Common Position (EC) No 24/2001 of 5 June 2001 adopted by the Council, acting in accordance with the procedure referred to in Article 251 of the Treaty establishing the European Community, with a view to adopting a Directive of the European Parliament and of the Council amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), with regard to investments of UCITS
Date: 2001-06-05
Institutions: Council of the European Union
Subjects: approximation of laws, financial legislation, investment company, investment transaction, securities

23.10.2001

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COMMON POSITION (EC) No 24/2001

adopted by the Council on 5 June 2001

with a view to adopting Directive 2001/.../EC of the European Parliament and of the Council of ...
amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrat-
ive provisions relating to undertakings for collective investment in transferable securities
(UCITS), with regard to investments of UCITS

(2001/C 297/03)

THE EUROPEAN PARLIAMENT AND
THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Com-
munity, and in particular Article 47(2) thereof,

Having regard to the proposal from the Commission (1),

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

Acting in accordance with the procedure laid down in
Article 251 of the Treaty (3),

Whereas:

(1)

(2)

The scope of Council Directive 85/611/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).
It was
to Directive
85/611/EEC that collective investment undertakings
falling outside its scope would be the subject of coordi-
nation at a later stage.

envisaged in the preamble

Taking into account market developments, it is desirable
that the investment objective of UCITS be widened in
order to permit them to invest in financial instruments,
other than transferable securities, which are sufficiently
liquid. The financial instruments which are eligible to be
investment assets of the portfolio of the UCITS are listed
in this Directive. The selection of investments for a
portfolio by means of an index is a management
technique.

(3)

The definition of transferable securities included in this
Directive is valid only for this Directive and in no way

(1) OJ C 280, 9.9.1998, p. 6 and OJ C 311 E, 31.10.2000, p. 302.
(2) OJ C 116, 28.4.1999, p. 44.
(3) Opinion of the European Parliament of 17 February 2000 (OJ
C 339, 29.11.2000, p. 220), Council Common Position of 5 June
2001 and Decision of the European Parliament of ... (not yet
published in the Official Journal).

(4) OJ L 375, 31.12.1985, p. 3. Directive as last amended by
Directive 2000/64/EC of the European Parliament and the Council
(OJ L 290, 17.11.2000, p. 27).

affects the various definitions used in national legislation
for other purposes such as taxation. Consequently,
shares and other securities equivalent to shares issued by
bodies such as building societies and 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) Money market

instruments cover those transferable
instruments which are normally not traded on regulated
markets but dealt in on the money market, for example
treasury and local authority bills, certificates of deposit,
commercial paper, medium term notes and bankers’
acceptances.

(5)

(6)

(7)

It is useful to ensure that the concept of ‘regulated
market’ in this Directive corresponds to that in Council
Directive 93/22/EEC of 10 May 1993 on investment
services in the securities field (5).

It is desirable to permit a UCITS to invest its assets
in units of UCITS and/or other collective investment
undertakings of the open-ended type which also invest
in liquid financial assets mentioned in this Directive and
which operate on the principle of risk spreading. It is
necessary that UCITS or other collective investment
undertakings in which a UCITS invests be subject to
effective supervision.

The development of opportunities for a UCITS to invest
in UCITS and in other collective investment undertakings
should be facilitated. It is therefore essential to ensure
that such investment activity does not diminish investor
protection. Owing to the enhanced possibilities for
UCITS to invest in the units of other UCITS and/or
collective investment undertakings, it is necessary to lay
down certain rules on quantitative limits, the disclosure
of information and prevention of the cascade phenom-
enon.

(5) OJ L 141, 11.6.1993, p. 27. Directive as last amended by Directive

2000/64/EC.

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(8)

(9)

To take market developments into account and in
consideration of the completion of economic and mon-
etary union it is desirable to permit UCITS to invest in
bank deposits. To ensure adequate liquidity of invest-
ments in deposits, these deposits are to be repayable on
demand or have the right to be withdrawn.
If the
deposits are made with a credit institution the registered
office of which is located in a non-member State, the
credit institution should be subject to prudential rules
equivalent to those laid down in Community legislation.

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. The holding of such ancillary liquid assets may be
justified, for example, in the following cases: in order to
cover current or exceptional payments; in the case of
sales, for the time necessary to reinvest in transferable
securities, money market instruments and/or in other
financial assets provided for in this Directive; for a
period of
time strictly necessary when, because of
unfavourable market conditions, the investment in trans-
ferable securities, money market instruments and in
other financial assets must be suspended.

(10)

For prudential reasons it is necessary to avoid excessive
concentration by a UCITS in investments which expose
them to counterparty risk to the same entity or to
entities belonging to the same group.

(11) UCITS should be explicitly permitted, as part of their
general investment policy and/or for hedging purposes
in order to reach a set financial target or the risk
profile indicated in the prospectus, to invest in financial
derivative instruments.
In order to ensure investor
protection, it is necessary to limit the maximum poten-
tial exposure relating to derivative instruments so that it
does not exceed the total net value of the UCITS’s
In order to ensure constant awareness of
portfolio.
the risks and commitments arising from derivative
transactions and to check compliance with investment
limits, these risks and commitments will have to be
measured and monitored on an ongoing basis. Finally, in
order to ensure investor protection through disclosure,
UCITS should describe their strategies, techniques and
investment limits governing their derivative operations.

(12) With regard to over-the-counter (OTC) derivatives,
additional requirements should be set in terms of the
eligibility of counterparties and instruments,
liquidity
and ongoing assessment of the position. The purpose of

such additional requirements is to ensure an adequate
level of investor protection, close to that which they
obtain when they acquire derivatives dealt in on regu-
lated markets.

(13) Operations in derivatives may never be used to circum-
vent the principles and rules set out in this Directive.
With regard to OTC derivatives, additional risk-spread-
ing rules should apply to exposures to a single counter-
party or group of counterparties.

(14) Some portfolio management techniques for collective
investment undertakings investing primarily in shares
and/or debt securities are based on the replication of
stock indices and/or debt-security indices. It is desirable
to permit UCITS to replicate well-known and recognised
stock indices and/or debt-security indices. It may there-
fore be necessary to introduce more flexible risk-
spreading rules for UCITS investing in shares and/or
debt securities to this end.

(15) Collective investment undertakings falling within the
scope of this Directive should 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. In the cases identified by this Directive a
UCITS may have subsidiaries only when necessary to
carry out effectively on behalf of that UCITS certain
activities, also defined in this Directive. It is necessary to
ensure an effective supervision of UCITS. Therefore the
establishment of a subsidiary of a UCITS in a non-
member country should be permitted only in the cases
and under the conditions identified in the Directive. The
general obligation to act solely in the interests of unit-
holders and, in particular, the objective of increasing
cost efficiencies, never justify a UCITS undertaking
measures which may hinder the competent authorities
from exercising effectively their supervisory functions.

(16) There is a 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. Therefore, only a binding
Community Directive laying down agreed minimum
standards can achieve the desired objectives. This Direc-
tive effects only the minimum harmonisation required
and does not go beyond what is necessary in order to
achieve the objectives pursued in accordance with the
third paragraph of Article 5 of the Treaty.

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(17) The measures necessary for the implementation of this
Directive should be adopted in accordance with Council
Decision 1999/468/EC of 28 June 1999 laying down
the procedures for the exercise of implementing powers
conferred on the Commission (1).

5.

in Article 19(1):

— the terms ‘and/or’ shall be added to the end of

point (d),

(18) The Commission may consider proposing codification
in due course after the adoption of the proposals,

— the following point shall be added:

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Directive 85/611/EEC is hereby amended as follows:

1.

in Article 1(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 referred to in Article 19(1) of capital
raised from the public and which operates on the
principle of risk-spreading and’;

2.

in Article 1 the following paragraphs shall be added:

‘8. For the purposes of this Directive, “transferable securi-
ties” shall mean:

— shares in companies and other securities equivalent

to shares in companies (“shares”),

— bonds and other forms of securitised debt (“debt

securities”),

— 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.

9. For the purposes of this Directive “money market
instruments” shall mean instruments normally dealt in
on the money market which are liquid, and have a value
which can be accurately determined at any time’;

3. Article 19(1)(a) shall be replaced by the following:

‘(a)

transferable securities and money market instru-
ments admitted to or dealt in on a regulated market
within the meaning of Article 1(13) of the ISD,
and/or’;

4.

in Article 19(1)(b) and (c), the words ‘and money market
instruments’ shall be added after the words ‘transferable
securities’;

(1) OJ L 184, 17.7.1999, p. 23.

‘(e) units of UCITS authorised according to this
Directive and/or other collective investment
undertakings within the meaning of the first
and second indent of Article 1(2), should they
be situated in a Member State or not, provided
that:

— such other collective investment under-
takings are authorised under laws which
provide that they are subject to super-
vision considered by the UCITS’ com-
petent authorities to be equivalent to that
laid down in Community law, and that
cooperation between authorities is suf-
ficiently ensured,

— the level of protection for unitholders in
the other collective investment undertak-
ings is equivalent to that provided for
unit-holders in a UCITS, and in particular
that the rules on assets segregation, bor-
rowing, lending, and uncovered sales of
transferable securities and money market
instruments are equivalent to the require-
ments of this Directive,

— the business of the other collective invest-
ment undertakings is reported in half-
yearly and annual reports to enable an
assessment to be made of the assets and
liabilities, income and operations over the
reporting period,

— no more than 10 % of the UCITS’ or the
other collective investment undertakings’
assets, whose acquisition is contemplated,
can, according to their fund rules or
instruments of incorporation, be invested
in aggregate in units of other UCITS or
other collective investment undertakings,
and/or

(f)

deposits with credit
institutions which are
repayable on demand or have the right to be
withdrawn, and maturing in no more than
12 months, provided that the credit institution
has its registered office in a Member State or, if
the registered office of the credit institution is
situated in a non-member State, provided that
it is subject to prudential rules considered by
the UCITS’ competent authorities as equivalent
to those laid down in Community law, and/or

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(g)

instruments,

financial derivative
including
equivalent cash-settled instruments, dealt in on
a regulated market referred to in subpara-
graphs (a), (b) and (c), and/or financial deriva-
tive instruments dealt
in over-the-counter
(“OTC derivatives”), provided that:

— the underlying asset consists of instru-
ments covered by this paragraph, financial
indices,
interest rates, foreign exchange
rates or currencies, in which the UCITS
may invest according to its investment
objectives as stated in the UCITS’ fund
rules or instruments of incorporation,

— the counterparties

to OTC derivative
transactions are institutions subject
to
prudential supervision, and belonging to
the categories approved by the UCITS’
competent authorities and

— the OTC derivatives are subject to reliable
and verifiable valuation on a daily basis
and can be sold, liquidated or closed by
an offsetting transaction at any time at
their fair value at the UCITS’ initiative,
and/or

(h) money market instruments other than those
dealt in on a regulated market, which fall under
if the issue or issuer of such
Article 1(9),
instruments is itself regulated for the purpose of
protecting investors and savings, and provided
that they are:

— issued or guaranteed by a central, regional
or local authority or 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 State belongs, or

— issued by an undertaking any securities of
which are dealt in on regulated markets
referred to in subparagraphs (a), (b) or (c),
or

supervision,

to prudential

— issued or guaranteed by an establishment
subject
in
accordance with criteria defined by Com-
munity law, or by an establishment which
is subject to and complies with prudential
rules considered by the competent auth-
orities to be at least as stringent as those

laid down by Community law, or

— issued by other bodies belonging to the
categories approved by the UCITS’ com-
petent authorities provided that invest-
ments in such instruments are subject to
investor protection equivalent to that laid
down in the first, the second or the third
indent and provided that the issuer is
a company whose capital and reserves
amount to at least EUR 10 million and
which presents and publishes its annual
accounts in accordance with Directive
78/660/EEC(*), is an entity which, within
a group of companies which includes one
or several listed companies, is dedicated
to the financing of the group or is an
entity which is dedicated to the financing
of securitisation vehicles which benefit
from a banking liquidity line.

(*) Fourth Council Directive 78/660/EEC of 25 July 1978
based on Article 54(3)(g) of the Treaty on the annual
accounts of certain types of companies (OJ L 222,
14.8.1978, p. 11). Directive as last amended by
Directive 1999/60/EC (OJ L 162, 26.6.1999, p. 65)’;

6.

in Article 19(2)(a), the words ‘and money market instru-
ments’ shall be added after the words ‘transferable
securities’;

7. Article 19(2)(b), and (3) shall be deleted;

8. Article 20 shall be deleted;

9. Article 21 shall be replaced by the following:

‘Article 21

1. The management or
investment company must
employ a risk-management process which enables it to
monitor and measure at any time the risk of the positions
and their contribution to the overall risk profile of the
portfolio;
it must employ a process for accurate and
independent assessment of the value of OTC derivative
It must communicate to the competent
instruments.
authorities regularly and in accordance with the detailed
rules they shall define, the types of derivative instruments,
the underlying risks,
the quantitative limits and the
methods which are chosen in order to estimate the risks
associated with transactions in derivative instruments
regarding each managed UCITS.

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2. The Member States may authorise UCITS to employ
techniques and instruments relating to transferable securi-
ties and money market instruments under the conditions
and within the limits which they lay down provided that
such techniques and instruments are used for the purpose
of efficient portfolio management. When these operations
concern the use of derivative instruments, these con-
ditions and limits shall conform to the provisions laid
down in this Directive.

Under no circumstances shall these operations cause the
UCITS to diverge from its investment objectives as
instruments of
laid down in the UCITS’
incorporation or prospectus.

fund rules,

3. A UCITS shall ensure that its global exposure relating
to derivative instruments does not exceed the total net
value of its portfolio.

The exposure is calculated taking into account the current
value of the underlying assets, the counterparty risk,
future market movements and the time available to
liquidate the positions. This shall also apply to the
following subparagraphs.

A UCITS may invest, as a part of its investment policy
and within the limit laid down in Article 22(5), in financial
derivative instruments provided that the exposure to
the underlying assets does not exceed in aggregate the
investment limits laid down in Article 22. The Member
States may allow that, when a UCITS invests in index-
based financial derivative instruments, these investments
do not have to be combined to the limits laid down in
Article 22.

When a transferable security or money market instrument
embeds a derivative, the latter must be taken into account
when complying with the requirements of this Article.

4. The Member States shall send the Commission full
information and any subsequent changes in their regu-
lation concerning the methods used to calculate the risk
exposures mentioned in paragraph 3, including the risk
exposure to a counterparty in OTC derivative trans-
actions, no later than ... (*). The Commission shall forward
that
information to the other Member States. Such
information will be the subject of exchanges of views
within the Contact Committee in accordance with the
procedure laid down in Article 53(4).

(*) Twenty-four months after the entry into force of this

Directive amending Directive 85/611/EEC’;

10. Article 22 shall be replaced by the following:

‘Article 22

1. A UCITS may invest no more than 5 % of its assets in
transferable securities or money market
instruments
issued by the same body. A UCITS may not invest more
than 20 % of its assets in deposits made with the same
body.

The risk exposure to a counterparty of the UCITS in an
OTC derivative transaction may not exceed:

— 10 % of its assets when the counterpart is a credit

institution referred to in Article 19(1)(f), or

— 5 % of its assets, in other cases.

2. Member States may raise the 5 % limit laid down in
the first sentence of paragraph 1 to a maximum of 10 %.
However, the total value of the transferable securities and
the money market instruments held by the UCITS in the
issuing bodies in each of which it invests more than 5 %
of its assets must not then exceed 40 % of the value of its
assets. This limitation does not apply to deposits and OTC
derivative transactions made with financial institutions
subject to prudential supervision.

Notwithstanding the individual limits laid down in para-
graph 1, a UCITS may not combine:

— investments in transferable securities or money

market instruments issued by,

— deposits made with, and/or

— exposures arising from OTC derivative transactions

undertaken with

a single body in excess of 20 % of its assets.

3. The Member States may raise the 5 % limit laid down
in the first sentence of paragraph 1 to a maximum of
35 % if the transferable securities or money market
instruments are issued or guaranteed by a Member State,
by its local authorities, by a non-member State or by
public international bodies to which one or more Member
States belong.

4. Member States may raise the 5 % limit laid down in
the first sentence of paragraph 1 to a maximum of 25 %
in the case of certain bonds when these are issued by a
credit institution which has its registered office in a
Member State and is subject by law to special public
supervision designed to protect bond-holders. In particu-
lar, sums deriving from the issue of these bonds must be
invested in conformity with the law in assets which,
during the whole period of validity of the bonds, are
capable of covering claims attaching to the bonds and
which, in the event of failure of the issuer, would be used
on a priority basis for the reimbursement of the principal
and payment of the accrued interest.

When a UCITS invests more than 5 % of its assets in the
bonds referred to in the first subparagraph and issued by
one issuer, the total value of these investments may not
exceed 80 % of the value of the assets of the UCITS.

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The Member States shall send the Commission a list of
the aforementioned categories of bonds together with the
categories of issuers authorised, in accordance with the
laws and supervisory arrangements mentioned in the first
subparagraph, to issue bonds complying with the criteria
set out above. A notice specifying the status of the
guarantees offered shall be attached to these lists. The
Commission shall immediately forward that information
to the other Member States together with any comments
which it considers appropriate, and shall make the
information available to the public. Such communi-
cations may be the subject of exchanges of views within
the Contact Committee in accordance with the procedure
laid down in Article 53(4).

5. The transferable securities and money market instru-
ments referred to in paragraphs 3 and 4 shall not be
taken into account for the purpose of applying the limit
of 40 % referred to in paragraph 2.

The limits provided for in paragraphs 1, 2, 3 and 4 may
not be combined, and thus investments in transferable
securities or money market instruments issued by the
same body or in deposits or derivative instruments
made with this body carried out in accordance with
paragraphs 1, 2, 3 and 4 shall under no circumstances
exceed in total 35 % of the assets of the UCITS.

Companies which are included in the same group for
the purposes of consolidated accounts, as defined in
accordance with Directive 83/349/EEC (*) or in accord-
ance with recognised international accounting rules, are
regarded as a single body for the purpose of calculating
the limits contained in this Article.

Member States may allow cumulative investment
in
transferable securities and money market instruments
within the same group up to a limit of 20 %.

(*) Seventh Council Directive 83/349/EEC of 13 June
1983 based on the Article 54(3)(g) of the Treaty on
consolidated accounts (OJ L 193, 18.7.1983, p. 1).
Directive as last amended by the 1994 Act of
Accession’;

11.

the following Article 22a shall be inserted:

‘Article 22a

1. Without prejudice to the limits laid down in Article 25,
the Member States may raise the limits laid down in
Article 22 to a maximum of 20 % for investment in
shares and/or debt securities 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 or debt
securities index which is recognised by the competent
authorities, on the following basis:

— its composition is sufficiently diversified,

— the index represents an adequate benchmark for the

market to which it refers,

— it is published in an appropriate manner.

2. Member States may raise the limit laid down in
paragraph 1 to a maximum of 35 % where that proves to
be justified by exceptional market conditions in particular
in regulated markets where certain transferable securities
or money market instruments are highly dominant. The
investment up to this limit is only permitted for a single
issuer’;

12.

In Article 23(1), the words ‘and money market instru-
ments’ shall be added after the words ‘transferable
securities’;

13. Article 24 shall be replaced by the following:

‘Article 24

1. A UCITS may acquire the units of UCITS and/or
other collective investment undertakings referred to in
Article 19(1)(e), provided that no more than 10 % of its
assets are invested in units of a single UCITS or other
collective investment undertaking. The Member States
may raise the limit to a maximum of 20 %.

2. Investments made in units of collective investment
undertakings other than UCITS may not exceed,
in
aggregate, 30 % of the assets of the UCITS.

The Member States may allow that, when a UCITS
has acquired units of UCITS and/or other collective
investment undertakings, the assets of the respective
UCITS or other collective investment undertaking do not
have to be combined for the purposes of the limits laid
down in Article 22.

3. When a UCITS invests in the units of other UCITS
and/or other collective investment undertakings that
are managed, directly or by delegation, 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, that management company or other
company may not charge subscription or redemption
fees on account of the UCITS’ investment in the units of
such other UCITS and/or collective investment undertak-
ings.

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A UCITS that invests a substantial proportion of its assets
in other UCITS and/or collective investment undertakings
shall disclose in its prospectus the maximum level of the
management fees that may be charged to both to the
UCITS itself and to the other UCITS and/or collective
investment undertakings in which it intends to invest. In
its annual report it shall
indicate the maximum pro-
portion of management fees charged both to the UCITS
itself and to the UCITS and/or other collective investment
undertaking in which it invests’;

14.

the following Article 24a shall be inserted:

‘Article 24a

1. The prospectus shall indicate in which categories of
assets a UCITS is authorised to invest. It shall mention
if transactions in financial derivative instruments are
authorised; in this event, it must include a prominent
statement indicating if these operations may be carried
out for the purpose of hedging or with the aim of meeting
investment goals, and the possible outcome of the use of
financial derivative instruments on the risk profile.

2. When a UCITS invests principally in any category of
assets defined in Article 19 other than transferable
securities and money market instruments or replicates a
stock or debt securities
index in accordance with
its prospectus and, where necessary, any
Article 22a,
other promotional literature must include a prominent
statement drawing attention to the investment policy.

3. When the net asset value of a UCITS is likely to have
a high volatility due to its portfolio composition or the
portfolio management techniques that may be used, its
prospectus and, where necessary, any other promotional
literature must include a prominent statement drawing
attention to this characteristic.

4. On request of an investor, the management company
must also provide supplementary information relating to
the quantitative limits that apply in the risk management
of the UCITS, to the methods chosen to this end and to
the recent evolution of the main instrument categories’
risks and yields’;

15.

In Article 25(2):

1.

the third indent shall be replaced by the following:

‘— 25 % of the units of any single UCITS and/or
other collective investment undertaking within
the meaning of the first and second indent of
Article 1(2)’,

2.

the following indent shall be added:

‘— 10 % of the money market instruments of any

single issuing body’,

16.

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

‘The limits laid down in the second, third 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’;

17.

in Article 25(3), (a), (b) and (c) the words ‘and money
market
instruments’ shall be added after the words
‘transferable securities’;

18. Article 25(3)(e) shall be replaced by the following:

‘(e)

shares held by an investment company or invest-
ment companies in the capital of subsidiary com-
panies carrying on only the business of management,
advice or marketing in the country where the
subsidiary is located, in regard to the repurchase of
units at unit-holders’ request exclusively on its or
their behalf’;

19. Article 26(1) shall be replaced by the following:

‘1. UCITS need not comply with the limits laid down in
this section when exercising subscription rights attaching
to transferable securities or money market instruments
which form part of their assets.

While ensuring observance of
the principle of risk
spreading, the Member States may allow recently author-
ised UCITS to derogate from Articles 22, 22a, 23, and 24
for six months following the date of their authorisation’;

20. Article 41(2) shall be replaced by the following:

‘2. Paragraph 1 shall not prevent such undertakings
from acquiring transferable securities, money market
instruments or other financial instruments referred to in
Article 19(1)(e), (g), and (h) which are not fully paid’;

21. Article 42 shall be replaced by the following:

‘Article 42

Neither:

— an investment company, nor

— a management company or depositary acting on

behalf of a unit trust

may carry out uncovered sales of transferable securi-
ties, money market instruments or other financial
instruments referred to in Article 19(1)(e),
(g),
and (h)’;

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22. after Article 53 the following Article shall be inserted:

Article 2

‘Article 53a

functions provided for

1. In addition to its
in
Article 53(1), the Contact Committee may also meet as a
Regulatory Committee within the meaning of Article 5 of
Decision 1999/468/EC (*) to assist the Commission in
regard to the technical modifications to be made to this
Directive in the following areas:

— clarification of the definitions in order to ensure
uniform application of this Directive throughout the
Community,

— alignment of terminology and the framing of defi-
nitions in accordance with subsequent acts on
UCITS and related matters.

2. Where reference is made to this paragraph, Articles 5
and 7 of Decision 1999/468/EC shall apply, having
regard to the provisions of Article 8 thereof.

The period provided for in Article 5(6) of Decision
1999/468/EC shall be set at three months.

3. The Committee shall adopt its rules of procedure.

(*) OJ L 184, 17.7.1999, p. 23.’

No later than .... (*) Member States shall adopt the laws,
regulations and administrative provisions necessary for them
to comply with this Directive. They shall forthwith inform the
Commission thereof.

They shall apply these measures no later than .... (**).

When Member States adopt these measures they shall contain
a reference to this Directive or shall be accompanied by such
reference on the occasion of their official publication. The
methods of making such a reference shall be laid down by the
Member States.

Article 3

This Directive shall enter into force on the day of its publication
in the Official Journal of the European Communities.

Article 4

This Directive is addressed to the Member States.

Done at ...

For the European Parliament

The President

For the Council

The President

(*) Eighteen months after the date of entry into force of this Directive.
(**) Twenty-four months after the date of entry into force of this

Directive.

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C 297/43

STATEMENT OF THE COUNCIL’S REASONS

I.

INTRODUCTION

1.

2.

On 17 July 1998, the Commission put forward a proposal (1) for a Directive of the European
Parliament and of the Council amending Council Directive 85/611/EEC on the coordination
of laws, regulations and administrative provisions relating to undertakings for collective
investment in transferable securities (UCITS) (2).

The Economic and Social Committee adopted its opinion at its session on 24 and 25 February
1999 (3). The European Central Bank gave its opinion on 16 March 1999 (4). On 17 February
2000, the European Parliament adopted 24 amendments at first reading (5). On 30 May 2000,
the Commission put forward its amended proposal (6).

3.

On 5 June 2001, in accordance with Article 251 establishing the Treaty of the European
Community the Council adopted its Common Position and these reasons.

II.

AIM OF THE PROPOSAL

Market developments have exposed a need to modernise UCITS through an extension of the list of
assets in which an undertaking for collective investment may invest, such as other collective
investment undertakings, money market instruments, deposits and financial derivative instruments.
The principal objective of the Commission proposal, which is fully shared by the Council, is to
extend this list and to ensure cross-border marketing of units in UCITS while providing a uniform
level of investor protection. The proposal further aims to update and clarify certain provisions of
the UCITS Directive.

III. ANALYSIS OF THE COMMON POSITION

While in general terms supporting the aforementioned amended proposal from the Commission,
the Council has in a number of cases opted for different solutions, which are further explained
below. This has been done mainly to render the provisions more transparent and coherent and to
give UCITS added flexibility in their investment policy while at the same time safeguarding investor
protection.

The Council has also changed the title of the Directive in order to clarify the relationship between
this amending Directive and the other Directive which also amends Directive 85/611/EEC but with
a view to regulating management companies and simplified prospectuses.

1. Definitions — Article 1

The Council’s Common Position makes several references to Article 19 of Directive 85/611/EEC,
which lists the investments open to UCITS, consistently using the phrase ‘referred to in Article 19 of
this Directive’ which the Council considers more precise than the European Parliament’s ‘covered by
this Directive’. The Council therefore prefers Article 1(2) to read along the lines of the Commission’s
amended proposal rather than as drafted in amendment 8 of the European Parliament.

(1) OJ C 280, 9.9.1998, p. 6.
(2) OJ L 375, 31.12.1985, p. 3. Directive as last amended by Directive 2000/64/EC of 7 November 2000 (OJ L 290,

17.11.2000, p. 27).

(3) OJ C 116, 28.4.1999, p. 44.
(4) OJ C 285, 7.10.1999, p. 9.
(5) OJ C 339, 29.11.2000, p. 220.
(6) OJ C 311 E, 31.10.2000, p. 302.

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The Council furthermore prefers to make it clear that the term ‘transferable securities’ defined in
Article 1(8) does not include the techniques and instruments referred to in Article 21 (derivative
instruments).

Since money market instruments are not generally considered to be transferable securities (for
instance, Directive 93/22/EEC on investment services contains two separate definitions) and since
the text of the Directive in a number of instances distinguishes between transferable securities and
money market instruments, the Council has decided to introduce a separate definition of the term
‘money market instruments’ in Article 1(9). The text of the Common Position has been modified
accordingly.

2. Provisions extending the list of assets — Article 19

(a) The Council agrees that it is useful to introduce into Article 19 the concept of regulated
markets in the sense of Directive 93/22/EEC and has therefore, by largely taking over the
Commission’s amended proposal of the, incorporated amendment 9 of the European Parliament
in its Common Position.

The substance of amendment 1 relating to the recitals has been included in recital 5 of the
Common Position.

(b) The Council furthermore shares the view of the European Parliament and of the Commission
that UCITS ought to be allowed to buy units of other UCITS and/or other collective investment
undertakings. The Common Position therefore includes Article 19(1)(e) as proposed by the
Commission in its amended proposal with the modification that the ‘cascade rule’ has been
included in Article 19(1)(e) as proposed by the European Parliament, and not in Article 24(3),
as in the amended Commission proposal. The Council has made two further minor changes as
compared with the amended Commission proposal: it has specified that the conditions set out
apply to all collective investment undertakings not authorised as UCITS, regardless of where
they are situated, and rules on asset segregation have been included among those rules which
must be respected by other collective investment undertakings. The Common Position thus
includes the main part of amendment 44.

The Council has also partly included amendments 2 and 5 concerning recitals 6 and 7 of the
Common Position.

(c) Regarding deposits, the Council fully endorses the ideas of the European Parliament and of the
Commission in its amended proposal, and amendment 11 is thus included in Article 19(1)(f)
of the Common Position.

The substance of amendment 3, which relates to the recitals, is included in recital 8 of
the Common Position, reinforced by the alignment of the text on amendment 11 and
Article 19(1)(f).

(d) The Council is in favour of extending Article 19 to financial derivative instruments and agrees
with the European Parliament that it makes sense to cover all financial derivative instruments
in paragraph 1(g) thereof.

In comparison with the Commission’s amended proposal and the European Parliament’s
amendment, the Council has strengthened this provision by extending the provision in
paragraph 1(g) relating to the underlying assets to exchange traded derivatives by merging
subparagraphs (g) and (h) in the Commission proposal.

The Common Position includes the OTC counterparty requirements and the idea behind the
valuation, sale and liquidation requirements contained in the amended proposal of the
Commission and in amendment 37. However, the Council believes that the latter requirements
should be further strengthened by specifying that sale and liquidation can take place at any
time at the initiative of the UCITS and at the fair value of the OTC derivative instrument.
Furthermore, the Council has added to sale and liquidation the possibility of closing the
position by an offsetting transaction.

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On the other hand, the European Parliament’s idea that only derivative instruments with a high
rating based on a recognised rating scale be included is unacceptable to the Council since no
such universally recognised rating scale exists.

The main part of amendment 37 is thus included.

(e)

Finally, the Council agrees with the European Parliament and the Commission that UCITS
should be permitted to invest in money market instruments other than those traded on a
regulated market as long as the issuer is regulated and falls into one of the categories listed in
Article 19(1)(h) of the Common Position. The Common Position to a large extent follows the
amended proposal of the Commission except on three points.

Firstly, the Council believes that authorities, central banks, the ECB, the EU, the EIB, non-
member States and States in a federation could act not only as issuers but also as guarantors.
Secondly, it is made clear that the second indent concerns issuing undertakings that have their
securities dealt in on regulated markets. Thirdly, the Council has added a fourth category to the
three set out in the Commission’s amended proposal, namely money market instruments issued
by undertakings whose securities are not dealt in on regulated markets, provided that a number
of specific conditions are met.

Amendment 13 of the European Parliament is included in Article 19(1)(h) of the Common
Position.

3. Articles 20 to 24 — Investment limits

(a) Article 20 has been deleted from the Common Position. The provisions in Article 20 of the
existing Directive concerning exchange of information which remain valid have been included
in Article 22(4) of the Common Position. The Council finds this drafting clearer and the
procedure laid down in the Common Position simpler than the one proposed by the
Commission in Article 20 of its amended proposal. The Council believes that the concerns of
the European Parliament which led it to propose the reintroduction of Article 20 have thus
been met and that the spirit of amendment 14 has thus been included in the Common Position.

(b)

Since the adoption of the existing Directive in 1985, the use of financial derivative instruments
has become considerably more widespread and refined to meet the needs of the market and
the supervisory methods to deal with these instruments have developed accordingly. The
Council therefore considered the existing Article 21 inadequate to respond to current regulatory
needs. The Council agrees to a large extent with the content of Article 24b of the Commission’s
amended proposal and the amendments proposed by the European Parliament, but finds that a
regrouping of all provisions relating to the use of derivative instruments in one article improves
the transparency of the text. For these reasons the Council preferred to restructure and redraft
all such provisions in Article 21 of the Common Position. The provisions relating to disclosure
are however set out in a general article, Article 24a of the Common Position (see below).

The elements aiming at investor protection contained in the amended Commission proposal
are included in the Common Position, namely the provisions requiring that:

— global exposure relating to derivative instruments does not exceed the total net value of

the UCITS’s portfolio (Article 21(3) first subparagraph of the Common Position),

— exposure to the issuing body of the underlying assets does not exceed the investment
limits laid down in Article 22 (third subparagraph of Article 21(3) of the Common
Position). Thus the Council has included the substance of Amendment 43,

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— the investment objectives stated in the UCITS’ fund rules or prospectuses must be

respected, (second subparagraph of Article 21(2) of the Common Position).

The drafting has been strengthened and made more precise and new provisions have been
added concerning,
in particular, the procedures a UCITS must follow in relation to the
management of risk linked to the use of derivative instruments and exchange of information
between the competent authorities:

— the provisions relating to the risk management process employed by the UCITS have been
strengthened as have the rules regarding disclosure to the competent authorities
(Article 21(1) of the Common Position),

— a new provision relating to exchange of information between Member States and the
Commission concerning the methods used to calculate risk exposures has been introduced
in Article 21(4) of the Common Position to replace Article 24b of the Commission’s
amended proposal.

The Council considers the provisions in the Common Position adequate to ensure the
protection of the investors while at the same time sufficiently flexible to ensure that the UCITS
can invest optimally to pursue its investment objectives. The Council has consequently decided
not to set a specific limit to UCITS’ investment in OTC derivative instruments as proposed by
the European Parliament in amendment 39 and by the Commission in Article 24b(3) of its
amended proposal.

The Council finds it unnecessary to include a specific provision relating to securities lending in
the Common Position and amendment 16 is consequently not included in the Common
Position.

(c) The Council shares the view of the European Parliament and of the Commission that the
quantitative limits in Article 22 governing a UCITS’ investment in various assets need to be
adjusted to the extended investment possibilities, and that these rules should as far as possible
be set out in one article, Article 22, to make the text as transparent as possible.

The Council agrees with the European Parliament, and the Commission in its amended
proposal, that a separate article on deposits is not necessary and amendment 20, deleting most
of Article 24a of the original Commission proposal, is thus included in the Common Position.

It also shares the view of the European Parliament and of the Commission that as a general rule
UCITS should not invest more than 5 % of their assets in transferable securities or money
market instruments issued by the same body (Article 22(1)). Concerning OTC derivative
instruments, the Council agrees with the European Parliament and the Commission that the
risk exposure to a single counterparty should not exceed 5 % of the assets of the UCITS, unless
the counterparty is a credit institution, in which case the Council has opted for the higher
exposure limit of 10 % in view of the lower risk involved. The Council disagrees with the
European Parliament and the Commission over the appropriate investment limit for deposits,
which the Council believes should be 20 % in view of the low risk.

Concerning the option for Member States to raise the 5 % limit to 10 % in Article 22(2), the
Council finds that it should apply to transferable securities and money market instruments. The
Council agrees with the Commission that the overall proportion of such investments should
not normally exceed 40 % of the assets of a UCITS. However, the Council has excluded OTC
derivative instruments where the counterparty is a supervised institution and deposits with
credit institutions from the calculation of this limit. In Article 22(2) of the Common Position
the Council has taken over the ‘single body’ limit the Commission proposed in Article 22(1) of
its amended proposal, but with a limit of 20 % rather than 15 % as proposed by the
Commission.

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The Council agrees with the Commission that Article 22(3) of the existing Directive, which the
European Parliament had proposed to delete, should be maintained. It has therefore not taken
on board amendment 42. A new provision on certain bonds has been introduced in
Article 22(4) following the deletion of Article 20, see above.

As the Council agrees with the European Parliament and the Commission that it is also
necessary to introduce a limit for investments in the same group and a definition is set out in
Article 22(5) of the Common Position, in fact, two definitions of the term ‘group’ are included
in order to take account of companies outside the EU: one definition of a group is aligned on
Directive 83/349/EEC, the other refers to recognised international accounting rules. The 35 %
global limit, already contained in Directive 85/611/EC, as previously amended, for all kinds of
investment is maintained and a 20 % limit for cumulative investment in transferable securities
and money market instruments with the same group is introduced. This means that a UCITS
may, for instance, invest 15 % of its assets in money market instruments, 5 % in transferable
securities and 15 % of its assets in bonds, covered by paragraphs 3 and 4, issued by companies
belonging to the same group.

Thus, the Council has been able to accept parts of amendments 36 and 45.

The substance of amendment 6 relating to the recitals has been included in recital 10 of the
Common Position, where it has been strengthened and extended to groups.

(d) As far as index-tracking funds are concerned, the Council has fully accepted the Commission’s
amended proposal for Article 22a(1), except for the requirement in the first indent that the
investment policy reflect the composition of the index in question, which the Council thinks is
superfluous in the light of the text preceding that indent. In so doing, the Council has also
largely incorporated amendment 4 relating to the recitals in recital 14 of the Common Position,
and the first half of amendment 18.

On the other hand, the Council has not accepted the information requirements laid down in
Article 22a(2) of the Commission’s amended proposal and the second half of amendment 18,
considering that such a requirement would place an unduly heavy administrative burden on
Member States without according any extra protection to the investor.

In paragraph 2 the Council has added a new paragraph giving Member States the possibility of
raising the 20 % limit to 35 % when justified by exceptional market conditions in order to take
account of the fact that for certain small stock exchanges, securities issued by one issuer may
in fact represent more than 20 % of the stock index.

(e)

In accepting the first two paragraphs of Article 24 on investment in the units of UCITS and/or
other collective undertakings as proposed by the Commission in its amended proposal, the
Council has also accepted the corresponding parts of amendment 19.

The third paragraph proposed by the European Parliament has not been included in Article 24
but in Article 19(1)(e), (see above) where the Council has already incorporated the corresponding
part of amendment 44. The last paragraph of amendment 19 has been included, in a modified
form, in Article 24a(2) of the Common Position, (see below).

As regards paragraphs 4 and 5 of Article 24 in the amended Commission proposal, the Council
found the restrictions on investment set out in the first subparagraph of Article 24(4) of the
amended Commission proposal unnecessary. On the other hand, the Council supports the idea
that no fees may be charged when UCITS invest in units of other UCITS managed by the same
management company or by a management company within the same group, and has included
this in Article 24(3) of the Common Position. Also in the context of fees and to enhance

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transparency, in the second subparagraph of Article 24(3) the Council has added an obligation
for UCITS investing substantially in units of other UCITS to disclose their fee structure.

4. Other provisions

As in the amended Commission proposal, the Common Position regroups the information
requirements in Article 24a, but with different wording. Article 24a of the Common Position
covers essentially the same elements as Article 24a of the Commission proposal, but with some
modifications. The prospectus, and where necessary other promotional literature, is considered
the main vehicle for investor information and the provisions therefore do not refer to the fund
rules. The disclosure requirements are less detailed since the Council believes that they would
place an unnecessary administrative burden on management companies. The Council has,
however, added a new paragraph 4 to Article 24a which requires the management company to
furnish supplementary information at the request of an investor.

Concerning the question of how large a share of another company or institution a UCITS may
own, regulated in Article 25, the Common Position broadly follows the amended Commission
proposal. The only exception is that the Council considers that there is no reason to restrict
ownership of the units of any single UCITS and/or other collective investment undertaking to
10 % of its units, but that a limit of 25 % is more appropriate since the ownership of such units
generally does not give the authorised UCITS a controlling interest in any individual company.

Articles 26 and 42 follow the amended Commission proposal.

Finally, the Council fully supports the new Article 53a as proposed by the Commission in its
amended proposal, the aim of which is to redefine the responsibilities of the Contact
Committee. In taking on board Article 53a as proposed by the Commission, the Council has
also accepted amendment 21.

5.

The recitals

The recitals have been adapted in line with the amendments to the enacting terms. The extent
to which the European Parliament’s amendments to the recitals relating to amendments
concerning the enacting terms have been included in the Common Position is explained above.

The Council
fully endorses the idea of a possible future codification of the Directive,
amendment 7, but in recital 18 has opted for the wording of the Commission’s amended
proposal which it believes better complies with the latter institution’s right of initiative.

IV. CONCLUSION

In its Common Position, the Council has been able to include fully, partly or in essence 20 of the
24 European Parliament first-reading amendments.

The Council considers that all its amendments are fully in line with the aim of the proposed Directive and
that the Common Position constitutes a balanced text, in particular when seen against the backdrop of
the Common Position on the other proposal which aims to amend the UCITS Directive, (the Common
Position with a view to adopting the Directive of the European Parliament and of the Council amending
Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to
UCITS with a view to regulating management companies and simplified prospectuses).