amendment 1 to the second proposal).

(d) Articles

Article 1 (2) first indent: Description of UCITS

Amendment 8 proposed a broad reference to instruments 'covered by this Directive'. This could lead to different interpretations about whether there are any other instruments in the Directive apart from those covered in Article 19 (1). For the sake of avoiding any ambiguity the amended text explicitly refers to instruments mentioned in Article 19 (1). This is consistent as the 'securities lending' of Article 21 is not conceived here as an 'instrument for investment' but a technique to improve the return of the portfolio. The investment of a portfolio according to an index is also just a management technique while the instruments for investment are transferable securities or derivatives which are covered in Article 19 (1). The insertion of 'and' at the end of the provision corrects an editing error.

Article 1 (8): Definition of transferable securities

The presentation of this Article has been changed since money market instruments are also defined as 'transferable securities' and thus do not need to be separated. The indent on money market instruments has been slightly modified in the light of the suggestions of the Economic and Social Committee on the clear distinction to be made between money market instruments traded on regulated markets - which are included in the definition - and those traded on money markets which are covered in Article 19 (1) (i). This is in line with amendment 13. As these money market instruments are traded on regulated markets, they are liquid and their value can be easily determined. Consequently, these requirements were deleted. The references to Article 21 have been removed because Article 21 is deleted as a consequence of the integration of OTC financial derivatives as eligible instruments for investment as proposed in amendments 37, 36/45, 39, and 43. Further explanation on this issue is given in the comments on Article 21.

Article 19 (1) (a): Investments in listed securities

The change of wording is due to amendment 9. As a matter of consistency in editing, the name of Directive 93/22/EEC is not included in the text.

Article 19 (1) (e): Investments in units of funds

The amendment of this subparagraph integrates as far as possible amendment 44. It inserts qualitative requirements regarding eligible units of non-harmonised funds. The amended text is slightly different from the text of the Parliament as regards the requirement for a depository and the reference to 'rules laid down by this Directive are respected' which are included in the second indent of the amendment. These two items are omitted because they would forbid investments in almost all non European funds which would be even narrower than the currently allowed 5 % investment in those funds. Without this change, the text runs counter to WTO commitments. European investors of fund-of-funds are not less protected in regard to non-harmonised fund investments of UCITS because these investments are now limited to 30 % and qualitative requirements apply to them. The last indent of the amendment is not included because the prevention of cascade funds is fully covered - in regard to units of UCITS as well as to units of other collective undertakings - in amendment 19 (on Article 24 (3)).

Article 19 (1) (f): Investments in deposits

The change incorporates completely amendment 11 which inserts requirements on investments in deposits.

Article 19 (1) (g) and (h): Investment in financial derivatives

This change takes account of the spirit of amendment 37 which called for the inclusion of OTC financial derivatives as eligible investment instruments for UCITS. Sub-paragraph (g) has been amended to cover standardised financial derivative instruments - previously covered by sub-paragraphs (g) and (h). Sub-paragraph (h) now introduces investments in OTC financial derivative instruments. The two categories of instruments have been split in order to show more clearly the applicable requirements and to provide for easy and exact reference in the following text. More specific conditions for such investments are covered in Article 24b. This latter Article also takes into account that certain derivatives positions can - if one takes a narrow approach which is not intended by Article 19 (1) - be seen to be more an obligation than an investment (e.g. in regard to margins to be provided, or if a fund is the seller of an option). However, for the UCITS directive, ultimately the crucial matter is the risk involved with these positions. Consequently, the introduced requirements address the need to have a low solvency risk, ensure verifiable and daily valuation and liquidity. More specific wording to reflect this approach is contained in Article 24b.

The Commission did not include investments in OTC financial derivatives in its initial proposal namely for reasons of liquidity and valuation, and because the counter-party risk connected to OTC derivatives which is not addressed in Directive 85/611/EEC requires adequate coverage. Consequently, the Commission's position on the inclusion of these instruments during the first reading was negative. The underlying points of concern are still valid and have to be dealt with. After having received strong signals from the European Parliament and also the Economic and Social Committee, the Commission has reviewed now its position and the amended proposal includes such instruments. But it is the explicit aim of the Commission text, especially in regard to investor protection, to pursue its prudent approach to OTC financial derivatives, i.e. to make it very clear under which conditions OTC financial derivatives may be used, how their value is determined, and to ensure that no loopholes or areas with undefined limits exist. Therefore, this change required subsequent changes in some other provisions which the Commission did not touch in its initial proposal, e.g. Articles 21 and 22.

Article 19 (1) (i): Investments in money market instruments other than those included in the notion of transferable securities

Amendment 13, which takes up an idea of the Economic and Social Committee, is integrated into this provision, however, the reference to Article 1 (8) had to be adapted to the new structure of this Article. The reference and wording of the second indent had to be adapted in order to be consistent with the change of Article 19 (1) (a) initiated in amendment 9.

Article 20: Exchange of information

Amendment 14 reverses the deletion of Article 20 (as initially proposed by the Commission) because there was still a reference to Article 20 left in the unchanged Article 22 (4). The discussion made it clear that Parliament wanted to keep this notification procedure which is important for the industry and it wanted to encourage and give the opportunity to update the provision in order to take due account of new electronic means. The latter may facilitate the process and make the information more easily accessible to the public. Article 20 is re-worded in this sense. It also makes clear that the information is not for exclusive use of the Member States and the Commission but that the public, namely the industry to which the information is of major importance, has access to it. The amended proposal is based on the Parliament's approach because this avoids further complicating the issues contained in amended Article 22. As an additional benefit, Article 20 can be used now as a general provision to which other Articles can simply refer thus eliminating the need for repetition.

Article 21: Deletion of paragraphs 1 and 2 and securities lending

Under the Directive 85/611/EEC as well as under the Commission's initial proposal, investment in these instruments used to be limited to the purposes contained in Article 21 (1) and (2). Following the clear demands by the European Parliament, investments in OTC derivatives are now fully covered as eligible investment. Therefore, a distinction of the assets contained in the portfolio of the UCITS between being for 'general investment purposes', 'hedging purposes', and 'purposes of efficient portfolio management' as in Article 21 (1) and (2) is no longer necessary. Also, the reference to the concept of 'efficient portfolio management' was criticised of having no precise meaning, given that the use of these provisions in the Member States is extremely diverse.

Therefore, the previous wordings of paragraphs 1 and 2 have been entirely deleted. This measure is especially important in regard to the introduction of investments in OTC financial derivatives. The safeguard of a threshold on these investments, as proposed by the Parliament, can only be effective if it is clear that all OTC investments are subject to the thresholds and no loopholes exist. This is expressed in the new structure of Article 19 (1) (g) and (h) and Article 24b and the changed content of Article 21. However, this does of course not exclude in particular that UCITS buy certain instruments for the purposes of hedging or efficient portfolio management; these investments are now just part of the overall portfolio of the UCITS.

Article 21 consists now solely of the previously proposed paragraph 4 on securities lending. The paragraph itself has been amended in regard to the first part of amendment 16 which is now covered in an adopted wording in the newly introduced letter (c). The changed introduction of the provision makes it clear that, as securities lending is not an investment instrument according to Article 19 (1), it may not be applied to the whole portfolio at all times, but is a technique which may be used on a limited basis to improve returns. This basis is already adequately defined in a number of Member States, therefore the proposal builds on these grounds. It is also clarified that the UCITS may not use the received collateral for further investments.

The initially proposed paragraph 3 has been dropped because - as explained above - the concept of different investment purposes is no longer applied.

Article 22: General investment limits applicable to all instruments of investment

Amendments 36 and 45 introduce changes, especially more quantitative limits, to the existing Article 22 which was not included in the initial proposal of the Commission. Considering the introduction of new instruments for investments which might involve the same counter-party, there is a need for a spreading rule in this regard which is not provided for in the existing Directive or the initial proposal. A thorough review of the amendments showed that it was not possible to integrate them on a word-by-word basis and still provide a clear unambiguous text covering all the instruments.

Therefore, the existing Article 22 has been slightly modified to take into account the new instruments now allowed for investments and the consequently arising new risks as identified by the Parliament, such as the global counter-party risk. The previous and proven limits remained unchanged. A new limit of 15 % for investments with entities belonging to the same group is introduced; this is based on amendment 45. However, the definition of the 'group' itself is contained in the Commission's second amended proposal COM(1998) 451 to amend Directive 85/611/EEC. The same limit seems appropriate and applies to 'cumulative investments' which are only possible under paragraph 1. That means that aggregate investment in different instruments with one body/counter-party is possible if it does not exceed 15 %, but the limit of investment in one kind of instrument remains at 5 %. Limits or requirements which apply only to a certain kind of investments, e.g. matters of valuation in regard to financial derivative investments, have been transferred to the Articles dealing with these investments in order to render the new wording of Article 22 as clear as possible.

Article 22a: Index funds

The Commission's proposal is amended in the light of amendment 18. The aim of this Article is to allow for more flexibility in investments in order to replicate indices. However, the competent authorities have to be involved regarding this type of management in order to avoid abuse of the replication technique. The exchange and availability of information the Parliament looked for in its changes to paragraph 2 have been taken into account by a reference to Article 20 which now covers an adequate procedure to achieve these aims. Paragraph 4 of the proposal is moved to paragraph 1 of Article 24a which focuses now on disclosure rules for all types of investment funds.

Article 24: Fund of funds

Article 24 now includes the text put forward by amendment 19. However, since the Parliament clearly indicated by its amendment 20 that it is in favour of a separate article on disclosure, the text of paragraph 3a. of the amendment has been integrated into Article 24a which now covers tough disclosure rules for all types of funds. Accordingly, the disclosure text of paragraph 6 of the Commission proposal is deleted.

Article 24a: Disclosure requirements in regard to certain investments

Article 24 a has been re-designed to incorporate all disclosure requirements for the different types of funds. Therefore, as proposed in amendment 20, the first two paragraphs on investments in deposits, the content of which is now covered in Article 19 (1) (f) and Article 22, have been deleted. Paragraph 3 is unaffected and has been integrated into the third indent because, in order to avoid repetition, this Article on disclosure has been edited in a different form without changing the substance.

The text of the previous paragraph 4, to which the Parliament agreed, has been removed because Article 22 now contains also spreading rules for deposits.

The new form of Article 24a incorporates in its

- first indent: the formerly Article 22a (4) regarding disclosure of index funds, taking into account that now debt securities indices may be replicated,

- second indent: paragraph 3a of amendment 19 on fund of funds. For reasons of consistency explained under Article 21, the reference to 'general investment policy' which is contained in the amendment, has not been taken on board. Furthermore, the previous Article 24 (6) is reflected in this indent,

- third indent: disclosure rules for funds investing in financial derivative instruments; the basis is taken from the previously proposed Article 24b (2). The wording had to be adapted to cover standardised and OTC financial derivative instruments and to cover the deletion of Article 21,

- fourth indent: Article 24a (3) of the initial proposal on disclosure for investments in deposits,

- fifth indent: a new disclosure rule on the possibility of high volatility of a UCITS assets. This rule is inserted in particular because of the inclusion of OTC derivatives, but may also apply to other instruments. It is in line with amendment 29, 30 and 32 on the Commission's second proposal COM(1998) 451 to amend Directive 85/611/EEC, in particular the request for disclosure of the fund's risk-profile in the documents.

Article 24b: Financial derivative funds

This Article reflects the idea proposed in amendments 39 and 43 taking into account the remarks on requirements for derivatives investments made by the Economic and Social Committee. These allow for investments in OTC financial derivative instruments in a limited way, based on the nature of these instruments and their specific risks in order to assure investor protection. The previously proposed paragraph 2 of this Article has been integrated into the third and fifth indent of Article 24a on disclosure.

Article 25 (2) second subparagraph: Limits to significant influence

The second and third indent were already included in the text of Directive 85/611/EEC. Following the Parliament's approach to distinguish between harmonised and non-harmonised funds, the third indent had to be amended.

Article 25 (3) (e): Subsidiaries

This sub-paragraph is now clarified to also cover subsidiary companies the shares of which are held by more than one investment company. The proposed limitation to subsidiaries incorporated in a Member State was deleted because these subsidiaries were primarily included in Directive 85/611/EEC to repurchase units at unit-holders' request. This purpose is still valid and it may also occur in non Member States. However, the amended text makes also clear, that these subsidiaries may not be used for other purposes than the carrying on the business of management, advice or marketing.

Article 26 (1): Derogation for recently authorised UCITS

The reference to Article 24a had to be deleted as this Article 24a is now dealing with disclosure rules only, and does not cover risk spreading rules any more.

Article 53a: Comitology issues

This change of deleting the second indent fully reflects amendment 21 of the European Parliament. Furthermore, the amended wording takes duly into account the decision of the Council on the procedure applied to comitology which was taken only after the initial proposal has been published. Recital 21 is the corresponding text in the recitals.

3. Overview

(a) Work of the Economic and Social Committee (ESC)

Points deemed essential by the ESC // Position of the Commission

Funds of Funds (Am. 3 and 8, amending Art. 19(1)(e))

ESC welcomes allowing funds of funds (i.e. UCITS investing in other UCITS) and supports the 35 % limit proposed by COM. It proposes to raise also the 10 % limit regarding the investment in UCITS which are itself partly 'fund of funds' to 35 % (new Art. 24(3)). // COM rejects the proposal. Art. 24(3) will prevent opaque cross-investment of UCITS into UCITS investing in other UCITS. The 'fund of funds' concept makes sense to a certain extent to enhance a portfolio. However, this does not apply to cascades of funds. The reasoning of the ESC is misleading because it is not difficult to check compliance: whether a fund falls under Art. 24(3) is described in its rules (this has to be checked upon initial investment). Afterwards, the proportion of investment in this UCITS has to be monitored on a daily basis, in the same way as for every other investment of the UCITS.

Use of derivatives (Am. 6 and 9, introducing Art. 21(3) and 24b)

ESC proposes to

a) allow OTC derivatives to be used not only for efficient portfolio management but also for investment of assets purposes

b) change the cover requirements for derivatives

c) bringing in a single article all derivatives regulations // COM

- rejects a) because there is no 'simple and inexpensive' way to cover the counter-party risks involved (as suggested by the ESC), instead Directive 93/6/EEC on capital adequacy would have to be fully applied

- in regard to b): reserves its position pending the outcome of the negotiations with the Council and the position of the Parliament

- will take into account the idea outlined under c) when further discussing the directive within the Council

Points deemed essential by the ESC // Position of the Commission

Thresholds for index funds (Am. 7, introductory sentence in Art. 22a)

ESC proposes to

a) change the wording describing index funds

b) lower the proposed threshold of 35 % for investments in one single security of an index to 20 %

c) raise the investment limits for non-index UCITS to the same level as applicable to index funds

d) delete Art. 22a(2) // COM

- accepts the proposed new wording under a) and will take account of this wording in the Commission's amended proposal

- accepts the proposed lowering of the limit under b) and will propose a threshold of 20 % in the amended proposal

- rejects the proposal under c) as the main aim of thresholds is to ensure risks spreading through a diversified portfolio; the exception related to the limits for index funds is only to enable them to 'rebuild' the index in their portfolio

- rejects proposal d) as this could lead to manipulative creation of indices, disadvantaging the investors

(b) Amendments of the European Parliament (A5-25/00, PE 288.702)

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1998/0243 (COD)

Amended proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 47(2) thereof,

Having regard to the proposal from the Commission [6],

[6] OJ C 280, 09.09.1998, p. 6.

Having regard to the opinion of the Economic and Social Committee, [7]

[7] OJ C 116, 28.04.1999, p. 44.

Acting in accordance with the procedure laid down in Article 251 of the Treaty,

Whereas:

(1) The scope of Council Directive 85/611/EEC [8], as last amended by Directive 95/26/EC [9], was confined initially to collective investment undertakings of the open-ended type which promote the sale of their units to the public in the Community and the sole object of which is investment in transferable securities (UCITS); it was envisaged in the preamble to Directive 85/611/EEC that undertakings falling outside its scope would be the subject of co-ordination at a later stage;

[8] OJ L 375, 31.12.1985, p. 3.

[9] OJ L 100, 19.04.1988, p. 31. OJ L 168, 18.07.1995, p. 7.

(2) Taking into account market developments, it is desirable that the investment objective of UCITS is widened in order to permit them to invest in financial assets, other than transferable securities, which are sufficiently liquid; financial instruments which are eligible to be investment assets of the portfolio of the UCITS are stated in Article 19 (1); the 'Securities lending' mentioned in Article 21 is not an 'instrument for investment' but a technique to improve the return of the portfolio; the investment of a portfolio according to an index is a management technique; the instruments bought in order to replicate the index are transferable securities or derivatives and are covered in Article 19 (1);

(3) The definition of transferable securities including money market instruments traded on regulated markets included in this Directive is valid only for this Directive and consequently in no way affect the various definitions of financial instruments used in national legislation for other purposes such as taxation; furthermore, the definition of transferable securities covers negotiable instruments only; consequently, shares and other securities equivalent to shares issued by bodies, such as building societies and industrial and provident societies, the ownership of which cannot in practice be transferred except by the issuing body buying them back, are not covered by this definition;

(4) Money market instruments cover also those transferable instruments which are normally not traded on regulated markets but dealt in on the money market, for example treasury and local authority bills, certificates of deposit, commercial paper and bankers' acceptances;

(5) It is useful to ensure that the concept of regulated markets in this directive corresponds to that in Directive 93/22/EEC [10];

[10] OJ L 141, 11.06.1993, p. 27.

(6) It is desirable to permit a UCITS to invest its assets in units of UCITS and/or other collective investment undertakings of the open-ended type which also invest in transferable securities and which operate on the principle of risk spreading; UCITS or other collective investment undertakings in which a UCITS invests should also be subject to effective supervision; investments in units of UCITS and/or other collective investment undertakings shall not result in cascades of funds; UCITS shall adequately disclose to investors if they invest in units of UCITS and/or other collective investment undertakings;

(7) To take market developments into account and in consideration of the completion of the EMU it is desirable to permit UCITS to invest in bank deposits; to ensure adequate liquidity of the investments in deposits the terms of these deposits should include a break clause; if the deposits are made with a credit institution situated in a non-Member State, the credit institution should be subject to effective supervision;

(8) In addition to the case in which a UCITS invests in bank deposits according to its fund rules or instruments of incorporation, it may be necessary to allow all UCITS to hold ancillary liquid assets, such as bank deposits at sight and/or cash; the holding of such ancillary liquid assets may be justified, for example, in the following cases: in order to cover current or unexpected payments; in the case of sales, for the time necessary to reinvest in transferable securities and/or in other financial assets provided for by this Directive; for a period of time strictly necessary when, because of unfavourable market conditions, the investment in transferable securities and in other financial assets needs to be suspended;

(9) For prudential reasons, UCITS should avoid assuming an excessive concentration in deposits with a single credit institution or with institutions belonging to the same group;

(10) ; UCITS should be explicitly permitted to invest, as part of their general investment policy and/or for hedging purposes, in standardised and over-the-counter (OTC) financial derivative instruments; in regard to the OTC derivatives, additional requirements must be set in terms of the eligibility of counter-parties and instruments, liquidity and on-going assessment of the position; the purpose of such additional requirements is to ensure an adequate level of investor protection which is close to that of derivatives dealt in on regulated markets;(11) New portfolio management techniques for collective investment undertakings investing primarily in shares are based on the replication of stock-indices and/or indices on debt securities; it is desirable to permit UCITS to replicate well-known and recognised stock-indices and/or debt indices; therefore it is necessary to introduce more flexible risk-spreading rules for UCITS investing in shares and/or debt securities; in order to ensure transparency of the indices which the Member States consider to be replicable by harmonised UCITS and a wide acceptance of such indices, it is desirable to provide for adequate publication of the list of replicable indices and an indication about where updated information can be obtained, possibly by electronic means; UCITS may also replicate the index by appropriate investments in other instruments, such as standardised derivatives; UCITS tracking an index may also dedicate a part of their portfolio to counteract adverse movements of the replicated index in accordance with their disclosed investment objectives and within the limit set by this Directive;

(12) ; Operations in derivatives may never be used to circumvent the principles and regulations set out in this Directive; in particular to ensure risk-spreading, limits must apply to derivatives on the basis of the underlying; concerning OTC derivatives additional risk-spreading rules must apply to exposures to a single counter-party or group of counter-parties; finally, in order to ensure constant awareness of the risks and commitments arising from derivative transactions and to check compliance with investment limits, a UCITS will have to measure and monitor risks and commitments arising from derivatives transactions on an ongoing basis;

(13) In order to ensure investor protection, it is necessary to limit a UCITS' commitments arising from financial derivatives so that they do not exceed certain percentages in terms of the total net value of the UCITS' portfolio; in order to ensure investor protection through disclosure, UCITS shall describe their strategies, techniques and investment limits governing derivatives operations in the relevant documents available to the public and to the competent authorities; furthermore UCITS investing in derivatives shall make it clear in a risk-warning to the potential investors that a proportion of the UCITS will be invested in OTC derivatives thereby allowing investors to make an informed decision as regards the level of risk involved with the investment in units of such UCITS;

(14) Notwithstanding Article 41 of Directive 85/611/EEC, it is desirable to permit UCITS to enter into securities lending transactions ; in order to limit the risks involved in such transactions, it is necessary to regulate the conditions under which a UCITS may be permitted to act as a lender in securities lending transactions; considering the need for liquidity of a UCITS' portfolio, securities lending transactions shall only be carried out on parts of the portfolio and on a temporary basis;

(15) The development of opportunities for a UCITS to invest in UCITS and other collective investment undertakings should be facilitated; it is therefore essential to ensure that such investment activity does not diminish investor protection; taking into account the nature of investments in sufficiently diversified collective investment undertakings, it may be necessary to restrict the possibility for a UCITS to combine its direct investments in a liquid financial asset with the investments made through these UCITS and/or other collective investment undertakings; because of the enhanced possibilities for UCITS to invest in units of other UCITS and/or collective investment undertakings, it is necessary to lay down certain rules on quantitative limits and disclosure of information to prevent the cascade phenomenon;

(16) Collective investment undertakings falling within the scope of this Directive shall not be used for purposes other than the collective investment of the money raised from the public according to the rules laid down in this Directive; in the cases identified by this Directive, a UCITS may hold subsidiaries only when necessary to carry out effectively on behalf of that UCITS certain activities, also identified by this Directive; it is necessary to ensure an effective supervision of UCITS; therefore the establishment of a UCITS' subsidiary in third countries should be permitted only in the cases and under the conditions identified in the Directive; the general obligation to act solely in the interest of unit-holders and, in particular, the objective to increase cost efficiencies, never justify a UCITS undertaking measures which may hinder the competent authorities from exercising effectively their supervisory functions;

(17) For prudential reasons, a UCITS should, whether its chosen investment policy is to invest in a variety of liquid financial assets or to specialise in a certain category of such assets, avoid assuming an excessive concentration in liquid financial assets issued by and/or made with a single body;

(18) The depositary of the assets of a UCITS carries out crucial controlling functions over the compliance of a UCITS with the law and its fund rules or instruments of incorporation; therefore it is important to ensure an effective independence between the management company and the depositary; when both the management company and the depositary belong to the same economic group or when the depositary has a qualifying holding in the management company's capital, or vice versa, or in all other cases in which the depositary may exercise a significant influence over the management company, or vice versa, it is necessary to undertake all measures assuring the independence between the two entities; when a management company, acting on behalf of the common funds or investment companies it manages, is permitted to enter into transactions with the depositary, arrangements have to be made preventing conflicts of interests and ensuring the compliance of the transaction with the law and the UCITS' fund rules or instruments or incorporation;

(119) Considering the depositary's liabilities towards the management company and the unit-holders and the complexity of its controlling functions, only institutions which have adequate financial resources and an adequate organisational structure and which are subject to prudential supervision should fall within the categories of institutions eligible to be depositaries;

(120) Considering the need to ensure the free cross-border marketing of the units of a wider range of collective investment undertakings, while providing a uniform minimum level of investor protection; therefore, only a binding Community Directive laying down agreed minimum standards can achieve the desired objectives; this Directive effects only the minimum harmonisation required;

(21) The measures necessary for the implementation of this Directive are measures of general scope within the meaning of Article 2 of Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred to the Commission [11], they should be adopted by use of the regulatory procedure provided for in Article 5 of that Decision;

[11] OJ L 184, 17.7.1999, p. 23.

(22) The Commission may consider proposing codification in due time after adoption of the proposals,

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Directive 85/611/EEC is amended as follows:

1. In Article 1(2), the first indent shall be replaced by the following:

«- the sole object of which is the collective investment in transferable securities and/or in other liquid financial assets mentioned in Article 19 (1) of this Directive of capital raised from the public and which operates on the principle of risk-spreading, and»;

2. In Article 1 the following paragraph shall be added:

«8. For the purposes of this Directive transferable securities shall mean:

- shares in companies and other securities equivalent to shares in companies ("shares"),

- bonds and other forms of securitised debt ("debt securities"),

- money market instruments normally dealt in on regulated markets within Article 19 (1) (a), (b) or (c), and

- any other negotiable securities which carry the right to acquire any such transferable securities by subscription or exchange.

»3. In Article 19 paragraph 1, subparagraph (a) shall be replaced by the following:

«(a) transferable securities admitted to or dealt in on a regulated market within the meaning of Article 1 (13) of Directive 93/22/EEC in a Member State; and/or»

4. In Article 19 the following shall be added to paragraph 1:

«(e) units of UCITS and/or other collective investment undertakings within the meaning of the first and second indent of Article 1 (2) provided that the latter:

- is authorised under laws which provide that it is subject to supervision considered by the UCITS' competent authorities to be equivalent to that laid down in Community law, and that cooperation between authorities is sufficiently ensured;

- the level of protection for unitholders in the other collective investment undertaking is equivalent to that provided for unit-holders in a UCITS, and in particular that the rules on borrowing, lending, and uncovered sales of transferable securities are equivalent to the requirements of this Directive;

- the business of the other collective investment undertaking is reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period; and/or

(f) deposits with credit institutions which are repayable on demand or have the right to be withdrawn, and maturing in no more than 12 months, provided that the credit institution has its registered office in a Member State or, if the registered office of the credit institution is situated in a non-Member State, provided that it is subject to prudential rules considered by the UCITS' competent authorities as equivalent to those laid down in Community law; and/or

(g) standardised financialderivative instruments, including equivalent cash-settled instruments, dealt in on a regulated market mentioned in the previous sub-paragraphs (a), (b) and (c) ("standardised derivatives"); this category includes, in particular, options on currency and on interest rates dealt in on the mentioned markets; and/or

(h) financial derivative instruments dealt in over-the-counter ("OTC derivatives"), provided that

- the counter-parties to OTC derivative transactions are institutions subject to prudential supervision, and belonging to the categories approved by the UCITS' competent authorities,

- the underlying consists of instruments covered by Article 19 (1), financial indices, interest rates, foreign exchange rates or currencies, in which the UCITS may invest according to its investment objectives as stated in the UCITS' fund rules or instruments of incorporation, and

- the OTC derivatives are subject to reliable and verifiable valuation and can be sold or liquidated on a daily basis;

and/or

(i) money market instruments other than those dealt in on a regulated market, which fall under Article 1 (8) third indent, unless the issue of such instruments is itself regulated for the purpose of protecting investors and savings, and provided that they are:

- issued by a central, regional or local authority, a central bank of a Member State, the European Central Bank, the European Union or the European Investment Bank, a non-Member State or, in the case of a Federal State, by one of the members making up the federation, or by a public international body to which one or more Member States belong, or

- issued by an undertaking any securities of which are admitted to official listing on a stockbe dealt in on other regulated markets mentioned in sub-paragraphs (a), (b) or (c), or

- issued or guaranteed by an establishment subject to prudential supervision, in accordance with criteria defined by Community law or by an establishment which are subject to and comply with prudential rules considered by the competent authorities to be at least as stringent as those laid down by Community law.»;

5. Article 19(2)(b), and (3) shall be deleted;

6. Article 20 shall be replaced by the following:

1. The Member States shall send to the Commission in due time all information which is required to be provided according to the relevant Articles of this Directive. They shall also furnish any amendments to the information concerned and shall indicate a source where up-to-date information can be obtained or accessed. Information covered by this Article shall be disclosed to the public on request by any holder of the information if it is not made public on a general basis.

2. The Commission shall forward the received information to the other Member States together with any comments which it considers appropriate. Such communications may be the subject of exchanges of view within the Contact Committee in accordance with the procedure laid down in Article 53 (4). The Commission shall publish the received information and updated thereto in an adequate form in the Official Journal of the European Communities or make such information publicly available in an appropriate manner.

7. Article 21shall be replaced by the following:

. On a limited basis prescribed by the Member States, a UCITS may enter into securities lending transactions in which it acts as a lender, provided that the following conditions are fulfilled:

(a) securities lending transactions may be concluded only with a recognised securities clearing house or exchange, or with a counter-party which is an authorised person specialised in that type of transaction and subject to prudential supervision at Community level; or is a Zone A credit institution as defined in Directive 89/647/EEC [12] or an investment firm as defined in Directive 93/22/EEC; or is a recognised third country investment firm which is subject to and complies with prudential rules considered by the UCITS' competent authorities to be at least as stringent as those laid down in Directive 93/6/EEC [13];

[12] OJ L 386, 30.12.1989, p. 14.

[13] OJ L 141, 11.6.1993, p. 1.

(b) in relation to each securities lending transaction appropriate collateral shall be given covering the risk of default of the borrower. The value of collateral must be, during the entire period of the contract, at least equal to the total value of the financial instruments lent and must be kept as collateral,

(c) if the securities lending transaction is carried out by recognised security clearing houses and/or exchanges, collateral must be provided in accordance with the relevant rules of these entities; the collateral must be kept as collateral and may not be used by the UCITS for further investments,.

When a UCITS is permitted to conclude securities lending transactions with the depositary which performs for that UCITS the duties mentioned in Articles 7 and 14 of this Directive, the competent authorities shall ensure that the collateral is entrusted, during the entire period of the contract, with a third party custodian and that measures are undertaken preventing the depositary from using it.»;

8. Article 22 (1), (2) and the second sub-paragraph of (5) shall be replaced by the following:

1. A UCITS may invest no more than 5 % of its assets in each of the following instruments issued by or made with the same body or to which the same body is the counter-party:

- transferable securities,

- money market instruments according to Article 19 (1) (i),

- deposits,

- OTC financial derivative instruments.

Member States may allow to cumulate investments in different instruments with the same body/counter-party up to a limit of 15 %. Companies within the same group are regarded as a single body for the purpose of calculating the limits contained in this Article.

2. The Member States may raise the limit laid down in paragraph 1 sentence 1 to a maximum of 10 %, and in case of group investments to a maximum of 15 %; paragraph 1 sentence 2 does not apply. However, the total value of the UCITS' investments in the instruments mentioned in paragraph 1 with one body/counter-party/group in each of which it invests more than 5 % of its assets must not then exceed 40 % of the value of its assets.

5. (...)

The limits provided for in paragraphs 1, 2, 3 and 4 may not be combined, and thus investments in the instruments mentioned in Article 19 (1) with one body/counter-party/group carried out in accordance with paragraphs 1, 2, 3 and 4 shall under no circumstances exceed in total 35 % of the assets of a UCITS.

9. The following Article 22a shall be inserted:

«Article 22a

1. Without prejudice to the limits laid down in Article 25, the Member States may raise the limits laid down in Article 22 to a maximum of 20 % for investment in shares and/or debt securities issued by the same body when, according to the fund rules or instruments of incorporation, the aim of the UCITS' investment policy is to replicate the composition of a certain stock or debt securities index which is recognised by the UCITS' competent authorities, on the following basis:

- its investment policy reflects the composition of that index,

- its composition is sufficiently diversified,

- the index represents an adequate benchmark for the market to which it refers,

- it is published in an appropriate manner.

2. As laid down in Article 20 (1), each Member State shall send to the Commission for the purpose of information and with a view to facilitate a common approach to which indices are recognised, a list of the indices which they consider replicable by UCITS, together with details of the characteristics of such indices. The procedure laid down in Article 20 (2) shall apply.

10. Article 24 shall be replaced by the following:

«Article 24

1. A UCITS may acquire the units of UCITS and/or other collective investment undertakings mentioned in Article 19 (1) (e), provided that no more than 10 % of its assets are invested in units of a single UCITS or other collective investment undertaking. The Member States may raise the limit to a maximum of 20 %.

2. Investments made in units of collective investment undertakings other than UCITS may not exceed, in aggregate, 30 % of the assets of the UCITS.

The Member States may allow that, when a UCITS has acquired units of UCITS and/or other collective investment undertakings, the assets of the respective UCITS or other collective investment undertaking do not have to be combined to the limits laid down in Article 22.

3. A UCITS may not invest in units of another UCITS and/or other collective investment undertaking which invests itself more than 10 % in units of other UCITS and/or other collective investment undertakings.

4. Investment in the units of a unit trust managed by the same management company or by any other company with which the management company is linked by common management or control, or by a substantial direct or indirect holding, shall be permitted only in the case of a unit trust which, in accordance with its rules, has specialised in investment in a specific geographical area or economic sector, and provided that such investment is authorised by the competent authorities. Authorisation shall be granted only if the unit trust has announced its intention of making use of that option and if that option has been expressly stated in its rules.

A management company may not charge any fees or costs on account of transactions relating to a unit trust's units where some of a unit trust's assets are invested in the units of another unit trust managed by the same management company or by any other company with which the management company is linked by common management or control or by a substantial direct or indirect holding.

5. Paragraph 4 shall also apply where an investment company acquires units in another investment company to which it is linked within the meaning of the previous subparagraph.

Paragraph 4 shall also apply where an investment company acquires units of a unit trust to which it is linked or where a unit trust acquires units of an investment company to which it is linked.

11. The following Articles 24a and 24b shall be inserted:

«Article 24a

If the UCITS' intends to invest its assets in instruments other than transferable securities, the UCITS' fund rules or instruments of incorporation, its prospectuses and any promotional literature shall

- in the case of investments according to Article 22a: describe the characteristics of the replicated index and contain a prominent statement drawing attention to the fact that the aim of the UCITS' investment policy is to replicate a certain index and that therefore it may invest a relevant part of its assets in securities issued by the same issuer,

- in the case of investments according to Article 24: include a clear statement drawing the attention to the fact that the UCITS invests in units of UCITS and/or other collective investment undertakings and describe the characteristics of the other UCITS or other collective investment undertakings in the units of which the UCITS is authorised to invest,

- in the case of investments according to Article 24b: include a clear statement drawing attention to the fact that the UCITS invests in standardised and/or OTC derivatives and contain a warning that those investments may be more risky and therefore are only suitable for experienced investors and for investors whose financial situation allows them to bear the risks involved in the investment in units of such UCITS,

- in the case of investments in deposits: include a prominent statement drawing attention to the fact that the UCITS invests all or a part of its assets in deposits with credit institutions,

- in case the net asset value of a UCITS is likely to have a high volatility due to its portfolio composition or the management techniques used: include a clear statement referring to this feature of the UCITS.

Article 24b

1. A UCITS may invest, as a part of its general investment policy and/or for hedging purposes, in financial derivative instruments mentioned in Article 19 (1) (g) and (h), provided that - the management or investment company has a risk-management process which enables it to daily monitor and measure the material risk of the positions and their contribution to the overall risk profile of the portfolio,

- the management or investment company has a process for accurate and independent assesment of the value of OTC derivative instruments.

2. When a UCITS intends to invest, as part of its general investment policy and/or for hedging operations, in the financial derivative instruments mentioned in art.19 (1) (g) and (h), it must disclose this intention in the documents referred to in Art.24a. In particular, it must list which instruments can be dealt in and the derivatives' contribution to the risks and returns of the entire portfolio. Information must also be given on quantitative limits, as provided for either in this directive or in the UCITS' investment objectives, for daily exposure in such instruments, and the methodologies used to calculate such limits.

3. In any case:

- the amount of all the commitments entered into by the UCITS through financial derivatives operations must not exceed the total net value of the UCITS' portfolio. In calculating the value of the commitments, reference must be made to the current value of the underlying; and,

- the amount of all the commitments entered into by the UCITS through OTC derivatives operations must not exceed 30% of the total net value of the UCITS' portfolio. When calculating on a daily basis the value of such commitments, reference must be made to the current value of the underlying.

4. When the underlying of a financial derivative instrument consists of instruments for which the Directive sets quantitative limits, the underlying must be taken into account in the calculation of such limits. When a transferable security embeds a derivative, the latter must be taken into account when complying with the requirements of this Article.

5. Under no circumstances:

- shall the use of derivatives cause the UCITS to diverge from its investment objectives as laid down in the UCITS' prospectus,

- shall the UCITS carry out deals in the financial derivative instruments mentioned in art.19 (1) (g) and (h), which correspond to uncovered sales of transferable securities.

6. For the purpose of calculating the limits set out in Article 22 for counter-party risk, the management or investment company must calculate a UCITS' counter-party exposure for OTC financial derivatives according to the methodology described in annex II, paragraph 5 of Directive 93/6/EEC as amended by Directive 98/33/EC [14], without application of the weightings for counter-party-risk.»;

[14] OJ L 204, 21.7.1998, p. 29.

12. In Article 25(2), the third indent shall be replaced and the following fourth indent shall be added:

- «10 % of the units of any single UCITS and/or other collective investment undertaking within the meaning of the first and second indent of Article 1 (2);

- 10 % of the money market instruments according to Article 19 (1) (i) of any single issuing body.»;

13. In Article 25(2), the second sentence shall be replaced by the following:

«The limits laid down in the second, third and fourth indents may be disregarded at the time of acquisition if at that time the gross amount of the debt securities or of the money market instruments, or the net amount of the securities in issue cannot be calculated.»;

14. Article 25(3)(e) shall be replaced by the following:

«(e) shares held by an investment company or investment companies in the capital of subsidiary companies carrying on only the business of management, advice or marketing in the country where the subsidiary is located, in regard to the repurchase of units at unit-holders' request exclusively on its or their behalf.»;

15. Article 26(1), second sentence shall be replaced by the following:

«While ensuring observance of the principle of risk spreading, the Member States may allow recently authorised UCITS to derogate from Articles 22, 22a, 23, 24 and 24b for six months following the date of their authorisation.»;

16. Article 41(2), shall be replaced by the following:

«2. Paragraph 1 shall not prevent such undertakings from acquiring transferable securities or other financial instruments mentioned in Article 19(1)(e), (g), (h) and (i) which are not fully paid.»;

17. Article 42 shall be replaced by the following:

«Article 42

Neither:

- an investment company, nor

- a management company or depositary acting on behalf of a unit trust

may carry out uncovered sales of transferable securities or of other financial instruments mentioned in Article 19(1)(e), (g), (h) and (i).»;

18. After Article 53 the following Article 53a is inserted:

«Article 53a

1. In addition to its functions provided for in Article 53 (1), the Contact Committee may also meet as a Regulatory Committee within the meaning of Article 5 of Decision 1999/468/EC to assist the Commission in regard to the technical modifications to be made to this Directive in the following areas:

- clarification of the definitions in order to ensure uniform application of this Directive throughout the Community,

- alignment of terminology on and the framing of definitions in accordance with subsequent acts on UCITS and related matters.

2. The regulatory procedure laid down in Article 5 of Decision 1999/468/EC shall apply, in compliance with Article 7(3) and Article 8 thereof.

3. The period provided for in Article 5(6) of Decision 1999/468/EC shall be three months.»

Article 2

No later than 30 June 2002 Member States shall adopt the laws, regulations and administrative provisions necessary for them to comply with this Directive.

These provisions shall enter into force no later than 31 December 2002. The Member States shall forthwith inform the Commission thereof.

When Member States adopt these provisions they shall include a reference to this Directive or accompany them with such a reference on the occasion of their official publication. The manner in which such references are to be made shall be laid down by the Member States.

Article 3

This Directive shall enter into force 20 days after the date of its publication in the Official Journal of the European Communities.

Article 4

This Directive is addressed to the Member States.

Done at Brussels,

For the European Parliament For the Council

The President The President

IMPACT ASSESSMENT FORM THE IMPACT OF THE PROPOSAL ON BUSINESS WITH SPECIAL REFERENCE TO SMALL AND MEDIUM-SIZED ENTERPRISES( SMEs)

Title of proposal

PROPOSAL FOR A EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE AMENDING DIRECTIVE 85/611/EEC ON THE COORDINATION OF LAWS, REGULATIONS AND ADMINISTRATIVE PROVISIONS RELATING TO UNDERTAKINGS FOR COLLECTIVE INVESTMENT IN TRANSFERABLE SECURITIES (UCITS)

Document reference number

MARKT/3009/00 REV 2

The proposal

1. Taking account of the principle of subsidiarity, why is Community legislation necessary in this area and what are its main aims-

Considering that the main objectives of this proposal are to complete the internal Market in the field of collective investment undertakings and to ensure the free cross-border marketing of the units of a wider range of collective investment undertakings while providing a uniform minimum level of investor protection, only a binding Community Directive laying down agreed minimum standards can achieve the desired objective.

Apart from the basic minimum standards (e.g. investment and risk-spreading rules, investor information, etc.) Member States are free to define in detail the regulation for collective investment undertakings covered by this proposal, prescribing possibly stricter or additional requirements. The scope left for national discretion is therefore large.

In accordance with what has been announced by the Commission Action Plan for the Single Market, the Financial Services Action Plan and especially the recent European Council conclusions in Lisbon in which the objectives of creating a strong integrated pan-European financial services market has been agreed, the aim of this proposal is to remove barriers to cross-border marketing of units of collective investment undertakings through:

* the extension of the freedom to be marketed throughout the EU to collective investment undertaking investing in financial assets other than transferable securities such as: units of other UCITS and other collective investment undertakings, bank deposits and derivatives;

* the revision of some other provisions of the UCITS Directive in order to up-date the Directive in the light of new portfolio management techniques which have been developed since 1985;

* the removal of interpretative uncertainties relating to a number of provisions of the UCITS Directive which hinder a uniform application of basic principles of this Directive.

The impact on business

2. Who will be affected by the proposal-

The proposal will affect management companies of unit trusts/common funds and investment companies already regulated by the UCITS Directive, irrespective of their size. As Member States have different regulation on the capital requirements of management companies the concentration of small and medium-sized firms varies. The majority of management companies have their registered offices in the financial centres of the EU.

3. What will business have to do to comply with the proposal-

In order to receive an authorisation valid in all Member States, collective investment undertakings investing in financial instruments other than transferable securities identified in the proposal will have to comply with the investment policy rules and the transparency requirements also laid down in this proposal.

4. What economic effects is the proposal likely to have-

- on employment

Even if the UCITS sector is managing very large amounts of savings, the number of employees is relatively small. From this point of view, the proposal is not expected to have much influence on employment in this sector.

- on investment and the creation of new businesses

The increased investment possibilities for UCITS will contribute to sustain growth in this sector. It also might contribute to the creation of deeper and more liquid financial markets in Europe with indirect benefits for employment.

- on the competitiveness of businesses

The fact that a wider range of investment funds would be covered by the Directive 85/611/EEC and that the units of such funds could be freely marketed throughout the EU, could increase the competition among management companies, thus improving the price/quality relation of these investment products.

5. Does the proposal contain measures to take account of the specific situation of small and medium-sized firms (reduced or different requirements etc)-

No. All collective investment undertakings covered by the Directive must comply with the same provisions.

Consultation

6. List the organisations which have been consulted about the proposal and outline their main views.

The European Federation of Investment Funds and Companies (FEFSI), representing the interests of the sector in general, and national associations of investment fund managers have been consulted during the preparation of proposal no. 1 and they were also involved in the further development of the amended proposal. The European fund industry broadly supports its approach.