OPINION OF THE EUROPEAN MONETARY INSTITUTE
on a Consultation received from Danmarks Nationalbank under Article 109f(6) of the Treaty
establishing the European Community and Article  5.3 of the Statute of the EMI on a proposed law
concerning UCITS and NON-UCITS (“Forsla g til lov om investeringsforeninger og
specialforeninger”).
CON/96/12
1. The present consultation was initiated by a letter from Danmarks Nationalbank dated 15 August
1996, enclosing a proposed draft law concerning UCITS and NON-UCITS in the Danishlanguage (“Forslag til lov om investeringsforeni nger og specialforeninger”) (“the Bill”) and a
set of explanatory comments in respect of the provisions of the Bill, also submitted in the
Danish language (“Bemærkninger til lovforslag ets enkelte bestemmelser”) (“the Explanatory
Comments”). Danmarks Nationalbank has also submitted a brief explanatory memorandum inDanish (on 20 August 1996) a nd in translation to English (on 22 August 1996) (“the
Memorandum”).
2. The main purpose of the Bill is to extend the pr esent Danish legislation concerning investment
funds, which is based upon the European Directiv e on Undertakings in Collective Investment in
Transferable Securities (UCITS) (85/611/EEC) (“the UCITS Directive”), to encompass newforms of funds labelled specialised investment funds, and referred to in the Memorandum asNON-UCITS. One objective of the new specialised investment funds is to improveopportunities to provide capital to small and medium -sized enterprises; it is also proposed that
so-called money market funds (“pengemarkedsforeninger”) be permitted in Denmark.
3. As background to the proposed extension of th e existing Danish law on investment funds to
include also specialised investment funds, the Explanatory Comments refer to the proposal for a
European Parliament and Council Dir ective amending the UCITS Directive1 (“the Proposed
Amendment Directive”). However, the Proposed  Amendment Directive, which inter alia
suggested a broadening of the UCITS Directive to include four new categories of investment
                                                     
1 Commission proposal for a European Parliament and Council Directive amending Directive 85/611/EEC, OJ
No. C 59, 2 March 1993, p. 14, as amended by OJ No. C 242, 30 A ugust 1994, p. 5.
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funds (money market funds, cash funds, funds inve sting in units of other UCITS, so-called
funds-of-funds, and master/feeder funds), ha s not yet been adopted. The Explanatory
Comments also note that a number of the Member States of the European Union have provided
for other categories of investment funds in their domestic legislation as a supplement to
Community legislation on UCITS. In view of the above and the competitive situation forinvestment products, the Bill proposes f our new specialised investment funds:
(a) “Placement funds” (“placeringsforeninger”);
(b) Money market funds (“pengemarkedsforeninger”);
(c) Investment institute funds or funds-of-f unds (“investeringsinstitutforeninger”); and
(d) “Business development funds” ( “erhvervsudviklingsforeninger”).
4. The EMI is competent to deliver an opinion in this consultation on the basis of Article 109f(6)
of the Treaty, Article 5.3 of the EMI Statut e and Article 1.1, fifth indent, Council Decision
93/717/EC of 22 November 1993 for the following  reasons. Firstly, the introduction of these
new specialised investment funds (also referred to below as “NON-UCITS”) would affect thestability of financial institutions and markets and, secondly, the Bill is not merely a measure toimplement Community legislation since the scope of the proposed Bill goes beyond the scopeof the existing UCITS Directive. The scope of the Bill also goes beyond that which is coveredby the Proposed Amendment Directive, which la tter Directive has not been adopted. In this
connection, the EMI recalls its opinion on the consultation from the Council of the European
Communities in respect of the Proposed Amendment Directive (CON/94/8), including itsdissenting opinions.
5. There are three general aspects of the proposed Bill which the EMI wishes to highlight: (i) the
impact of money market funds on financial markets, notably on the financing of credit
institutions; (ii) the stability of the new specialised investment funds themselves; and (iii) the
distinction between UCITS and NON-UCITS and the concern that potential problems arising inrespect of NON-UCITS could negatively affect the existing UCITS regime.
5.1 When it comes to the impact of money market funds on financial markets , it should be duly
noted that a wide acceptance of money market  funds may lead to changes in the liability
structure of credit institutions. Retail deposits wh ich are inexpensive and, in general, relatively
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stable would be replaced by whole-sale deposits  made on behalf of investment funds. Taken as
a whole, these deposits will be less stable and more expensive for the banks that hold thesedeposits than equivalent retail deposits and this could exert further pressure on credit
institutions’ interest rate margin s. The EMI notes that the Danish legislator has duly considered
these aspects and concluded that the introducti on of money market funds will not pose a threat
to the stability of the Danish banking system in  the light of the specific features of Danish
markets (e.g. the high degree of competition in the deposit market, a large secondary bondmarket and the applicable fiscal regime with no tax advantages related to investments in moneymarket funds).
The EMI would also suggest that the Danish legislator considers imposing an obligation to
inform the investor that his investment in a money market fund will not be subject to deposit
protection. Such an obligation appears desirable as  the units in these funds are likely to be sold
as substitutes for bank deposits. Although the prin ciple of risk spreading will reduce the risk of
total loss to an investor, the provision of appr opriate information to in vestors to enable the
proper assessment of the risks represented by par ticular classes of investments is essential for
the stability and maintenance of trust in the fi nancial markets (which concern would extend not
only to money market funds, but also to the proposed new placement funds, funds-of-funds and
business development funds).
5.2 The risk of loss for investors would also relate to the question of the stability of the
specialised investment funds themselves.  The EMI welcomes the proposals that the
establishment in Denmark of any such funds would need the prior approval by the Danish
Financial Supervisory Authority (“Finanstilsynet”)  (Chapter 2 of the B ill) and that  also NON-
UCITS would be subject to the Danish supe rvisory regime (Chapter 13 of the Bill). 
The EMI also notes that the maximum placement through investments in securities issued by
the same issuer and related rules differ for NON-UCITS in comparison with UCITS (assummarised for the four proposed new NON-UCITS in the Memorandum provided byDanmarks Nationalbank), and that the risk-s preading requirements fo r NON-UCITS will be less
demanding than the existing requirements for UCIT S. By way of example, the Bill suggests that
the proposed placement funds, which would be allowed to invest in the same type of securitiesas existing UCITS, should be allowed to place a maximum of 30% of their respective capital incertain categories of securities issued by the sa me issuer, which limit may be compared with the
existing 5% for UCITS (which latter level, however, can be raised by a Member State to amaximum of 10% under certain conditions, cf Ar ticle 22 of the UCITS Directive). Similarly,
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the corresponding limits for money market funds and funds-of-funds are also higher than for
existing UCITS. These provisions will permit a si gnificant concentration of risk, having the
potential to impact on the stability of the funds  in question which could possibly affect the
stability of financial markets. These considera tions add further weight to the inclusion of
adequate information to investors referred to above.
5.3 The EMI would also suggest that the new NON-UCITS are clearly distinguished from
UCITS. The Bill proposes to cover both UCITS and NON-UCITS and it is im portant that these
two categories of investment funds are nevert heless clearly identified in the Bill as falling
under two different regulatory and legal struct ures, and that only UCITS are covered by the
more strict legal regime set out in the UCITS Directive. The EMI notes that the distinction
between UCITS and NON-UCITS is presently addressed in inter alia Section 3, third paragraphand Section 4, first paragraph, of the Bill. Ho wever, the Bill could also provide that the
prospectus requirements in respect of the va rious funds should set out the need to inform
investors of this distinction and to what cat egory the fund in question belongs (cf Section 5,
second paragraph and Chapter 6 of the Bill). In this connection, the EMI notes and welcomesthe remarks in the Explanatory Comments, page 15, where it is stated that the rules to be issued
by the Financial Supervisory Authority under Section 35, second paragraph, of the Bill willprovide such prospectus requirements. 
6. The EMI has no objection to this opinion being made public.
10th October 1996