COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251(2) of the EC Treaty concerning the common position of the Council on the adoption of a Directive of the European Parliament and 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) with a view to regulating management companies and simplified prospectuses

1998/0242 (COD)

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251(2) of the EC Treaty concerning the common position of the Council on the adoption of a Directive of the European Parliament and 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) with a view to regulating management companies and simplified prospectuses

1. BACKGROUND

-On 17 July 1998 the Commission presented a proposal for a 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) with a view to regulating management companies and simplified prospectuses [2].

[1] OJ L 375, 31.12.1985, p. 3, as last amended by Directive 2000/64/EC (OJ L 290, 17.11.2000, p. 27).

[2] COM(1998) 451 final (OJ C 272, 01.09.1998, p. 7).

-The Economic and Social Committee delivered its opinion at its 361st plenary session on 24 and 25 February 1999 [3]. At the Council's request, the European Central Bank delivered its opinion on 16 March 1999. [4]

[3] OJ C 116, 28.04.1999, p. 1.

[4] OJ C 285, 7.10.1999, p. 9.

-On 17 February 2000 the European Parliament adopted a legislative resolution [5] giving its opinion on the Commission's proposal.

[5] A5-25/00, PE 288.702; Rapporteur: O. Schmidt.

-On 30 May 2000 the Commission adopted an amended proposal [6] taking account of the consultation of Parliament and the Economic and Social Committee.

[6] COM(2000) 331 final (OJ C 311 E, 31.10.2000, p. 273).

-On 5 June 2001 the Council adopted the common position [7] which is the subject of this communication.

[7] OJ...........

2. PURPOSE OF THE PROPOSAL

The aim of the proposal is to reinforce the single market in the field of UCITS by:

-updating the rules for management societies, aligning them on the rules existing for other operators in the financial services sector. In particular, these operators would receive a "European passport", which, in accordance with the principles of the Treaty, would allow them to set up branches in other Member States and to operate within the EU under the freedom to provide services;

-revising the current restrictions which prevent management companies from engaging in activities other than the management of the assets of common funds/unit trusts and investment companies (collective portfolio management). In the future, such companies will be permitted to provide, in addition to collective portfolio management, individual portfolio management services, as well as some specific non-core activities linked to the core business;

-identifying the functions involved in the activity of collective portfolio management and defining the conditions under which such functions can be delegated to third parties;

-modernising the information documents to be given to investors. The proposal introduces simplified prospectuses.

3. COMMENTS ON THE COMMON POSITION

3.1. General comments

3.1.1. The common position agreed by the Council preserves the essence of the Commission's amended proposal: it lays down principles and rules with regard to the criteria for taking up, and the conditions for pursuing, the business of management companies. It also preserves the maximum harmonisation approach to the introduction of the simplified prospectus as the only pre-contractual commercial document required in the host country.

3.1.2. The common position takes account of the main amendments proposed by Parliament, which acted as the basis for the Commission's amended proposal. This is the case, for example, with the principle that a management company's own funds must be adequate to the volume of assets for which it is responsible.

3.1.3 More than this though, the text of the amended proposal has been supplemented to a significant degree in the common position by new provisions concerning in particular the rules of conduct which management companies must follow and the set of rules applying to "self-managed" investment companies, i.e. those that have not designated a management company.

3.1.4. The main changes made to the Commission's amended proposal in the Council common position are commented on in detail below. In addition, an overview of the follow-up to Parliament's amendments, first in the amended proposal and then in the text of the common position is contained in the annex. The summary table also shows the changes introduced by the Commission and the Council that fall outside the scope of Parliament's amendments.

3.2. The substance of Parliament's amendments reproduced in the common position

3.2.1. Recitals [8]

[8] For an analytical overview of the changes made, see table annexed.

3.2.1.1 General comments

The preamble was the subject of only one amendment made by Parliament, the substance of which is reproduced in the Commission's amended proposal and in the common position. The other changes made, including the addition of three recitals and the deletion of a fourth, reflect the extent to which the text has been improved in the common position.

3.2.1.2 Recitals changed or added

Parliament's amendment 22 stating the principle that Community legislation on UCITS should be "codified" was accepted by the Commission. A slightly amended wording which preserves the Commission's right of initiative has been incorporated in the amended proposal and reproduced in the common position.

The other main changes consist, firstly, of specific improvements made in the amended proposal to the text of recitals 4 (internal overview in the management company) and 8 (prevention of supervisory arbitrage in regard to the authorisation of a UCITS) and in the common position to the text of recitals 6 (European passport only for investment companies coordinated by the Directive), 11 (minimum harmonisation for the full prospectus) and 16 (need for minimum harmonisation, this being the justification for the Directive).

Secondly, three new amendments reflect the changes made to the text of the substantive provisions of Article 5a and the new Section IV (obligations of investment companies): they are, respectively, recitals 5 (own funds of management companies), 13 (initial capital of self-managed investment companies) and 14 (application, direct or indirect as appropriate, of the rules on delegation and professional conduct to investment companies).

3.2.1.3 Recitals deleted from the text of the amended proposal

Recital 7 has been deleted from the preamble. Linking the Directive, as it does, to progress in the establishment of a single market for collective management, it was held to be superfluous since all interested parties now seem to be fully aware of the challenge presented by the Directive's entry into force.

3.2.2 Substantive provisions

3.2.2.1 Amendments deemed acceptable by the Commission

Of the twelve amendments to the substantive provisions adopted by Parliament, nine were declared immediately acceptable by the Commission during the vote at the first reading.

An initial group of three amendments (Nos 23, 24 and 41/Rev) concerned respectively the definition of management companies (more specifically, the field of activity covered by the authorisation), the prevention of statutory arbitrage in the authorisation procedure, and the conditions for authorisation (in particular the own funds requirements). As regards the definition given in Article 1a(2), the common position adopts a more succinct wording but retains the essential point (mention of the collective management functions listed in Annex II). As regards statutory arbitrage, it seemed inappropriate to reproduce verbatim in Article 5(5) the existing text appearing at the beginning of recital 8. Amendment 24 has therefore been taken into account by including an essential practical provision the principle of which is introduced at the end of recital 8: authorisation must certify that there is a legal guarantee that it is possible to market the units of a UCITS in any Member State, including that in which the UCITS is authorised. This provision has been judiciously inserted as a common factor in Article 4(3a) in the common position: thus it also covers self-managed investment companies, which are not concerned by the authorisation for a management company. The own funds requirements and other criteria laid down in Article 5a are analysed in detail below.

Amendments 25 and 27 concerned the prudential rules applying to management companies and relating, respectively, to the internal organisation arrangements (reconstruction of transactions) and the arrangements for outsourcing certain functions through a delegation contract. Article 5f(1) of the amended proposal had reproduced the text of amendment 25, but with a clarification demarcating the management company's registration obligations. This nuance has been deleted, and the management company's obligations have been extended in this paragraph, which is consequently more complete as far as prudential obligations relating to the monitoring of transactions are concerned. As regards delegation, the logic of amendment 27 has been reproduced in part in the amended proposal and the common position, except that the competent authorities no longer need uniformly to approve each delegation mandate. More generally, the rules in Article 5g are the subject of a collective commentary below.

A sixth amendment (No 28) concerned one aspect of the administrative procedure for notifying the host Member State that is the precondition for setting up a branch of a management company in that Member State (Article 6a(4)). The clarification introduced by Parliament has been fully taken into account in the amended proposal and the common position.

Lastly, other amendments (Nos 29, 30 and 32) accepted by the Commission concerned information for investors. The relevant provisions have been introduced in Article 28 (full prospectus) and Annex I (contents of the simplified prospectus) -see table annexed.

3.2.2.2 Amendments deemed unacceptable as they stood by the Commission

During the vote at the first reading three amendments (Nos 35, 26 and 31) were declared unacceptable as they stood by the Commission and were discarded in the preparation of the amended proposal and, subsequently, of the common position.

The first of these (amendment 35), which relates to Article 5a(3), was rejected in its entirety by the Commission and by the Council since the proposal for a Directive is not aimed at achieving maximum harmonisation of authorisation conditions and procedures in the Member States.

The second (amendment 26), relating to Article 5f(2), left to the discretion of the Member States whether or not to offer the management companies concerned the possibility, albeit limited, of derogating from the requirements and prohibitions laid down in the same paragraph. The Commission considered this possibility of derogation to be inappropriate and did not reproduce it therefore in the amended proposal. The common position starts from the same premise, except that it is less stringent, since one of the prohibitions - previously in the second indent - has been deleted (it proscribed the supply of individual portfolio management services to the depositary). The Commission considers the balance in the text of the common position to be acceptable, given the above remarks.

It was clear from the Council negotiations that the updating of the provisions relating directly to the depositary called, if anything, for an overall approach, without resorting at the outset to detailed provisions. The Commission will therefore, at the Council's request, devote a special report to this [9].

[9] "The Council invites the Commission to present a report, within one year from the entry into force of this Directive, on the regulation of depositaries according to Directive 85/611/EEC and the need for amending the regulation, accompanied, where appropriate, by a proposal for a revision." Statement for the minutes of the Council, temporary reference: Council document 9006/01 ADD 1.

The third amendment (No 31) was rejected since it seemed wrongly focused: its purpose was, in Article 29 (which concerns the documents for subscribers or holders of UCITS units), to transpose the provisions on the code of conduct and information for investors about compensation mechanisms in, respectively, Articles 11 and 12 of the Investment Services Directive (ISD) [10]. Article 5(4) of the Commission's original proposal had already referred to Articles 11 and 12(1) of the ISD [11] in order to cover the activity of individual portfolio management and any auxiliary services supplied by the management company (Article 5(3) of the proposal). The amendment in question thus sought to extend to collective portfolio management activities references which applied only to those cases where the management company provides the same type of services as an investment firm. It was therefore discarded in the amended proposal and, subsequently, the common position.

[10] Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities fields (OJ L 141, 11.06.1993, p. 127), as last amended by Directive 2000/64/EC (OJ L 290, 17.01.2000, p. 27).

[11] The reference to the latter article of the ISD was subsequently replaced by a more up-to-date provision: see table annexed.

3.2.2.3 Changes made to the text by the Commission and the Council independently of Parliament's amendments

A number of changes to individual points were made by the Commission in its amended proposal. These were subsequently reproduced, more or less in full, and supplemented in the text of the common position, which also sets new deadlines for the implementation of the Directive (Final provisions: Articles 2 and 3).

They include the rearrangement of the definitions in Article 1a (see table annexed). Coupled with this attempt to introduce greater clarity are the changes made to Article 5 (access to the business of management companies) as regards paragraphs (2) (scope of collective portfolio management activities) and (3) (scope of any additional, individual management and non-core service activities). Other minor changes are indicated in the annex. The Commission considers that, altogether, these changes help to improve the text of the proposal.

The substantial changes are discussed below.

3.2.2.4 Criteria for access to and pursuit of the business of management companies: in particular, own funds requirements (Article 5a)

The amended proposal and, subsequently, the common position have essentially retained the logic of Parliament's amendment 41/Rev: the increase in the initial capital of a management company, first set at EUR 50 000 in the initial proposal (i.e. the lowest level of initial capital laid down for investment firms in Article 3 of the Capital Adequacy Directive 93/6/EEC, [12] hereinafter referred to as the "CAD"); the adequacy of own funds to the volume of funds managed; and the resultant ceiling on the own funds requirement. However, a number of new elements have been introduced.

[12] OJ L 141, 11.06.1993, p. 1, as last amended by Directive 98/33/EC of the European Parliament and of the Council (OJ L 204, 21.07.1998, p. 29).

The amended proposal maintains a clear distinction between collective and individual portfolio management and is based as much as possible on the reference values established in the CAD in order to guarantee equality of treatment with investment firms (whose core business is individual portfolio management). Thus the minimum capital requirement has also been raised to EUR 125 000 for each branch of activity: collective management (core business of the management company) and individual management (where a lower additional own funds requirement is possible in certain circumstances).

In the case of collective management, the introduction of an own funds requirement proportional to the volume of assets managed was intended in part to complement the considerable widening of the range of eligible investments, to include inter alia derivatives, in the amended proposal for a sister directive on investments of UCITS [13]. This own funds requirement, based on a very low asset value multiplier, is in no way intended to constitute a minimum "safety net" for compensating investors, which would be illusory given the volumes and types of assets managed. Market and credit risks are borne by investors in UCITS unaided and are charged direct to the value of the UCITS portfolio and hence to their units in the unit trust/common fund or their shares in the investment company. The management company, however, must bear the operational risk associated with its management of UCITS and other collective investment bodies, such as the cost of human or computer errors in the processing of transactions or the calculation of closing values, disputes with a counterparty or internal fraud. An own funds "cushion", therefore, is needed for this purpose.

[13] COM(1998) 449 final (OJ C 280, 09.09.1998, p. 6).

The text of the common position is based on the same concern. However, it contains different reference values: the additional own funds requirement only becomes operative above a threshold of EUR 250 million, by applying a multiplier of 0.02% to the value of the portfolios in question. These are defined very precisely as the UCITS and other collective investment undertakings for which the management company is liable in law, taking account of Article 5g(2), which emphasises that delegation does not mean the transfer of legal liability. In other words, assets whose management is delegated are still taken into consideration, whereas delegation mandates received are not. The Commission regards this as a very judicious clarification.

Furthermore, the common position introduces an additional factor into the structure of own funds requirements, viz. the possibility afforded to the management company of transferring explicitly to a guarantor establishment (credit institution or insurance company) the burden of covering part of the operational risk associated with its collective management activity. In exchange for this guarantee, the net additional own funds requirement which the management company must meet can be reduced by up to half its nominal amount. This provision has to be combined with the previous paragraph, which sets as a minimum own funds threshold the amount laid down in Annex IV to the CAD (one quarter of the preceding year's fixed overheads).

The structure of the provisions in the common position is thus altogether more complex; it also contains an element (the partial guarantee) which is without precedent in the rules relating to other financial operators. This new element should be examined over time: accordingly, the text of Article 5a specifies that the Commission will submit to Parliament and the Council a report on the capital requirement thus established. A revision clause is included.

In addition to the other changes made to Article 5a, the common position has strengthened the obligation on managers to be of good repute and sufficiently experienced: it establishes the principle that the authorities must be informed immediately of any changes in these respects.

3.2.2.5 Rules concerning the business of management companies (Articles 5f, 5g and new 5h)

In the case of the prudential rules (Article 5f) applying to management companies with regard to the business of collective management, the changes made as a result of Parliament's amendment 25 have already been emphasised: the principles governing internal control have been fleshed out. In addition, in the common position, an entire subparagraph (b) has been added concerning the arrangements for preventing conflicts of interest.

Article 5g on the delegation rules has also benefited from the improvements resulting from taking amendment 27 into account in the amended proposal (with a changed wording). The basic principles, thus consolidated, remain: delegation, of which the competent authorities are duly informed, should not hamper the exercise of prudential supervision, deprive the managers of the management company of their ability to monitor effectively or withdraw the mandate, or lead to conflicts of interest. The common position in its turn, while incorporating a number of changes, is consistent with these principles. One of the main changes is that the text states succinctly that "the competent authorities must be informed in an appropriate manner", the details of the procedure being decided by the authority itself. This wording seemed more flexible than the text of the amended proposal. The Commission considers that, thus worded, the article is satisfactory and complete, including with regard to the provision added to paragraph (2) by the common position, which in fact summarises most of the preceding subparagraphs and states that "the management company may not delegate its functions to the extent that it becomes a letterbox company". This vivid formula echoes a similar provision proscribing "a letter box entity" in recital 12.

The introduction of rules of conduct (new Article 5h) for the function of collective portfolio management is a striking, judicious innovation in the common position: as with the prudential rules applicable to collective management, these rules are established by the home Member State in which the management company has its registered office. Consequently, the principles retained, which are based on the ISD, strengthen the framework for the use of the European passport, to which the management company is entitled under the present Directive, responsibility remaining with the home Member State.

3.2.2.6 Obligations of investment companies, in particular self-managed investment companies (Section IV)

As Section IV was not affected by Parliament's amendments and the changes made in the amended proposal, the articles relating specifically to investment companies have retained the wording used in Directive 85/611/EEC. Thus, Article 12 of the current Directive provides in particular that an investment company "must have sufficient paid-up capital to enable it to conduct its business effectively and meet its liabilities".

The logic underlying the common position at this point is that the provisions applicable to management companies must be applicable mutatis mutandis to self-managed investment companies, taking into account the latter's specific characteristics: for instance, no investment company may be authorised to manage assets on behalf of a third party. Similarly, the fact that an investment company's capital is variable does not mean that the same logic as regards additional own funds can be applied as that for management companies.

Thus Article 13a simply lays down an initial capital of EUR 300 000 for the own funds requirement, transposing as far as possible the other provisions of Article 5a. Similarly, in Article 13b, the rules on the delegation by a self-managed investment company of some of its functions, and the rules of conduct relating to such companies, are reproduced from Articles 5g and 5h respectively. As far as prudential rules are concerned, a simple reference to Article 5f would have been ineffective since the internal organisation of a management company differs significantly from that of an investment company, even if the latter is self-managed. Thus, Article 13c is shorter since only the provisions that can be effectively transposed have been retained.

Altogether, the Commission approves the changes made in the common position in this respect since they are a judicious complement to the existing substantive provisions.

3.2.2.7 Certain provisions relating to marketing and to information for the investor (Articles 28, 46 and 47; Annex I)

The follow-up to Parliament's amendments 29 and 30 has already been mentioned: it makes it possible to specify in Article 28 and Annex I (contents of the simplified prospectus) the information which investors need to appraise risks. Article 28 also specifically discusses the simplified prospectus (paragraph 3). The amended proposal supplied an essential clarification stating that it may be used in all Member States without alterations except translation: the simplified prospectus is a benchmark marketing tool, the culmination of the Commission's maximum harmonisation approach in this matter. The common position reproduces the Commission's wording in full. It also extends the information listed in Annex I.

As regards procedures prior to marketing in another Member State, the common position incorporates a specific change in Article 46. The Commission's initial proposal had reduced to one month the time allowed in the notification procedure for replying to the authorities of the Member States concerned. This was extended once again to two months (as in the current Directive) in the common position.

Lastly, the provisions concerning the language of the documents disseminated in the Member State where a UCITS markets its units (Article 47) are more succinct in the common position and preserve the autonomy of judgment of the competent authorities of each Member State concerned.

4. CONCLUSIONS

The Commission considers that the common position preserves the key elements of its proposal and of Parliament's amendments that were accepted and incorporated by it into the amended proposal. It also regards as judicious the additions made in the common position concerning the introduction of rules of conduct for the collective portfolio management function of management companies (Article 5h) and the introduction of new provisions affecting investment companies, especially self-managed investment companies (Articles 13a to 13c). Altogether, the Commission considers that the changes made in the common position to its amended proposal (both additions and deletions) strengthen the Directive's structure. It can therefore recommend to Parliament that it accept the common position.

Done at Brussels, [...]

For the Commission

The President

ANNEX

Overview of the changes to the Commission's initial proposal: follow-up to Parliament's amendments and other changes introduced by the Commission and the Council

N.B. A shaded box means that that particular field is not relevant.

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