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 (“Forslag til lov om investeringsforeninger og specialforeninger”) (CON/96/12)
Date: 1996-10-10
Institutions: European Monetary Institute
Subjects: Denmark, UCITS fund, financial stability, investment company, money market, securities, small and medium-sized enterprises

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 

(“Forslag 

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  Danish

language (“Forslag til lov om investeringsforeninger 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  lovforslagets  enkelte  bestemmelser”)  (“the  Explanatory

Comments”). Danmarks Nationalbank has also submitted a brief explanatory memorandum in

Danish  (on  20  August  1996)  and  in  translation  to  English  (on  22  August  1996)  (“the

Memorandum”).

2.

The main purpose of the Bill is to extend the present Danish legislation concerning investment

funds, which is based upon the European Directive on Undertakings in Collective Investment in

Transferable  Securities  (UCITS)  (85/611/EEC)  (“the  UCITS  Directive”),  to  encompass  new

forms  of  funds  labelled  specialised  investment  funds,  and  referred  to  in  the  Memorandum  as

NON-UCITS.  One  objective  of  the  new  specialised  investment  funds  is  to  improve

opportunities 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  the  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  Directive  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 August 1994, p. 5.

                                                     
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funds  (money  market  funds,  cash  funds,  funds  investing  in  units  of  other  UCITS,  so-called

funds-of-funds,  and  master/feeder  funds),  has  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  for

investment products, the Bill proposes four new specialised investment funds:

(a)

“Placement funds” (“placeringsforeninger”);

(b) Money market funds (“pengemarkedsforeninger”);

(c)

Investment institute funds or funds-of-funds (“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  Statute  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 the

stability of financial institutions and markets and, secondly, the Bill is not merely a measure to

implement Community legislation since the scope of the proposed Bill goes beyond the scope

of the existing UCITS Directive. The scope of the Bill also goes beyond that which is covered

by  the  Proposed  Amendment  Directive,  which  latter  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  its

dissenting 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 in

respect 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 which 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  these

deposits  than  equivalent  retail  deposits  and  this  could  exert  further  pressure  on  credit

institutions’ interest rate margins. The EMI notes that the Danish legislator has duly considered

these aspects and concluded that the introduction 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  bond

market and the applicable fiscal regime with no tax advantages related to investments in money

market 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 principle of risk spreading will reduce the risk of

total  loss  to  an  investor,  the  provision  of  appropriate  information  to  investors  to  enable  the

proper assessment of the risks represented by particular classes of investments is essential for

the stability and maintenance of trust in the financial 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 Bill) and that also NON-

UCITS would be subject to the Danish supervisory 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  (as

summarised  for  the  four  proposed  new  NON-UCITS  in  the  Memorandum  provided  by

Danmarks Nationalbank), and that the risk-spreading requirements for NON-UCITS will be less

demanding than the existing requirements for UCITS. By way of example, the Bill suggests that

the proposed placement funds, which would be allowed to invest in the same type of securities

as existing UCITS, should be allowed to place a maximum of 30% of their respective capital in

certain categories of securities issued by the same issuer, which limit may be compared with the

existing  5%  for  UCITS  (which  latter  level,  however,  can  be  raised  by  a  Member  State  to  a

maximum of 10% under certain conditions, cf Article  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  significant  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  considerations  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 important that these

two  categories  of  investment  funds  are  nevertheless  clearly  identified  in  the  Bill  as  falling

under  two  different  regulatory  and  legal  structures,  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 paragraph

and  Section  4,  first  paragraph,  of  the  Bill.  However,  the  Bill  could  also  provide  that  the

prospectus  requirements  in  respect  of  the  various  funds  should  set  out  the  need  to  inform

investors  of  this  distinction  and  to  what  category  the  fund  in  question  belongs  (cf  Section  5,

second paragraph and Chapter 6 of the Bill). In this connection, the EMI notes and welcomes

the 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  will

provide such prospectus requirements. 

6.

The EMI has no objection to this opinion being made public.

10th October 1996