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)
Date: 1998-07-17
Institutions: European Commission
Subjects: approximation of laws, financial legislation, free movement of capital, investment company, securities

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  17.07.1998 
COM(1998) 449  final 

98/ 0243 (COD) 

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) 

(presented by the Commission) 

EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION 

With the adoption  of the UCITS Directive (')  in  1985 the first important  step  was  taken 

toward  co-ordinating 

the  laws  and  regulations  for  certain  collective 

investment 

undertakings.  The  Directive 

laid  down  provisions  concerning 

the  authorisation, 

supervision,  investment  policy  and transparency  requirements  for  UCITS  ("undertakings 

for  collective  investment  in  transferable  securities").  The  main  purpose  of  the  co 

ordination  was  to  approximate  the  conditions  of  competition  between  UCITS  at 

Community  level  and  to  ensure  effective  and  uniform  protection  for  investors.  The 

Directive  also  introduced  -  for  the  first  time  in  the  financial  sector-  the  principle  of 

mutual  recognition  on the basis of which  a UCITS authorised  in its home  Member  State 

is  permitted  to  market  its  units  in  other  Member  States  without  being  subject  to  any 

further  authorisation by host Member States. 

The  collective  investment  undertakings  which,  for  the  time  being,  are  covered  by  the 

Directive  are  those  of  the  open-ended  type  which  promote  the  sale  of  their  units  to  the 

public  and  the  sole  objective  of  which  is  to  invest  in  transferable  securities  (e.g. 

essentially  in  listed  shares and  bonds). However at the time of adoption  of the  Directive 

there  was  a  consensus  that  other  types  of  collective  investment  undertakings  should  be 

harmonised at a later stage (2). 

The  Commission  presented  in  1993 a proposal  amending  the UCITS  Directive  the  main 

aim  of  which  was  to  extend  the  scope  of  the  Directive  to  other  types  of  collective 

investment  undertakings.  However,  Member  States  failed  to  agree  on  a  common 

approach. It was therefore  necessary for the Commission to explore new solutions. 

As  highlighted  by  the  Commission  Action  Plan  for  the  Single  Market  which  was 

endorsed  by  the  European  Council  in  June  1997,  the  sector  of  collective  investment 

undertakings  is  one  of  the  financial  services  areas  in  which  the  Single  Market  is  still 

1  Council  Directive  85/611/EEC  of  20  December  1985  on  the  co-ordination  of  laws,  regulations  and 
administrative  provisions  relating  to  undertakings  for  collective  investment  in  transferable  securities 
(UCITS), OJ N° L 375, 31.12.1985, p.3. 

2 

Sixth recital of the preamble of Directive 85/611/EEC. 

2 

incomplete.  Existing  barriers  to  a  free  cross-border  marketing  of  units  issued  by  such 

undertakings  need  urgently  to  be  removed  through  further  legislative  actions  which 

extend  the  Single  Market  benefits  to  other  types  of  collective  investment  undertakings, 

while preserving  a uniform  minimum  level  of investor protection.  For the completion  of 

the  Single  Market  in this area, the Action  Plan  also considered  it necessary  to  introduce 

harmonised  market  access  rules  and  operating  conditions  for  management  companies 

lacking for the time being -  so as to ensure the level-playing field among operators in the 

financial  services area. 

The  Commission  has  therefore  prepared  a  package  of  measures  distributed  in  two 

separate proposals: one ("proposal  n°  1")  focusing  essentially on the "product" (the types 

of  investment  funds),  the  other  ("proposal  n°  2")  focusing  essentially  on  the  "service 

provider" (the management  company) and on prospectuses  for  UCITS. The separation  of 

topics  involving  different  problems  could  facilitate  the  negotiating  process  in  the 

Council.  It will  not  matter  if one of the  two  Directives  is adopted  more rapidly  than  the 

other one. 

Summary 

The  aim  of  proposal  n°  1 is  to  remove  barriers  to  cross-border  marketing  of  units  of 

collective investment undertakings through: 

(a) 

(b) 

(c) 

the  extension  of  the  freedom  to  be  marketed  throughout  the  EU  to 
collective  investment  undertakings  investing  in financial  assets other  than 
transferable  securities  such  as:  units  of  other  collective  investment 
undertakings;  money  market  instruments;  bank  deposits;  standardised 
options and futures  contracts.  New transparency  requirements will  ensure 
adequate information  of investors; 

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 
the Directive. 

2.  GENERAL CONSIDERATIONS 

2.1.  Member  States and  operators  share the view of the  Commission  that  the  adaptation 

of  the  Directive  to  market  developments  can  no  longer  be  delayed.  A  wider  co 

ordination  of  investment  funds  at  Community  level,  as  envisaged  in  the  1985  UCITS 

Directive, will remove existing barriers to the free  circulation across borders of units and 

will  therefore  represent  an  important  step  towards  the  creation  of  a  fully  integrated 

European Market in this area. 

Recent  discussions  with  the  interested  parties  showed  that  the  harmonisation  of  new 
types  of  "products"  needs  to  be  consistent  with  the  basic  principles  of  the  UCITS 
Directive,  which  puts  a  special  emphasis  on  investor  protection,  and  that  any  solution 
moving  away  from  them  should  be  avoided.  There  is  also  general  agreement  that 
harmonised  risk  spreading  rules  and  the  rules  concerning  the  UCITS  depositary,  though 
fundamental,  are  not  sufficient  to  achieve  investor  protection;  these  rules  need  to  be 
combined  with  rules  ensuring  an  appropriate  information  of  the  investing  public.  Thus, 
the  revision  of  the  existing  disclosure  requirements  for  UCITS  has  been  considered  a 
further  important step. 

2.2. A number  of provisions  of the  existing  UCITS  Directive  are drafted  in a  somewhat 

imprecise manner which causes problems of interpretation  of basic rules of the Directive. 

In  order  to  facilitate  a  uniform  understanding  and  application  and  to  clarify  the 

borderlines  of  the  Directive,  these  interpretative  uncertainties  have  to  be  urgently 

removed.  Member  States  and  operators  share  the  view  of  the  Commission  that  this 

measure is a pre-condition of the expansion of the scope of the Directive. 

3.  MAIN OBJECTIVES 

3.1. 

The main objective  of this proposal is to extend the scope of the UCITS  Directive 

to other types of collective investment undertakings (3). 

Essentially,  the  proposed  approach  is  based  on  an  extension  of  the  investment 

possibilities for UCITS to liquid financial  assets other than transferable  securities. 

3 

It  should  be  noted  that  the  expression  "UCITS"  refers  to  two  types  of  collective 
undertakings:  common  funds/unit 
trusts  managed  by  a  management  company  and 
companies. 

investment 
investment 

According to the proposed solution, UCITS are permitted to invest also in: money market 

instruments; bank deposits, units of other collective investment undertakings of the open-

ended type, standardised financial  futures  and options dealt in on regulated markets. 

It  is  up  to  the  UCITS  to  chose  its  own  investment  profile:  whether  to  specialise  in 

investments  in  a particular  category  of  instrument  (4) or  economic  sector  or  geographic 

area or whether to chose a combination of different  types of investments. 

Moreover,  the  proposal  takes  into  account  a widely  adopted  management  technique  for 

collective  investment  undertakings  specialised  in  investments  in  shares  (equity  funds), 

based  on  the  replication  of  stock-indices  (5).  In  order  to  facilitate  the  replication  of 

qualified  stock-indices,  the  proposal  introduces  more  flexible  risk-spreading  rules  for 

investments in shares representing the underlying assets of such indices. This amendment 

would  represent  a  further  measure  encouraging  investments  in  equities;  it  may  also 

favour  the replication of sectoral stock-indices of pan-European shares. 

In  general,  the  extension  of  a  EU  passport  to  a  wider  range  of  collective  investment 
undertakings  will  favour  the development  of cross-border  activity  and prompt  beneficial 
effects  since  it  will  offer  more  opportunities  to  the  European  collective  investment 
undertakings  industry  and a wider  choice  of investments  to investors. The broadening  of 
the  scope  of  the  UCITS  Directive  therefore  represents  a necessary  step to  create  a  fully 
integrated  Single Market in the area of collective investment undertakings. 

3.2. 

The  aim  of  a  second  set  of  amendments  of  proposal  n°  1  is  to  remove 

interpretative  uncertainties  relating  certain  provisions  of  the  UCITS  Directive  which 

prevent a uniform  understanding and application of basic rules of the Directive. 

For that reason this proposal  would: 

4 

5 

For instance, a UCITS could  be specialised  in investments  in bank  deposits (so-called  cash fund)  or in 
units  of  other  collective  investment  undertakings  (so-called  fund  of  funds)  or  in  financial  futures  and 
options (so-called futures  and options fund)  or in shares (so-called  equity fund), etc. 

The  assets of such  funds  are  invested  in such  a way as to reproduce  the composition  of the  underlying 
assets  of  a  certain  stock-index.  Thus,  the  weighting  of  each  type  of  share  in  the  fund's  portfolio 
reflects  the weishtins; of each such shares within the basket on which the index  is based. 

a 

introduce a definition  of  "transferable  securities" (referring  essentially  to  shares  and 

securitised  debt  instruments).  Moreover,  taking  into  account  existing  regulatory 

solutions in Member States, it would make clear that "money market instruments" are 

types of "transferable  securities"; 

• 

introduce  minimum  risk  control  measures  with  regard  to  some  of  the  most  relevant 

transactions  which  Member  States  allow  UCITS  to  enter  into  for  purposes  of 

"efficient  portfolio  management".  In particular,  the  proposal  would  regulate  the  use 

of financial  derivatives, including over-the-counter  derivatives, and securities  lending 

transactions in which the UCITS acts as a lender; 

a  clarify  that subsidiaries of investment companies -  which are considered  a part of the 

organisational  structure of such types of UCITS -  must normally be incorporated  in a 

Member State. 

3.3. 

Finally,  the proposal  would  ascribe  to the  UCITS  Contact  Committee,  set  up  by 

the UCITS  Directive, comitology  powers  for  the introduction  of technical  adaptations  to 

that  Directive.  As  to  the  procedural  rules,  it  is  proposed  to  make  reference  to  a  self-

standing Directive, to be developed at a later stage. 

4. 

Commentary on individual  amendments 

Amendment n° 1 - Article  1(2) (definition  of UCITS) 

This amendment  announces that harmonised  investment  funds  may  invest,  in addition  to 

transferable  securities, in certain other types of liquid financial  assets (see amendment 3). 

Amendment n° 2 - Article 1, new paragraph 8 (definition  of transferable  securities) 

The  concept  of "transferable  securities" may  comprise  different  types  of  instruments.  In 

order  to  ensure  a  clear  understanding  of  this  concept  among  Member  States,  this 

amendment  clarifies  which  types  of  securities  qualify  as  "transferable  securities".  The 

proposed  definition,  though based  on that  included  in the  Investment  Services  Directive 

(ISD), has been adapted to the needs of the UCITS Directive: 

the  expressions  "negotiable  in  the  capital  market"  and  "excluding  instruments  of 

payments"  of  the  ISD  definition  have  not  been  reproduced,  because  they  were 

considered  irrelevant  (UCITS  have  to  invest  essentially  in  listed 

transferable 

securities;  according  to  the  amending  proposal  UCITS  would  be  permitted  to  invest 

also in bank deposits); 

• 

"money  market  instruments"  are  considered  to  be  comprised  in  the  category  of 

"transferable  securities"  as  they  have  characteristics  similar  to  those  of  bonds  and 

scuritized  debt  instruments.  This  solution  takes  into  consideration  the  implementing 

legislation  already  adopted  by  most  Member  States.  Moreover,  considering  the 

different  classes  of  instruments  negotiated  on  national  money  markets,  it  appeared 

desirable to leave to Member  States the power to identify  the instruments which  fulfil 

the conditions for being considered eligible money market instruments for UCITS. 

Amendment n° 3 - Article 19 (1) (other types of eligible investments for UCITS) 

This  amendment  is  the  most  substantial  of  the  proposal,  because  it  broadens  the 

investment  opportunities  for  UCITS  (up  to  now  UCITS  were  essentially  permitted  to 

invest in listed shares and bonds). 

The  amendment  identifies  some  liquid  financial  assets,  other  than  listed  transferable 

securities, which also qualify  as eligible investment for UCITS. The list includes: units of 

other  UCITS, bank  deposits,  financial  futures  and  options  dealt  in on regulated  markets 

and non listed money market instruments issued by qualified  issuers. 

More  comments  on  such  investments  will  be  given  when  providing  comments  to 

amendments n° 7, 8 and 9 which lay down the conditions under which UCITS may  invest 

in these other instruments. 

Amendments n° 4 and 5  - Articles  19, (2)(b) and (3), and 20 

They  refer  to  technical  consequences  of  including  money  market  instruments  in  the 

definition  of "transferable  securities". 

Amendment  n°  6  -  Article  21  (use  of  financial  derivatives  and  securities  lending 

transactions) 

Article  21  of  the  existing  UCITS  Directive  permits  UCITS  to  employ  "techniques  and 

instruments" for efficient  portfolio  management without further  specification  of the types 

of techniques and instruments. 

Taking  into  account the new portfolio  management  and  hedging  techniques  which  have 

been  developed  since  the  adoption  of  the  Directive  in  1985  and  the  solutions  already 

adopted by a number of Member  States, this amendment  is intended to make clear that  -

for purposes of efficient  portfolio management -  UCITS: 

•  may  conclude  transactions  involving  all  sorts  of  financial  derivatives,  including 

derivatives not dealt in on regulated markets (over-the-counter derivatives) and 

•  notwithstanding  Article  41  of  Directive  85/611/EEC  which  prevents  UCITS  from 

granting loans, may act as lenders in securities lending transactions. 

The  conclusion  of  such  transactions  would  be  subject  to  the  respect  of  some  specific 

measures  eliminating  or  reducing  to  an  acceptable  degree  the  risks  involved  with  such 

transactions (i.e. counter-party risks). 

Amendment n° 7 -  new Article 22a (replication of stock-indices) 

According to the existing Article 22, a UCITS may invest no more than  10% of its assets 

in securities issued by the same issuer. 

Today  a widely  adopted  management  technique  for  UCITS  investing  primarily  in  shares 

(equity funds),  is based essentially on the replication of the composition of certain  stock-

indices  which  represent  a  useful  benchmark  for  such  investments.  The  aim  of  this 

amendment  is  therefore  to  introduce  more  flexible  risk-spreading  requirements  for 

investments  in shares representing the underlying  assets of qualified  stock-indices  which 

should facilitate the replication of such indices. Only indices complying with a number of 

pre-conditions,  identified  by the  amendment,  are considered  to be replicable  by UCITS. 

The  compliance  with  such pre-conditions  must  be  verified  by  the  competent  authorities 

of the Member State authorising such UCITS. 

In  order  to  inform  supervisors  and  operators  about  the  stock-indices  which  UCITS  may 

replicate, the amendment would ensure a periodical  publication  in the Official  Journal  of 

the  European  Communities  of  the  list  of  replicable  stock-indices,  to  be  drafted  by  the 

Commission on the basis of indications furnished  by Member States. 

Amendment n° 8 -  Article 24 (investment in units of other UCITS) 

Today  UCITS  may  invest  only  up  to  5% of  their  assets  in  units  of  other  UCITS  of  the 

open-ended type. 

This  ceiling  has  been  considered  unnecessarily  restrictive  by  Member  States  and  the 

investment  fund  industry, considering that the investment  in units of investment  funds  of 

the open-ended  type is very  liquid  (such  UCITS must  redeem  or re-purchase  the units at 

the request of the unit-holder) and has generally proven  profitable. 

Taking  into  account  market  developments,  the  aim  of  this  amendment  is  therefore  to 

permit  UCITS  to  invest  -  even  all  their  assets  -  in  units  of  other  UCITS  of  the  open-

ended  type,  provided  that  minimum  risk-spreading  rules  and  transparency  requirements 

are respected. 

Amendment  n°  9  -  Articles  24a 

(investment  in  bank  deposits)  and  Article  24b 

(investment in standardised futures and options) 

•  Article 24a 

Today  UCITS are not permitted to invest, as a part of their general  investment  policy, in 

bank  deposits.  UCITS  may  only  hold  "ancillary  liquid  assets",  which  means  essentially 

cash and bank deposits at sight of an amount  strictly  necessary  to enable payments to be 

made to unit-holders  and representing  funds  which UCITS  exceptionally  hold  after  sales 

of securities and before their reinvestment. 

The aim of this amendment  is to remove the existing  restriction  for  investments  in bank 

deposits.  As  a  consequence,  a UCITS  could  chose  to  specialise  in  investments  in  bank 

deposits  (so-called  cash  fund).  Also  for  this  type  of  investment  certain  risk-spreading 

rules  and transparency  requirements have to be respected.  Moreover,  only  bank  deposits 

complying  with  the  general  requirement  of  liquidity  (see  amendment  n°  1)  can  be 

considered  eligible  for  UCITS.  Finally,  in  application  of  the  existing  principle  of 

independence  between  the  depositary  and  the  management  company  and  in  order  to 

prevent  conflicts  of interest, the amendment would prevent UCITS holding deposits with 

their depositaries. 

•  Article 24b 

Today  UCITS  are  permitted  to  invest  in  derivatives  instruments  only  for  purposes  of 

"efficient  portfolio  management". 

This  amendment  is  intended  to  permit  UCITS  to  invest,  as  a  part  of  their  general 

investment  policy,  in  standardised  financial  futures  and  options  dealt  in  on  regulated 

markets ensuring  transparency,  a high degree of liquidity  and  netting mechanisms  which 

practically eliminate the counter-party risk. 

The amendment  lays down general criteria on how the exposure related to transactions on 

such instruments has to be covered  and special transparency  requirements. 

Amendments n° 10 and 11 -Article 25 (2) 

They  refer  to  technical  consequences  of  including  money  market  instruments  in  the 

definition  of "transferable  securities". 

Amendment n° 12 -  Article 25, (3)(e) 

Taking  into  account  discussions  with  Member  States,  this  amendment  is  intended  to 

clarify  that  subsidiaries of investment companies (6) - which carry out on their  behalf the 

business  of  management,  advice  or  marketing  -  must  normally  be  incorporated  in  a 

Member  State.  The  reason  is  that  such  subsidiaries  are  considered  a  part  of  the 

organisational  structure  of  such  companies  which,  in  order  to  ensure  an  effective 

supervision, has to be entirely located within the EU. This conclusion is confirmed  by the 

principle  laid  in paragraph  3 (d)  of Article  25, which  identifies  the  exceptional  cases  in 

which UCITS may hold subsidiaries in third countries. 

Investment companies are a special type of UCITS constituted as companies having a variable capital, 
also  obliged  to  redeem  or  re-purchase  the  shares  at  the  investor's  request.  The  investors  are  the 
shareholders of such companies. 

10 

Amendments  n° 13,14  and  15 -  Article 26 (1), second  subparagraph, Article 41 (2), 

Article 42 

These  amendments  refer  to  technical  consequences  of  broadening  the  investment 

possibilities for UCITS. 

Amendment n° 16 -  Article 53a (comitology) 

This amendment would identify  comitology  powers to be exercised at a later stage by the 

UCITS  Contact  Committee  set  up  by  Article  53  of  Directive  85/611/EEC.  This  will  in 

due course  facilitate  technical  amendments  to be made to that  Directive.  For the  UCITS 

Contact  Committe  to  effectively  exercise  comitology  powers,  a  further  self-standing 

Directive will be needed. 

11 

5. 

Justification  in the light of the principle of subsidiarity 

5.1 

What  are  the  objectives  of  the  proposed  action  with  respect  to  the 

obligations placed upon the Community? 

The  objective  is  to  complete  the  internal  Market  in  the  field  of  collective  investment 

undertakings. 

5.2 

Is the  action  envisaged  a matter  of exclusive  Community  competence 

or one shared with Member States? 

Considering  that  the  main  objective  of  this  proposal  is  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  objectives. 

5.3 

What means of action are available to the Community? 

Only  a  Community  Directive  laying  down  agreed  minimum  standards  can  achieve  the 

desired  objective. 

5.4 

Are uniform  rules necessary? 

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. 

12 

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) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION 

Having regard to the Treaty establishing the European Community, and in particular Article 57(2) thereof, 

Having regard to the proposal from the Commission (*), 

Having regard to the opinion of the Economic and Social Committee (2), 

Acting in accordance with the procedure laid down  in Article  189b of the Treaty, 

(1) 

Whereas  the  scope  of  Council  Directive  85/611/EEC  (3),  as  last  amended  by  Directive 

88/220/EEC  (4)  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);  whereas  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; 

(2) 

Whereas,  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; 

(3) 

Whereas the definitions  of transferable  securities and money market instruments included in 

this Directive are 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;  whereas,  furthermore,  the  definition  of  transferable  securities  covers  negotiable 

instruments only, normally dealt in on the capital market; whereas, consequently,  shares and 

other  securities  equivalent  to  shares  issued  by  bodies,  such  as  building  societies  and 

1  OJNoC... 

2  OJNoC... 

3  OJNoL  375, 31.12.1985 

4  OJNoL  100,  19.4.1988 

/2 

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) 

Whereas  money  market  instruments  cover  those  classes  of  transferable  instruments  which 

are  normally  dealt  in on the money  market,  for  example  treasury  and  local  authority  bills, 

certificates  of deposit, commercial paper and bankers'  acceptances; whereas  Member  States 

should  have  the  option  of  choosing  the  list  of  eligible  money  market  instruments  on  the 

basis of objective  criteria to take account of the existing  structural  differences  in the money 

markets of different  countries; 

(5) 

Whereas  it  is  desirable  to  permit  a  UCITS  to  invest  its  assets  in  units  of  other  collective 

investment  undertakings  of the open  ended  type which  also  invest  in transferable  securities 

and  which  operate  on  the  principle  of  risk-spreading;  whereas  the  requirement  of  risk 

spreading  for  UCITS  investing  in  other  collective  investment  undertakings  is  indirectly 

respected  since  such  UCITS  can  only  invest  in  units  issued  by  collective  investment 

undertakings  complying with the risk  spreading  criteria  of  Directive  85/611/EEC; whereas, 

it  is important  that  such  UCITS adequately  disclose  to  investors the  fact  that  they  invest in. 

units of other collective investment undertakings; 

(6) 

Whereas  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; 

(7) 

Whereas, 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;  whereas  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; 

(8) 

Whereas,  for  prudential  reasons, UCITS should  avoid  assuming  an  excessive  concentration 

in deposits with a single credit institution; 

(9) 

Whereas  UCITS  should  be  permitted  to  invest  their  assets  in  standardised  options  and 

futures  contracts dealt  in on regulated  derivatives  markets; whereas,  in  order  to  ensure that 

the risks  involved  are adequately  covered,  it is necessary  that  such  UCITS hold  at any time 

assets  of sufficient  value and of the right  kind  (i.e. securities,  if the  exposure  is  in terms of 

securities; cash or securities which are, or, on being turned  into money  in the right currency, 

if  the  exposure  is  in  terms  of  money);  whereas,  such  UCITS  too  have  to  operate  on  the 

principle  of  risk-spreading;  whereas,  considering  that  the  value  of  the  portfolio  of  such 

lH 

UCITS  may  fluctuate  widely,  such  UCITS  should  address  only  experienced  investors  or 

investors whose  financial  situation  allows them to bear the risks involved  in the  investment 

in  units  of  such  UCITS; whereas  the  risks  involved  should  be  adequately  disclosed  to  the 

investing public in the UCITS' prospectuses and in any promotional literature; 

(10)  Whereas  new  portfolio  management  techniques  for  collective  investment  undertakings 

investing  primarily  in  shares  are  based  on  the  replication  of  stock-indices;  whereas  it  is 

desirable  to  permit  UCITS  to  replicate  well  known  and  recognised  stock-indices;  whereas 

therefore  it is necessary to introduce more flexible  risk-spreading rules for  UCITS  investing 

in  shares; whereas  in  order  to  ensure  transparency  of  the  stock-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  stock-

indices; 

(11)  Whereas  the  employment  of  techniques  and  instruments  for  the  purpose  of  efficient 

portfolio  management  may  never  be  permitted  if  they  do  not  comply  with  the  principles 

enshrined  in  the  Directive  and  if  they  hinder  the  competent  authorities  from  exercising 

effectively  their supervisory  functions; 

(12)  Whereas, considering the new portfolio management techniques which have been developed 

in  recent  years,  it  is  desirable  to  permit  UCITS  to  make  use  of  all  sorts  of  derivative 

instruments  for  an  efficient  portfolio  management;  whereas,  in  order  to  ensure  investor 

protection,  it  is  necessary  to  provide  for  a  harmonised  framework  for  the  utilisation  of 

financial  derivatives  and  for  an  adequate  cover  for  exposure  deriving  from  such 

transactions;  whereas,  transactions  on  financial  derivatives. not  dealt  in  on  specialised 

derivatives  markets  (over-the-counter  derivatives)  involve  counter-party  risks;  whereas 

therefore  the  counter-parties  for  such  transactions  shall  be  chosen  only  among  qualified 

institutions approved by the UCITS' competent authorities; 

(13)  Whereas,  notwithstanding  Article  41  of  Directive  85/611/EEC,  it  is  desirable  to  permit 

UCITS  to  enter  into  securities  lending  transactions  for  the  purposes  of  efficient  portfolio 

management;  whereas,  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; 

(14)  Whereas  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; whereas, 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;  whereas  it  is 

necessary to ensure an effective  supervision  of UCITS; whereas therefore  the  establishment 

of  a  UCITS'  subsidiary  in third  countries  should  be  permitted  only  in the  cases  and  under 

>f 

the  conditions  identified  in the  Directive; whereas 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; 

(15)  Whereas  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;  whereas  therefore  it  is  important  to  ensure  an  effective 

independence 

between the management company and the depositary; whereas 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;  whereas,  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 of incorporation; 

( 16)  Whereas, 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; 

(17)  Whereas,  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; whereas, therefore,  only a binding Community  Directive  laying 

down agreed minimum  standards can achieve the desired  objectives; whereas this  Directive 

effects  only the minimum harmonisation  required: 

HAVE ADOPTED THIS DIRECTIVE 

IC 

Article  1  [5] 

Directive 85/611/EEC is amended as follows: 

1) In Article  1, paragraph 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 of this Directive of capital raised from  the public and which 

operate on the principle of risk-spreading." 

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

"8.  For the purpose of this Directive 

(a)  transferable securities shall mean: 

-  shares in companies and other securities equivalent to shares in companies, 

-  bonds and other forms of securitized  debt, 

-  any  other negotiable  securities  which  carry the right to acquire  any  such transferable  securities  by 

subscription  or exchange, 

excluding the techniques and instruments referred  to in Article 21 ; 

(b) money  market  instruments, which,  for  the  purposes  of this  Directive  shall be regarded  as  transferable 

securities,  shall mean  those classes of transferable  instruments  normally  dealt  in on the  money  market 

which Member States consider to: 

-  be liquid, and 

-  have  a  value  which  can  be  accurately  determined  at  any  time  or  at  least  with  the  frequency 

stipulated  in Article 34, excluding the techniques and instruments referred  to in Article  21." 

3) In Article  19 the following  shall be added to paragraph  1 : 

Changes compared with the text of the existing Directive 85/611/EEC are underlined. 

n 

"(e)  units of other collective investment undertakings within the meaning  of the first and second  indent of 

Article  1 (2) ; and/or 

(f)  deposits  with credit institutions; and/or 

(g)  standardised  financial-futures  contracts,  including  equivalent  cash-settled  instruments,  dealt  in  on  a 

regulated  market mentioned in the previous subparagraphs (b) and (c); and/or 

(h)  standardised  options  to  acquire  or  dispose  of  any  instruments  falling  within  this  article,  including 

equivalent  cash-settled  instruments,  dealt  in  on  a  regulated  market  mentioned  in  the  previous 

subparagraphs  (b) and  (c). This category  includes,  in particular,  options  on  currency  and  on  interest 

rates; and/or 

(i)  money  market  instruments which  are  not  dealt  in  on  a  regulated  market,  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 stock  exchange  or 

are dealt  in on other regulated  markets which operate regularly, are recognised  and are open to the public, 

or 

- 

issued  or  guaranteed  by an establishment  subject  to  prudential  supervision,  in  accordance  with  criteria 

defined  by  Community  law  or  by  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." 

4) Article  19, paragraph 2 (b) and paragraph 3 shall be deleted. 

5) Article 20 shall be deleted. 

6)  In Article 21, the following  paragraphs shall be added: 

"3.  In this context, a UCITS may carry out transactions  in financial derivative  instruments, also other than 

those  mentioned  in  Article  24b,  provided  that  the  exposure  relating  to  such  instruments  is  covered 

according to the rules laid down  in Article 24b. 

rt 

If  the  UCITS  carries  out  transactions  in  financial  derivative  instruments  which  are  not  dealt  in  on  a 

regulated  market  (over-the-counter  derivatives), the counter-parties to such transactions must  be  qualified 

institutions belonging to the categories approved by the UCITS' competent authorities . 

4.  Further,  in  the  context  of  efficient  portfolio  management,  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 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; 

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. 

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." 

7) The following  Article 22a shall be inserted: 

"Article 22,\ 

"1.  Without  prejudice  of  the  limits  laid  down  in Article  25, the  Member  States  may  raise  the  limits  laid 

down  in  Article  22  to  a  maximum  of  35%  for  investment  in  shares  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- index. 

2. Replicable stock  indices shall be indices which Member States consider to: 

-  have a composition  which  is sufficiently  diversified; 

-  be easy to replicate; 

-  represent an adequate benchmark for the equity market to which they  refer, 

-  be published  in an appropriate manner. 

/9 

3. Each Member State shall send to the Commission the list of stock-indices which they consider  replicable 

by UCITS, together with details of the characteristics of such stock-indices. A similar communication  shall 

be  effected  in  respect  of  each  change  to  the  aforementioned  list.  The  Commission  shall  publish  the 

complete  list  of  replicable  stock-indices  and  updates  thereto  in  the  Official  Journal  of  the  European 

Communities  at  least  once  a  year.  This  list  may  be  subject  to  exchanges  of  views  within  the  Contact 

Committee in accordance with the procedure laid down in Article 53 (4). 

4.  The  UCITS  fund  rules  or  instruments  of  incorporation,  its prospectuses  and  any promotional  literature 

shall describe the characteristics of the replicated  stock-index. 

These documents  shall also contain  a prominent  statement drawing attention to the fact  that the aim  of the 

UCITS'  investment  policy  is to replicate  a certain  stock-index  and that  therefore  it may  invest  a  relevant 

part of its assets in shares issued by the same issuer." 

8) Article 24 shall be replaced by the  following 

"Article 24 

1. A UCITS  may  acquire the  units of  other  collective  investment  undertakings  within  the  meaning  of  the 

first and second indent of Article  1  (2), provided that it invests no more than  10% of its own assets in units 

of a single UCITS. 

2.  The  Member  States  may  raise  the  limit  laid  down  in  paragraph  1 to a maximum  of  35%.  However,  in 

that case the UCITS must  invest at  least  in five different  collective  investment  undertakings  mentioned  in 

paragraph  1. 

3. A UCITS may not invest in units of a collective  investment undertaking within the meaning  of the first 

and  second  indent  of  Article  1  (2),  which  invests  more  than  10%  of  its  own  assets  in  units  of  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. 

c^ 

5 

Paragraph  4_shall  also  apply  where  an  investment  company  acquires  units  in  another  investment 

company 

npany 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. 

6. The UCITS'  fund  rules or  instruments of  incorporation,  its prospectuses  and any promotional  literature 

shall  describe the  characteristics  of  the  other  collective  investment  undertakings  in the units of  which  the 

UCITS  is authorised to invest. 

These  documents  shall  also  contain  a  prominent  statement  drawing  attention  to  the  fact  that  the  UCITS 

invests a part of or all its assets in units of other collective investment undertakings." 

9) The following  Articles 24a and 24b shall be inserted: 

"Article 24a 

1. Notwithstanding the provision laid down in Article  19(4), a UCITS may invest its assets in deposits with 

credit  institutions  furnishing  sufficient  financial  and  professional  guarantees,  provided  that  the  UCITS 

places no more than  10% of its assets in deposits with the same credit institution or with  credit  institutions 

within the same group. 

2.  Member  States  may  raise the  limit  laid  down  in paragraph  1 to a maximum  of  35%.  However,  in that 

case a UCITS must invest  in deposits with at  least five different  credit  institutions. For the purpose  of this 

rule, credit institutions belonging to the same group are considered to be one single  institution. 

3.  The UCITS'  fund  rules or  instruments  of  incorporation,  its prospectuses  and any promotional  literature 

must  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. 

4. Member  States shall not permit UCITS to  invest  in deposits with a credit  institution  which  performs  for 

that UCITS the duties of a depositary mentioned  in Articles 7 and  14. 

Article 24b 

1.  Notwithstanding  the  provisions  laid  down  in  Article  21, a UCITS may  invest,  as a  part  of  its  general 

investment  policy,  in  financial-futures  contracts  and options mentioned  in Article  19, paragraph  1 (g) and 

(h),  provided  that  the  maximum  potential  exposure  relating  to  the  conclusion  of  each  such  derivative 

transaction  is  covered,  during  the  entire  period  of  the  contract,  by  assets  belonging  to  the  UCITS  of  the 

right kind and sufficient  in value. 

c&. 

2.  The  UCITS'  fund  rules or instruments  of  incorporation,  its prospectuses  and  any  promotional  literature 

must include a prominent statement drawing the attention to the fact that the UCITS invests, as a part of its 

general investment policy, in the financial-futures contracts and options. 

These  documents  shall  also  contain  a  warning  that  the  investment  in  the  units  of  such  a  UCITS  is  only 

suitable  for  experienced  investors and for  investors whose  financial  situation  ajlows  them  to bear the risks 

involved  in the investment in units of such UCITS." 

10) In Article 25, paragraph 2,  the following  indent shall be added: 

"-  10% of the money market instruments of any single issuing body." 

11) In Article 25, paragraph 2, the second sentence shall be replaced by the following : 

"The  limits  laid down  in the second  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." 

12) Article 25, paragraph 3 (e) shall be replaced by the  following: 

"(e)  shares  held  by  an  investment  company  in  the  capital  of  subsidiary  companies  incorporated  in  a 

Member State carrying on the business of management, advice or marketing exclusively on its behalf." 

13) Article 26, paragraph  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,  24a  and  24b  for  six  months  following  the 

date of their  authorisation." 

14) Article 41, paragraph 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." 

&SL 

15) Article 42 shall be replaced by the  following: 

"Neither: 

-  an investment company, nor 

"Article 42 

-  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 (l)(e),(g),(h) and (i)." 

16) After  Article 53 the following  Article 53a is inserted: 

"Article 53a 

The  technical  modifications  to  be  made  to  this  Directive  in  the  following  areas  shall  be  adopted  in 

accordance with the procedure to be regulated at a later stage by a Directive amending this Directive: 

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

Community; 

-  adaptation  of  the  ceilings  referred  to  in  Section  V  and  in  Article  36(2)  in  order  to  take  account  of 

developments  on  financial  markets, where  such  adaptations  will  not  lead  to  stricter  requirements  for  the 

UCITS; 

-  alignment  of  terminology  on  and  the  framing  of  definitions  in  accordance  with  subsequent  acts  on 

UCITS and related matters." 

Article 2 

1.  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. 

câ2 

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  enters  into  force  20  days  after  the  date  of  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 
The President 

For the Council 

The President 

&f 

ISSN 0254-1475 

COM(98) 449 final 

DOCUMENTS 

EN 

06  09  10  17 

Catalogue  number  :  CB-C0-98-461-EN-C 

ISBN  92-78-38199-3 

Office  for  Official  Publications  of the European  Communities 

L-2985  Luxembourg