Opinion of the Economic and Social Committee on the 'Proposal for a European Parliament and Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertaking for collective investment in transferable securities (UCITS) with a view to regulating management companies and simplified prospectuses'
Date: 1999-02-24
Institutions: European Economic and Social Committee
Subjects: European Economic and Social Committee, approximation of laws, business management, financial legislation, investment company, securities

28.4.1999

EN

Official Journal of the European Communities

C 116/1

II

(Preparatory Acts)

ECONOMIC AND SOCIAL COMMITTEE

Opinion of the Economic and Social Committee on the ‘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) with a view to regulating management companies and simplified prospectuses’

(1999/C 116/01)

On 16 October 1998 the Council decided to consult the Economic and Social Committee, under Article
198 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 11 February 1999. The rapporteur was
Mr Levitt.

At its 361st plenary session (meeting of 24 February 1999), the Economic and Social Committee adopted
the following opinion with 68 votes in favour and 5 against.

1.

Introduction

Directive 85/611/EEC(1) on Undertakings for Collec-
1.1.
tive Investment in Transferable Securities (UCITS) established
a ‘single licence’ regime for Collective Investment Undertakings
(i.e. an authorisation for products to be sold throughout the
Single Market on the basis of approval in one Member State).
Collective Investment Undertakings are now established in all
Member States, whereas before the adoption of the Directive
in 1985 they were not widespread. However, the Directive’s
impact has been limited by the fact that its single licence
regime applies only to investments in transferable securities
(essentially shares and bonds) traded on a stock exchange or
similar regulated market. It is now proposed to maintain the
basic principles of the UCITS Directive but to extend its scope.

1.1.1.
The proposed legislative framework would ensure a
high level of protection for individual investors by setting
standards both for the investment products and for the

managers undertaking the investment. As regards the products,
the proposed rules would ensure that funds raised from the
public were invested in suitably qualified assets and that
risk-spreading requirements were respected. As for the port-
folio mangers, the rules would impose strict market access and
operating conditions and controls.

Two amending Directives have been proposed(2).
1.1.2.
The focus of this Opinion is on the proposal concerning
the financial
intermediary which may manage UCITS (the
management company). It would introduce co-ordinated rules
on market access, operating conditions and prudential safe-
guards to be respected by management companies. This
co-ordination should allow a ‘single licence’ regime equivalent
to that enjoyed by other financial services, increase investor
protection and enable management companies to carry out
the management of collective investment undertakings and
portfolios on behalf of both private and institutional investors,
including pension funds.

(1) OJ L 375, 31.12.1985, p. 3.

(2) COM(1998) 449 final and COM(1998) 451 final.

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2. Summary of the Commission document

3.2. Nationality

2.1.

The proposed Directive includes proposals concerning:

— conditions for taking up business;

— the nationality of the funds;

— activities of an investment fund manager;

— delegation;

— right of establishment and freedom to provide services;

and

— investor information and simplified prospectus rules.

Overall, the purpose of the proposal, according to the
2.2.
Commission, is to enable UCITS management companies to
receive a European passport allowing them to set up branches
in other Member States and to operate within the EU under
the freedom to provide services; it would revise 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. In
future such companies will be permitted to provide, in addition
to collected portfolio management, individual portfolio man-
agement services to single private or institutional investors
such as pension funds, as well as some specific non-core
activities linked to the core-business. The proposal defines the
conditions under which functions can be delegated to third
parties. It is intended to modernise information documents
provided to investors especially through introducing simplified
prospectuses. The present UCITS Directive contains no har-
monised market access rules, no prudential regulation, and no
provisions regulating the establishment of branches and the
free provision of services by management companies.

2.3.
Overall, the spirit of the proposal is to be welcomed.
However, the actual text lacks clarity in a number of respects
in others, appears to conflict with the Single Market
and,
principle of mutual recognition. These points are explained in
paragraph 3 below.

‘“Management company” shall mean any company the regular
business of which is management of unit trusts/common funds
and of investment companies; a management company’s home
Member State shall mean the Member State in which is situated
the management company’s registered office’ (Articles 1a.2
and 1a.3). But a UCITS which is a unit
trust takes the
nationality of a Member State in which the management
company’s registered office is located (Articles 1a and 5a),
whereas a UCITS constituted as an investment company takes
the nationality of the Member State in which the investment
company’s registered office is situated (Articles 1a and 5b).
This distinction is confusing, as it could give rise to different
rights of access around the EU and within countries. The
proposal does not, however, explain or justify the distinction,
neither in the Explanatory Memorandum, nor in the Articles
of the Directive itself.

3.2.1.
Different UCITS structures exist in different Member
States which work well in practice, including their supervisory
arrangements. These different structures and supervisory
arrangements should benefit from the principle of mutual
recognition, a fundamental cornerstone of the Single Market
in financial services. However:

— the draft Directive creates different standards for different
structures of funds and risks, discriminating against certain
types of fund;

— in addition, where a fund is structured in corporate form it
should be able to manage funds on a cross-border basis,
but under the draft Directive such freedom to provide
services will not be available to it in another Member State
where funds may only take the form of a Unit Trust under
national law.

instead of strengthening the single market

In short,
for
financial services, the proposal runs the risk of achieving the
opposite in the specific case of UCITS.

3. Specific comments

3.3. Activities of Fund Manager

3.1. Conditions for taking up business (amendments to Articles

1a.2 and 5.2)

The definition of ‘management company’
is confusing as
different meanings appear to be used in different places, i.e.
‘manager of invested funds or unit trusts’ and ‘delegated
manager of investment companies’. Moreover, it is not clear
whether ‘investment manager’ is always equivalent to ‘asset
manager’.

Article 5.2, second paragraph, refers to a list of ‘activities’ of
fund managers which is attached to the Directive as a new
Annex 2. The purpose of this list is unclear. Moreover, the
Committee is of the opinion that it should not be regarded as
exhaustive, as it would otherwise preclude flexibility to react
to different market circumstances and could exclude managers
from carrying out other activities not included in the list,
which may not be in conflict with their role as investment
fund managers. It should also be made clear that a management
company should not be required to carry out all the activities
in Annex 2.

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3.4. Delegation

particular, they must:

The proposed Article 5g would prevent
the investment
management company from delegating asset management to
persons with a qualifying holding in the management com-
pany’s capital. It would mean that a unit trust manager would
not be able to delegate to a parent company.

3.4.1.
In some
Practice in Europe varies considerably.
countries the investment management company is bound by
law to undertake the activity of asset management and/or fund
accounting, while in others these functions may be delegated
to third parties, including delegation to the parent company of
the fund management company.

— be a credit institution, an investment firm or a body
authorized by the Member State to act as a custodian of
accounts;

— have own capital in proportion to the assets of the UCITS
for which it is responsible, so as to be able to meet the
commitments inherent in that function;

— also be able to furnish the management company and any
investor so wishing with a document drafted by its
statutory auditor stating that its activities are conducted in
conformity with the legislation of the Member State in
which it is established.

These different structures work well and provide
3.4.2.
effective investor protection. Each national
jurisdiction has
implemented rules to deal with potential conflicts of interest,
and national supervisors enforce these rules.

All these conditions shall apply to any establishment to which
the depositary delegates the safe-keeping of foreign financial
instruments forming the assets of UCITS.

The Committee is, therefore, of the opinion that
3.4.3.
there is no reason for a Directive to interfere with these proven
arrangements. Instead, if there is a need to say anything at all,
it should be by means of stating general principles. For
example,
it could be required that where a Member State
permits a management company to delegate to third parties
for purposes of more efficient conduct of the company’s
business, the management company should be required to
notify the competent authority in advance, and that no
delegation should be made to any person whose interests may
conflict with those of the management company.

3.5. The Right of Establishment and the Freedom to Provide

Services

The proposed Articles 6, 6a, 6b and 6c establish the principle
that once the management company has been authorised by
its home Member State, it may carry out business throughout
the EU either by the establishment of branches or under the
freedom to provide services, without being subject to further
authorisation requirements by host countries. The broad
objective is to be welcomed, but although Article 6a requires
the management company to provide information to its home
country authority before being able to establish a branch or
provide services in host Member States, Article 46 requires an
investment company to provide information to the host
Member State, which seems unduly onerous.

3.6. Depositaries

Depositaries are a crucial feature of investment fund manage-
ment which need to be properly authorized and structured, in

3.6.1.
The current UCITS Directive states that depositaries
must be established in the same Member State as the fund.
This means that they have no passporting rights across the EU.
The Committee encourages the Commission to examine ways
in which passporting rights could be extended to depositaries
while ensuring adequate supervisory regulation for investor
protection.

3.7.

Investor Protection and Simplified Prospectus (Articles 27
and 28)

The proposal to introduce a simplified prospectus offers a
welcome opportunity to simplify the marketing of funds on a
cross-border basis, which has been hampered in the past by
the need to comply with a proliferation of
information
requirements among the Member States. The provision of a
simplified prospectus should not be mandatory.

4. Conclusions

4.1.
Overall, the Committee welcomes the intention to
extend the passporting principle to UCITS, to enable them to
provide individual as well as collective portfolio management
services, to undertake other activities beyond portfolio man-
agement and to publish simplified prospectuses.

4.2.
However, the proposal is very unclear with regard to
the reasoning behind the different status, nationality and
market access rights to be made available to UCITS constituted
as unit trusts and UCITS constituted as investment companies.
The draft Directive creates different standards for different
structures, risks discriminating against certain types of fund

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and restricts the freedom to provide services in other Member
States to certain types of funds, so that instead of strengthening
the Single Market for financial services, the proposal runs the
risk of achieving the opposite. In short, it risks contradicting
the principle of mutual recognition because the different
structures which exist at present are regarded as satisfactory
by their respective national competent authorities.

4.3.
The Committee is also of the opinion that the proposed
restrictions on delegation of asset management are unnecess-
ary. Existing structures work well, provide effective investor
protection, are subject to rules dealing with potential conflicts
of interest and are acceptable to national supervisors which
enforce these rules; as such the proposal runs counter to the
principle of mutual recognition.

Brussels, 24 February 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

APPENDIX

to the opinion of the Economic and Social Committee

This appendix sets out how the Commission’s proposal amends the 1985 Directive.

Article of 1985 UCITS
Directive concerned
(85/611/EEC)

Changes proposed by Commission
in COM (1998) 451 final

Purpose

Article 1

Insert new Article 1a

Defines terms used in Directive

Article 4, paragraph 3

Replace with new paragraph 3

Technical amendment due to new Articles 5, 5a and
5b

Articles 5 + 6

Replace with new Article 5

Articles 5 + 6

Insert new Article 5a

Articles 5 + 6

Insert new Article 5b

Articles 5 + 6

Insert new Article 5c

Articles 5 + 6

Insert new Article 5d

Specifies new conditions for taking up business for
management companies (principle of mutual recog-
nition; collective portfolio management;
individual
portfolio management; non-core activities)

Specifies criteria for authorization of management
companies

Specifies further authorization criteria (similar
Investment Services Directive)

to

Extends reciprocity regime of
Directive to non-EU management companies

Investment Services

Requires monitoring of continuing compliance with
authorization criteria

Articles 5 + 6

Articles 5 + 6

Insert new Article 5e

Requires monitoring of qualifying holdings

Insert new Article 5f

Requires Member States to draw up prudential rules
for management companies

Articles 5 + 6

Insert new Article 5g

Regulates delegations of management companies’ func-
tions to third parties

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Article of 1985 UCITS
Directive concerned
(85/611/EEC)

Changes proposed by Commission
in COM (1998) 451 final

Purpose

Articles 5 + 6

Insert new Article 5h

Articles 5 + 6

Replace with new Article 6

Articles 5 + 6

Insert new Article 6a

Articles 5 + 6

Insert new Article 6b

Foresees future proposal on compensation mechan-
isms

Extends right of establishment and freedom to provide
services to management companies

Details notification procedures for establishment of
new branches

Details notification procedures for activities without
establishment of new branches

Articles 5 + 6

Article 7

Insert new Article 6c

Specifies powers of host Member States

Add new heading to create Section
IIIa

Formal amendment to text

Article 27, paragraph 1 Modify wording

Introduces obligatory simplified prospectuses

Article 28, paragraph 1 Replace with new paragraph 1

Article 29

Reword Article 29

Article 30

Reword Article 30

Article 32

Reword Article 32

Article 33

Replace with new Article 33

Article 35

Reword Article 35

Article 46

Replace with new Article 46

Article 47

Replace with new Article 47

Article 52

Insert new Article 52a

Article 52

Insert new Article 52b

Technical consequence of changes to Article 27, para-
graph 1, and specifies preconditions of simplified
prospectuses

Technical consequence of introduction of simplified
prospectuses

Technical consequence of introduction of simplified
prospectuses

Technical consequence of introduction of simplified
prospectuses

Requires compulsory offer of simplified prospectuses
before conclusion of contract

Technical consequence of introduction of simplified
prospectuses

Establishes notification procedures for cross-border
activities of investment companies

Regulates language regime of prospectuses in host
Member States

Regulates co-operation of Member State supervisors in
the case of cross-border activities (as in Investment
Services Directive)

Regulates co-operation of Member State supervisors in
the case of cross-border activities (as in Investment
Services Directive)

Annexe 1Schedule A

Insert new paragraph 1.3Amend
paragraph 1.13Insert new para-
graphs 5 and 6

Aligns information included in full prospectuses to
that of simplified prospectuses

Annexe 1

Annexe

Insert new Schedule C

List of pre-conditions for simplified prospectuses

New Annexe 2

Defines functions included as ‘collective portfolio
management’

[Article 2 of new Directive]

Transitional provisions and permission of
fathering’

‘grand-