Commission staff working document accompanying the Proposal for a Directive of the European Parliament and of the Council on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) - Executive summary to the impact assessment report {COM(2008) 458 final} {SEC(2008) 2263}
Date: 2008-07-16
Institutions: European Commission
Subjects: approximation of laws, company structure, free movement of capital, investment company, securities

EN 

EN 

   EN 

 
 
COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.7.2008 
SEC(2008) 2264 

COMMISSION STAFF WORKING DOCUMENT 

accompanying the 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on the coordination of laws, regulations and administrative provisions relating to 
undertakings for collective investment in transferable securities (UCITS) 

EXECUTIVE SUMMARY TO THE IMPACT ASSESSMENT REPORT 

{COM(2008) 458 final} 
{SEC(2008) 2263} 

EN 

   EN 

 
 
 
  
 
 
 
 
COMMISSION STAFF WORKING DOCUMENT 

EXECUTIVE SUMMARY TO THE IMPACT ASSESSMENT REPORT 

1. 

REVIEWING THE UCITS DIRECTIVE 

The UCITS Directive 

The  Undertakings  for  Collective  Investment  in  Transferable  Securities  (UCITS)  Directive1 
was  adopted  in  1985.  It  aimed  at  creating  a  single  market  for  investment  funds  that  would 
enhance  the  business  and  investment  opportunities  for  both  industry  and  investors.  The 
Directive  defined  a  set  of  requirements  which  investment  funds  needed  to  comply  with  in 
order to be eligible for cross-border marketing. Their main objective was to ensure high levels 
of investor protection. The Directive also introduced the first financial services passport.  

The UCITS Directive has been key to the development of the European fund market. In June 
2007, UCITS assets under management amounted to € 6tr. UCITS represent about 75% of the 
EU  investment  fund  market.  Despite  this  positive  evolution,  it  became  evident  that  the 
Directive was excessively constraining and prevented fund managers and administrators from 
fully exploiting their development possibilities. Amendments in 2001 enlarged the investment 
powers available to UCITS managers but did not tackle bottlenecks to industry efficiency.  

The  review  of  the  UCITS  legislative  framework  has  been  a  three-stage  process  (please  see 
figure  1).  In  2005,  the  Commission  Green  Paper  on  investment  funds2  launched  a  public 
debate on the need for EU level action and its scope. Both Commission services' research and 
stakeholders'  consultation  led  to  the  same  conclusion:  focus  should  be  on  modifying  the 
Directive  to  remove  remaining  barriers  to  market  access  and  to  allow  fund  industry  to 
organise fund management and administration more efficiently.  

These reflections were taken one step further in the White Paper on investment funds3 and its 
impact  assessment  (WPIA).  This  analysed  a  series  of  possible  adjustments  both  to  enhance 
the efficiency of the fund  industry's  supply side and to strengthen its demand side. In some 
instances,  the  WPIA  report  concluded that EU level  action  did not  appear to  be  sufficiently 
justified. Industry-led or national initiatives were considered sufficient or preferable. In other 
cases, non-legislative measures were considered to be the most cost-effective option. Finally, 
the  analysis  concluded  that  legislative  changes  were  required  in  certain  cases.  Accordingly, 
the White Paper announced amendments to the UCITS Directive in relation to five issues: 1) 
notification procedure, 2) fund mergers, 3) asset pooling, 4) management company passport 
and 5) simplified prospectus. 

1 

2 

3 

Directive  85/611/EEC  of  20  December  1985  amended,  inter  alia,  by  Directives  2001/107/EC  and 
2001/108/EC of 21 January 2002, both also called UCITS III directives. 
Green Paper on  enhancing  the  European framework for  investment  funds,  COM(2005)  314  final,  12th 
July 2005. 
White  Paper  on  the  enhancing  the  single  market  framework  for  investment  funds,  COM  (2006)  686 
final, 15th November 2006. 

EN 

2 

   EN 

 
                                                 
On  22nd  March  2007,  DG  Markt  published  an  'exposure  draft'  as  a  basis  for  public 
consultation on the form of those legislative changes. The purpose of the consultation was to 
gather feedback on the design of the measures announced by the White Paper. Respondents' 
contributions  have  been  an  important  and  valuable  input  to  the  analysis  developed  in  the 
legislative proposal IA report.  

Figure 1: The UCITS framework review process 

2. 

IDENTIFIED PROBLEMS REQUIRING A CHANGE TO THE UCITS DIRECTIVE  

2.1. 

Barriers  to  marketing  funds  in  other  Member  States.  The  notification  procedure 
introduced  by  the  1985  Directive  is  often  long  and  cumbersome.  Host  regulator's 
requirements  often  exceed  those  in  the  Directive  and  the  two-month  limit  is  not 
always  respected.  As  a  result,  the  procedure  has  been  compared  to  a  second 
authorisation  of  the  fund.  Estimated  direct  annual  costs  for  the  fund  industry  for 
maintaining notification amount to €25 million (in addition to more than €20 million 
for the initial notification)4. More significant are the opportunity costs related to the 
delays in getting products to the market.  

Accordingly,  the  WPIA  recommended  that  amendments  to  the  Directive  should  a) 
reduce  notification  delays,  b)  replace  the  current  procedure  by  a  regulator-to-

4 

"A Harmonised, Simplified Approach to UCITS Registration", EFAMA and IMA, April 2005. 

EN 

3 

   EN 

 
 
 
                                                 
2.2. 

2.3. 

regulator communication exchange and c) clarify each Member State (MS) authority 
role and responsibilities. 

Proliferation of funds of a sub-optimal size. The European fund market landscape is 
characterised by a high number of small funds. At the end of 2006, 54% of European 
funds managed less than € 50 million in assets. The average European fund is more 
than  five  times  smaller  than  its  American  counterpart.  Managing  large  ranges  of 
small funds is costly. It impedes the exploitation of economies of scale and increases 
costs. Estimated annual savings amount to up to € 6bn5.  

The  WPIA  concluded  that  two  measures  would  allow  the  fund  industry  to  fully 
exploit  potential  economies  of  scale:  1)  a  legislative  framework  for  (cross-border) 
fund mergers and 2) the possibility for UCITS to engage in entity pooling. 

the 

in  organising 

Lack  of  flexibility 
industry  value-chain.  Although  2001 
amendments  introduced  a  passport  for  the  management  company  for  corporate 
UCITS, it is currently not possible for management companies to manage a UCITS 
in another MS. Ambiguities in the Directive text and split supervision concerns have 
deprived  the  relevant  2001  provisions  of  their  effect.  As  a  result,  fund  groups  are 
obliged  to  establish  a  fully-fledged  management  company  in  each  MS  where  they 
wish to base a fund range.  

The WPIA identified a prima facie case for introducing an operational passport. The 
introduction of the management company passport was conditional on finding cost-
effective and operational solutions to provide effective supervision and enforcement 
of remotely managed funds. 

2.4. 

An  ineffective  simplified  prospectus.  Despite  the  clarification  provided  by  the 
Commission  Recommendation  in  20046,  the  simplified  prospectus  has  failed  in  its 
mission  to  provide  investors  with  a  useful  tool  on  which  to  base  their  investment 
decisions.  The  simplified  prospectus  is  too  long  and  complex  and,  thus  of  limited 
value to the investors. At the same time the production of the simplified prospectus is 
relatively costly and time-consuming for the industry.  

The  WPIA  put  forward  pursuing  a  new  approach  for  the  simplified  prospectus,  i.e. 
changes to the Directive focusing on the core principles for investor disclosures and 
possibility  to  define  the  details  (e.g.  format  and  content)  through  implementing 
measures. 

3. 

DESIGNING THE WHITE PAPER LEGISLATIVE CHANGES 

In  designing  the  new  provisions,  a  number  of  possibilities  have  been  considered.  These 
options have been assessed against the criteria of efficiency, market integration and investor 
protection. These impacts are summarised in the table in annex.  

5 

6 

"Building an Integrated European Fund Management Industry: cross-border mergers of funds, a quick 
win?", Invesco, January 2005 
Commission  Recommendation  2004/384/EC  of  27  April  2004  on  some  contents  of  the  simplified 
prospectus as provided for in Schedule C of Annex I to Council Directive 85/611/EEC. 

EN 

4 

   EN 

 
                                                 
3.1. 

Addressing barriers to marketing funds in other MS  

The notification procedure  

The exposure draft presented an overhaul of the notification procedure. It envisaged a direct 
transmission  from  the  home  regulator  to  the  host  regulator.  The  authorities  of  a  host  MS 
would  not  be  able  to  oppose  the  marketing  of  duly  authorised  UCITS  in  the  host  Member 
State.  

Responses to the exposure draft consultation were generally supportive of the proposals but 
expressed  some  concerns  regarding  the  possibility  for  host  authorities  to  enforce  non 
harmonised rules on advertising. In finalising proposals Commission services have compared 
two possible options:  

1) maintain host MS regulator ex-ante7 verification of the UCITS marketing arrangements but 
reducing the period available for that verification;  

2) allow immediate marketing of UCITS in the host market: host MS regulator's checks takes 
then place ex-post on an on-going basis – focussed heavily on local distribution channels.  

The  analysis  carried  out  shows  that  the  first  option  (ex-ante  verification)  would  not 
significantly  improve  the  current  situation.  The  costs  linked  to  the  notification  procedure 
would  not  diminish  perceptibly.  Uncertainty  about  UCITS  time-to-market  in  the  host  MS 
would also remain. The notification procedure would then continue to act as an entry barrier. 
This  will  reduce  the  fund  offer  available  to  investors  and  hold  back  competition  forces  (as 
well  as  their  positive  effect  on  the  fund  charges  paid  by  investors).  Accordingly,  only  a 
decisive  simplification  of  the  procedure  would  produce  a  significant  positive  effect.  This  is 
achieved by the second option. It has been argued that eliminating host MS regulator's ex-ante 
controls could undermine investor protection. The analysis of impacts however concludes that 
this risk is fairly small.  

3.2. 

Addressing the proliferation of funds of a small size 

a) 

Fund mergers 

The exposure draft presented stakeholders with a preliminary design of an EU framework for 
UCITS  mergers.  The  proposed  framework  would  cover  a  series  of  commonly  used  merger 
techniques  (please  see  graphs  below)  and  would  apply  to  both  domestic  and  cross-border 
mergers. A set of requirements for the regulatory approval of the merger and specific investor 
protection provisions were also put forward. 

7 

That is, before the UCITS has been placed into the market of the host MS. (Likewise, 'ex-post' controls 
take place once the UCITS is marketed in the host MS). 

EN 

5 

   EN 

 
                                                 
Merger by absorption / 
Scheme of amalgamation 

A 

B 

Disappearing  
fund 

Receiving  
fund 

Merger by creation of a new fund 

C 

Receiving  
fund 

A 

B 

Disappearing  
fund

Disappearing 
fund 

The  proposed  approach  was  generally  supported  by  all  categories  of  stakeholder.  However, 
some  investor  protection  concerns  were  voiced  in  relation  to  the  proposed  investor  rights. 
Accordingly the IA has analysed two options: 

1) Information on the merger is only provided to the investors of the disappearing fund 

2)  Information  on  the  merger  is  provided  to  both  investors  of  the  disappearing  and  of  the 
receiving funds 

The analysis of impacts concludes that none of these options are fully satisfactory from both 
efficiency and investor protection point of view. The first option minimises the administrative 
costs  for  the  industry  but  gives  rise  to  some  investor  protection  concerns;  the  second 
minimises  investor  protection  risks  but  is  overly  onerous.  The  analysis  considers  a 
combination  of  both  options  as  the  most  advisable  policy  choice.  This  could  imply  that 
information  is  systematically  provided  to  investors  of  the  disappearing  fund  but,  in  certain 
cases, also to investors of the receiving fund. It is for example recommended that the regulator 
responsible  for  deciding  on  the  merger  proposal  would  assess  the  potential  impact  of  the 
merger on the investors of the receiving fund and decide, if appropriate, that these investors 
be also informed.  

b) 

Asset pooling 

The WPIA report identified two possible pooling techniques: entity pooling in a broad sense 
and so-called 'master-feeder' structures. These concepts are described graphically below.  

The exposure draft presented an outline of the changes to the UCITS Directive necessary to 
provide a framework for entity pooling. On the basis of a preliminary assessment of impacts, 
the exposure draft proposals concentrated on master-feeder structures. Respondents found the 
proposed framework rather prescriptive. As regards to the entity pooling technique selected, a 
majority of respondents supported this choice. There was however a number of contributors 
that invited the Commission to consider the introduction of a framework for entity pooling in 
a broad sense. The analysis of impacts has therefore focused on the following options: 

1) Allowing entity pooling in a broad sense. 

2) Allowing master-feeder structures. 

EN 

6 

   EN 

 
 
Master-feeder scheme 

Entity pooling in a broad sense 

Master 

Master A

Master B

Master C 

Master D 

(up to) 100 % 

(up to) 100 % 

(up to) 100 % 

20%

20%

60%

30% 

50% 

20% 

50%

50%

Feeder α 

Feeder β 

Feeder γ 

Feeder α 

Feeder β 

Feeder γ 

The  possibility  to  use  entity  pooling  in  a  broad  sense  could  bring  important  advantages  to 
industry players. Flexibility to tailor feeder funds' composition would allow fund promoters to 
adapt their fund ranges to changing trends and investors' demands. However, the Commission 
considers  that  introduction  of  this  possibility  would  be  equivalent  to  a  relaxation  of  the 
existing  provisions  for  UCITS  funds  of  funds8.  Relaxation  of  these  diversification 
requirements could have significant unintended consequences for investors. The IA analysis 
therefore  concludes  that  the  simple  master-feeder  option  is  to  be  preferred  both  in  terms  of 
efficiency and investor protection. 

3.3. 

Addressing the lack of organisational flexibility 

The Management Company Passport 

The  exposure  draft  tried  to  strike  the  balance  between  a  comprehensive  Management 
Company  (MC)  passport  and  supervisory  concerns.  The  proposed  framework  included 
provisions  to  ensure  a  minimum  of  substance  in  the  fund  domicile  and  to  enhance  the 
supervisors' cooperation mechanisms.  

Contrary to the other four topics, responses to the exposure draft consultation expressed quite 
divergent  views  regarding  the  proposal.  Industry  respondents  voiced  their  disappointment 
regarding the proposed scope of the passport. Others, mainly national authorities, considered 
that  the  proposed  approach  did  not  provide  a  clear  definition  of  regulators'  respective 
responsibilities. Given the fundamental questions raised during the consultation, the analysis 
of impacts has concentrated on the following options: 

1) Maintain the status quo (i.e. do nothing) 

2) Make the MC passport (MCP) work for corporate funds and extend it to contractual funds  

3) Make the MCP work for corporate funds 

Commission's  analysis  suggests  that  the  absence  of  a  MCP  does  deprive  the  industry  of 
flexibility  in  domiciling  functions  and  of  costs  savings.  Work  since  the  exposure  draft  has 
concentrated on the design of provisions which avoid regulatory gaps, uncertainty or overload 

8 

A  fund  of  funds  is  a  fund  whose  portfolio  is  basically  made  of  funds  (and  liquidity).  The  UCITS 
Directive includes a set of rules that UCITS fund of funds need to comply with, notably the obligation 
to invest at least in 5 funds. 

EN 

7 

   EN 

 
 
 
                                                 
by  1)  clarifying  the  respective  responsibilities  of  fund  and  MC  supervisor,  2)  providing 
mechanisms to allow the fund supervisor and depositary with means to monitor and enforce 
compliance with the rules in force in the fund domicile and 3) ensuring that the MC and its 
supervisor provide all necessary support to the fund supervisor and depositary. 

Work on the design of effective provisions reveals that this would: 

•  Entail  extensive  information  exchange  and  reporting  obligations  between  management 
company,  fund  supervisor,  management  company  supervisor,  fund  administrator  and 
depositary. 

•  Leave  open  many  concerns  about  respective  responsibilities  –  fund  supervisor  and 
depositary would be largely dependent on the management company and the management 
company  supervisor  to  discharge  their  obligations.  Concerns  exist  that  incentives  and 
responsibilities would not be properly aligned 

•  Enforcement  concern  remains,  particularly  as  regards  contractual  funds.  As  these  are  the 
only  existing  UCITS  form  in  13  MS,  the  economic  impact  of  the  management  company 
passport for corporate funds appears limited. 

The IA therefore concludes that the type of provisions needed to provide a MCP would entail 
extensive bureaucracy and administrative costs. They would not fully dispel supervisory risks 
associated  with  cross-border  fund  management.  Potential  drawbacks  are  considered  to 
outweigh  the  expected  benefits.  The  Commission  therefore  proposes  not  to  change  the 
provisions of the Directive in this regard but maintain the status quo whereby fund managers 
undertake  cross-border  management  through  delegation-based  solutions.  The  Commission 
intends to ask CESR to provide advice on safe, efficient and cost effective solutions that can 
provide confidence in respect of a range of supervisory and risk management issues. 

3.4. 

Addressing the Simplified Prospectus ineffectiveness  

Key investor information 

The WPIA put forward a list of potential changes relating to the length, the content and even 
the name of the Simplified Prospectus (considered by some as confusing). On that basis, the 
exposure  draft  presented  a  new  approach  to  investors'  disclosures:  the  key  investor 
information  (KII)  concept.  It  put  forward  the  idea  of  a  fair,  clear  and  not  misleading  set  of 
information.  The  proposed 
framework  was  generally  welcomed  by  stakeholders. 
Nevertheless,  respondents  expressed  different  views  regarding  the  fact  that  the  proposal  did 
not require the KII to be presented in a single document. The analysis therefore focuses on the 
impacts of two possible options: 

1)  KII  is  provided  in  the  form  of  building  blocks  not  necessarily  embodied  in  one  single 
document. 

2) KII is provided as a single stand-alone document 

The building block approach would allow for greater flexibility regarding the presentation of 
the information. It would then be possible to adapt disclosures to the type of investor and/or to 
the  distribution  channels  and  methods  used.  However,  a  single  document  would  most 
probably  be  simpler  to  use  by  investors.  Investors  will  be  also  able  to  compare  between 

EN 

8 

   EN 

 
products.  This  ability  to  compare  among  funds  should,  in  the  medium  term,  encourage 
competition  forces  and  therefore  put  pressure  on  prices  (fees).  Additionally,  from  a 
compliance costs point of view, the building block approach should imply higher adjustment 
costs  for  the  industry.  Thus,  a  single  stand-alone  document  appears  to  be  the  option  that 
complies better with the objectives of investor protection and efficiency.  

4. 

THE PROPOSED PACKAGE OF MEASURES 

The IA therefore recommends action to: 

(1) 

Radically simplify the notification procedure 

(2) 

Facilitate fund mergers 

(3) 

(4) 

Allow master-feeder (pooling) structures 

Extensively overhaul the simplified prospectus 

The economic savings to be expected from the proposed measures take the form of both static 
cost  savings  for  industry  and  investors  and  dynamic  benefits  linked  to  competition  and 
productivity  gains.  Several  euro  billion  could  be  saved  annually  in  direct  efficiency  gains. 
These  will  flow  gradually  to  investors;  some  in  the  form  of  greater  performances  (due  to 
lower  fund  costs),  others,  in  the  form  of  lower  fees  pushed  by  a  greater  competition  and 
facilitated by investors' possibility to compare between funds. Greater flexibility to organise 
and  conduct  the  fund  business  and  simplified  procedures  should  create  new  business 
opportunities  and,  by  reducing  administrative  burden, 
industry's 
competitiveness  vis-à-vis  that  of  other  products  and  markets.  A  more  integrated  investment 
fund  market  will  also  offer  the  European  investor  an  enlarged  choice  of  better  performing 
funds.  Preserving  the  high  levels  of  investor  protection  already  offered  by  UCITS  will 
reinforce their attractiveness within and beyond EU borders. Over the long run, these positive 
effects  will  contribute  to  enhanced  economic  efficiency  and  competitiveness  and  thus  give 
effect to the Lisbon strategy goals in this important sector. 

the  fund 

increase 

EN 

9 

   EN 

 
Annex: Condensed overview of the IA analysis 

(Preferred options are marked in bold) 

Available options 

Notification 

Ex-ante verification (of marketing 
arrangements) 

On-going ex-post controls 

Fund mergers 

Information only to disappearing fund's 
investors 

Information to all investors¹ 

Entity pooling 

Allow entity pooling in a broad sense 

Allow master-feeder structures 

Management Company Passport (MCP) 

Do nothing² 

MCP for corporate and contractual funds 

Make the MCP for corporate funds work 

Simplified Prospectus 

KII provided in the form of building blocks 

KII provided as a single stand-alone 
document 

¹ Only in certain cases  

Impact on: 

In favour of? : 

Investor's 
protection 

Efficiency

Market integration 

+ 

+/≈ 

- 

+ 

- 

+ 

+/- 

-- 

- 

+/- 

+ 

- 

+ 

+ 

- 

+/- 

+ 

- 

≈ 

- 

- 

+ 

no 

yes 

yes 

no 

yes 

yes 

no 

yes 

yes 

no 

yes 

² Even if this option does not seems clearly superior, the analysis has identified important feasibility 
concerns regarding the other two. 

Assessment: '+' = positive; '-' = negative; ≈ = neutral 

EN 

10 

   EN