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) - Impact assessment of the legislative proposal amending ThE UCITS directive {COM(2008) 458 final} {SEC(2008) 2264}
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) 2263 

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) 

IMPACT ASSESSMENT OF THE  
LEGISLATIVE PROPOSAL AMENDING THE UCITS DIRECTIVE 

{COM(2008) 458 final} 
{SEC(2008) 2264} 

EN 

   EN 

 
 
 
  
 
 
 
 
Lead DG: Internal Market and Services.  

Other  involved  services:  Competition,  Economic  and  Financial  Affairs,  Enterprise  and  Industry,  Health  and 
Consumer Protection, Taxation and Customs Union, Secretariat General 

Reference: 2005/MARKT/005 

TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

1.3. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

Introduction .................................................................................................................. 5 

Content ......................................................................................................................... 5 

Procedural issues and consultation of interested parties .............................................. 5 

Changes following Impact Assessment Board evaluation ........................................... 6 

The European Market for Investment Funds ............................................................... 6 

Background .................................................................................................................. 6 

Reviewing the UCITS framework ............................................................................... 9 

The White Paper Impact Assessment......................................................................... 14 

Problem description ................................................................................................... 14 

Objectives................................................................................................................... 17 

3.3.  White Paper recommendations .................................................................................. 18 

4. 

Designing the legislative changes proposed in the White Paper................................ 20 

4.1. 

Addressing barriers to marketing funds in other MS markets (problem 1) ............... 20 

4.1.1.  The notification procedure ......................................................................................... 20 

4.2. 

Addressing the proliferation of funds of a small size (problem 2) ............................ 23 

4.2.1.  Fund mergers.............................................................................................................. 23 

4.2.2.  Asset pooling.............................................................................................................. 25 

4.3. 

Addressing the lack of organisational flexibility (problem 3) ................................... 28 

4.3.1.  Management Company Passport................................................................................ 28 

4.4. 

Addressing the ineffectiveness of the Simplified Prospectus (problem 4) ................ 30 

4.4.1.  Key investor information ........................................................................................... 30 

4.5. 

The overall impact of the proposed measures............................................................ 31 

4.5.1.  Overall impacts .......................................................................................................... 31 

4.5.2.  Synergies and trade-offs of the package of measures ................................................ 33 

4.5.3. 

Impact on investors .................................................................................................... 33 

EN 

2 

   EN 

 
4.5.4. 

Impacts on the industry organisation and global competitiveness............................. 34 

4.6. 

Other general considerations...................................................................................... 35 

5. 

Monitoring and evaluation ......................................................................................... 35 

ANNEX 1: Procedural issues and consultation of interested parties ....................................... 37 

ANNEX 2: Condensed overview of the IA analysis................................................................ 43 

ANNEX 3: The exposure draft's overview .............................................................................. 44 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

Guide to consultation process and material ............................................................... 45 

Introduction:............................................................................................................... 46 

The fund passport (notification procedure):............................................................... 48 

Fund mergers:............................................................................................................. 50 

Asset pooling/master-feeder structures:..................................................................... 53 

The management company passport: ......................................................................... 55 

Simplified Prospectus/Product disclosures: ............................................................... 57 

Supervisory cooperation: ........................................................................................... 59 

ANNEX 4: The Lamfalussy process ........................................................................................ 60 

ANNEX 5: List of acronyms.................................................................................................... 62 

ANNEX 6: References ............................................................................................................. 63 

ANNEX 7: Detailed Impact Assessment Fiches...................................................................... 65

EN 

3 

   EN 

 
EXECUTIVE SUMMARY 

This  report  summarises  the  steps  that  has  led  to  the  preparation  of  the  Commission  draft 
legislative proposal on amendments to the UCITS Directive. This legislative proposal is the 
result  of  a  long  process  of  analysis  and  open  consultation  that  started  in  2004  with  the 
publication of the recommendations of the Expert Group on Asset Management. This Expert 
Group identified a clear need to improve the efficiency of the European market for investment 
funds  and  recommended  measures  in  a  number  of  priority  areas.  Subsequent  research  and 
consultations  have  confirmed  this  need  for  EU  level  action  and  have  helped  to  design  the 
possible solutions. 

These solutions have been tested at two stages. A first impact assessment was carried out in 
2006  in  preparation  of  the  White  Paper  on  enhancing  the  single  market  framework  for 
investment funds. That first impact assessment singled out the areas requiring changes to the 
UCITS Directive. This second impact assessment report focuses on how those changes could 
be implemented in order to maximise their cost-effectiveness while preserving high levels of 
investor protection. The analysis in these two impact assessment reports is based on extensive 
discussion and consultation with all interested parties, relevant market data, a thorough review 
of the existing related literature and the outputs produced by ad hoc workshops and externally 
conducted  studies.  The  choices  retained  in  the  legislative  proposal  are  in  line  with  the 
conclusions  of  these  two  impact  assessment  analyses.  The  proposals  try  to  strike  a  balance 
between stakeholders' efficiency expectations and investor protection concerns.  

This report analyses two types of legislative changes: those aiming to enhance the working of 
existing  provisions  (namely  in  relation  to  the  notification  procedure,  the  management 
company  passport  and  the  simplified  prospectus);  and  those  aiming  to  introduce  new  single 
market  freedoms  (by  creating  a  facilitating  framework  for  fund  mergers  and  asset  pooling). 
The  guiding  principles  of  this  analysis  have  been  market  efficiency  and  investor  protection. 
Particular  attention  has  been  given  to  the  need  for  reducing  administrative  burdens.  The 
recommended  decisive  simplification  of  the  notification  procedure  and  of  the  simplified 
prospectus  would  lead  to  a  significant  reduction  of  those  burdens.  Recommendations  in 
relation to the other legislative change areas also pursue simplification by clearly identifying 
the respective responsibilities of the industry and competent authorities. 

The economic savings to be expected from the proposed measures take the form of both static 
costs savings for industry and investors and dynamic benefits linked to increased competition 
and  productivity  gains.  Direct  benefits  range  from  the  identified  savings  of  the  new 
notification procedure (most of the current € 20 million initial notification costs and probably 
also the € 25 million annual costs of maintaining notification) to the several euro billion to be 
saved  annually  if  European  funds  could  fully  exploit  the  economies  of  scale  derived  from 
consolidated  management  through  fund  mergers  or  asset  pooling.  The  simplification  of 
investors'  disclosures,  the  possibility  to  use  electronic  transmission  means  and  the 
recommended language regime will also entail important savings. Important dynamic effects 
are  also  to  be  expected.  Greater  flexibility  to  organise  and  conduct  the  fund  business  and 
simplified  procedures  should  create  new  business  opportunities  and  increase  the  fund 
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 
funds  will  reinforce  their  attractiveness  within  and  beyond  EU  borders.  Over  the  long  run, 
these positive effects will contribute to the enhanced economic efficiency and competitiveness 
and thus give effect to the Lisbon strategy goals in this important sector. 

EN 

4 

   EN 

 
1. 

INTRODUCTION 

This  report  describes  the  process  and  elements  that  have  led  to  the  preparation  of  the 
legislative proposal amending the UCITS Directive1. An important milestone in this process 
was  the  White  Paper  on  enhancing  the  single  market  framework  for  investment  funds2 
(November 2006). The White Paper announced, among other measures, targeted amendments 
to the UCITS Directive. The White Paper based its conclusions on the impact assessment (IA) 
work  carried  out  ahead  of  its  adoption.  That  IA3  identified  the  problems  hindering  the 
effective  working  of  the  European  fund  market  and  analysed  the  different  options  to 
overcome them.  

This  report  aims  to  avoid  any  unnecessary  duplication  of  the  work  already  undertaken.  For 
example  the  need  for  EU  action  has  already  been  demonstrated  by  the  White  Paper  Impact 
Assessment (WPIA) analysis. That IA concluded that an amendment of the Directive was the 
most cost-effective option in relation to the issues analysed in this document. The report will 
therefore  concentrate  on  the  concrete  legislative  changes  and,  in  particular,  on  the  different 
possibilities available for designing these. It should be also noted that this report is to serve as 
a  basis  for  comment  and  does  not  prejudge  the  final  form  of  the  legislative  proposal.  This 
initiative is part of the Commission's simplification rolling programme under the "Community 
strategy for simplifying the regulatory environment" (COM (2005) 535). 

The White Paper and the WPIA can be found at: 

http://ec.europa.eu/internal_market/investment/legal_texts/index_en.htm#whitepaper 

1.1. 

Content 

Section 2 aims to facilitate the reader's understanding of the issues discussed in this report by 
providing  an  overview  of  the  European  investment  fund  market  and  of  the  review  of  its 
framework. Section 3 will briefly recall the analysis and conclusions of the WPIA. Section 4 
focuses on the design of the legislative measures announced in the WP. Section 5 presents the 
monitoring  strategy  following  the  adoption  of  the  legislative proposal.  Fiches  developing  in 
greater detail the topics analysed in this report are included in annex 7. 

1.2. 

Procedural issues and consultation of interested parties 

The five-year Financial Services Action Plan (FSAP) launched in 1999 concentrated strongly 
on the completion of the single market for wholesale services. Towards the end of the FSAP 
period, it was clear that other areas would need close attention after 2004. In preparation of 
the strategy for the post-FSAP, the Commission established four groups of experts of which 
one focused on improvements to be done in the area of asset management (investment funds). 
The recommendations contained in the experts' report were the starting point of an extensive 

1 

2 
3 

Undertakings  for  Collective  Investment  in  Transferable  Securities  Directive  85/611/EEC  of  20 
December 1985 amended, inter alia, by Directives 2001/107/EC ("Management company Directive") of 
21 January 2002 and 2001/108/EC ("Product Directive”) of 21 January 2002 (UCITS III directives). 
COM (2006) 686 final, 15th November 2006. 
Impact  Assessment  accompanying  the  White  Paper  on  enhancing  the  single  market  framework  for 
investment funds {COM(2006) 686 final} 

EN 

5 

   EN 

 
                                                 
process  of  reflection  on  ways  to  improve  the  functioning  of  the  European  market  for 
investment funds. 

The conclusions presented in this report are the result of intensive analytical work developed 
on  the  basis  of  a  variety  of  inputs.  These  ranged  from  bilateral  informal  meetings  with 
stakeholders  to  studies,  expert  groups,  open  hearings,  public  consultations  and  workshops. 
Many  of  these  events  brought  together  different  stakeholders.  The  objective  was  to  better 
assess the implications of possible actions on each side of the market. Most of these exercises 
have been open and are largely documented on the Commission's website. The openness and 
transparency  of  the  process  has  been  highlighted  and  acknowledged  frequently  by 
stakeholders. The main elements of this process are described in annex 1. 

1.3. 

Changes following Impact Assessment Board evaluation 

This  report  was  submitted  to  the  Impact  Assessment  Board  (IAB)  on  September  26th.  The 
IAB  main  recommendations  related  to  the  structure  and  presentation  of  the  report.  It  also 
recommended  to  improve  the  analysis  of  economic  impacts,  in  particular  how  those  will 
benefit  investors,  and  to  better  assess  the  reduction  in  administrative  burden.  A  more 
quantitative assessment of impacts (including the administrative burden) has proved difficult 
due to the lack of data. However, additional quantitative examples have been included and the 
qualitative  elements  of  the  analysis  strengthened.  A  concluding  section  has  also  been 
introduced in order to better describe the global effect of the package of measures, as well as 
the  synergies  and  trade-offs  between  the  measures  proposed.  IAB  suggestions  to  clarify 
certain aspects of the analysis have also been followed.  

2. 

THE EUROPEAN MARKET FOR INVESTMENT FUNDS 

2.1. 

Background 

What are investment funds? 

Investment funds are specially constituted investment vehicles, created with the sole purpose 
of  gathering  assets  from  investors,  and  investing  those  assets  in  a  diversified  portfolio  of 
financial  instruments.  Investors  buy  units  issued  by  the  fund  against  the  portfolio  of 
underlying assets, and the value of those units fluctuates with the value of the portfolio. In this 
way, small investors can buy exposure to a professionally managed and diversified basket of 
financial  instruments.  Overheads  and  other  costs  are  spread  over  the  pool  of  investors, 
reducing average cost for the investor.  

Investment funds: main actors 

Management Company: Responsible for the day-to-day management of the fund. This usually 
involves  the  management  of  the  assets  but  also  a  number  of  associated  administrative 
functions such as record keeping, regulatory compliance monitoring... 

Depositary:  Typically  carries  out  two  functions:  the  safe-keeping  of  the  assets  and  the 
oversight  of  the  operation  of  the  fund.  It  has  therefore  a  crucial  role  in  the  protection  of 
investors' interests. 

National  regulator:  National  authority  responsible  for  the  authorisation  and  on-going 
supervision of the fund/management company. 

EN 

6 

   EN 

 
In the 1980s, the European industry for investment funds had started to develop. However, the 
existence  of  a  patchwork  of  national  legislation  had  created  an  increasingly  fragmented 
market.  The  UCITS  Directive  was  adopted  in  order  to  overcome  this  situation.  It  aimed  to 
offer  greater  business  and  investment  opportunities  for  both  industry  and  investors  in  an 
enlarged market. In contrast with more modern pieces of EU legislation, the UCITS Directive 
regulated the product. It set a series of requirements with which investment funds needed to 
comply4.  Their  main  objective  was  to  ensure  high  levels  of  investor  protection.  It  also 
introduced  the  first  financial  services  passport.  Once  a  UCITS  fund  had  been  authorised  by 
the competent authorities of its country of domicile, it could be marketed all over the EU. It 
simply needed to notify this intention to the competent authorities of the host market. 

Importance of investment funds for investors 

Saving in investment funds is one of the many options for households to allocate their assets. 
Although  banking  deposits  and  insurance  reserves  dominate  household  savings  in  most 
European countries, funds play an important role today. Their average share in EU household 
assets  amounts  to  11.5%,  varying  from  4.1%  in  the  United  Kingdom  to  26.1%  in  Sweden5. 
This share should increase in the future. European societies are ageing and there is a growing 
need  for  private  retirement  products.  Effective  private  solutions  will  be  important  to 
complement state and occupational pensions. Investment funds provide an established vehicle 
for accumulating capital throughout working life. 

The UCITS Directive has been key for the development of the European fund market. As of 
today, assets under management (AuM) amount to nearly € 6tr. and represent about 75% of 
the EU investment fund market.  

Figure 1: UCITS assets under management (€ bn)  

5.945

5.183

4.206

3.775

3.550 3.619

3.338

3.195

6.000

5.000

4.000

3.000

2.000

1.000

0

2.349

1.818

1.417

1.190

1995

1996

1997

1998

1999 2000

2001

2002

2003 2004

2005

2006

4 

5 

The Directive for  example  indicates  the  list  of  assets  in  which UCITS  funds  can  invest  and  in which 
proportion. 
EFAMA Fact Book 2007 

EN 

7 

   EN 

 
 
                                                 
Source: European Fund and Asset Management Association (EFAMA)6 

UCITS  have  grown  successfully  both  within  the  EU  and  beyond  its  borders.  Its  strong 
investor protection safeguards have gained the acceptance of financial services regulators in 
third  countries  in  Asia  and  Latin  America.  According  to  recent  market  research,  Asia 
represented 15% of European funds' net sales in 20067. 

Market integration has grown gradually. However, as of today, a mere 20% of the European 
funds  can  be  considered  as  'true  cross-border  funds'8.  Nevertheless,  they  are  the  faster 
growing funds9. The industry is also characterised by a certain concentration of the activity. 
The fund management is typically performed in financial centres such as London, Paris and 
Frankfurt;  fund  administration  in  Luxembourg  and  Ireland  (please  see  in  figure  2  UCITS 
assets  per  country).  Growth  of  the  Luxembourg  and  Dublin  centres  is  encouraged  by  the 
success of cross-border funds and by the migration of some management groups to single-hub 
strategies10.  Luxembourg  and  Ireland  funds  accounted  for  89%  of  the  total  European  fund 
subscription in 200611. 

Figure 2: Geographical distribution (in terms of assets under management) 

Net Assets UCITS (end 2006)

other EU
11%

new MS
0,6%

other non EU
3%

France
22%

United Kingdom
10%

Spain
5%

Germany
5%

Ireland
10%

Luxembourg
27%

Italy
6%

Source: EFAMA Fact Book 2007 

A certain level of activity concentration (measured by assets under management) is also to be 
found  in  some  national  markets.  Concentration  of  asset  management  companies  tends  to  be 

6 

7 
8 

9 

10 
11 

Data  includes  some  non-EU  countries  such  as  Liechtenstein,  Norway,  Switzerland  and  Turkey.  Their 
part in the total assets was 3.2% at the end of 2006. 
"Windows into Global Asset Management", Strategic Insight, March 2007. 
Funds  that  are  notified  for  sale  in  at  least  two  countries  other  than  their  fund  domicile  (PWC-Lipper 
data) 
In  2006,  net  sales  of  Luxembourg  and  Irish  funds  accounted  for  74%  of  the  total  UCITS  sales. 
(EFAMA Fact Book 2007).  
FERI Data Digest 2007. 
Idem. 

EN 

8 

   EN 

 
 
                                                 
lower in the biggest fund markets and higher in smaller markets. In 2004 the market share of 
top  five  asset  managers  was  below  30%  in  Ireland  and  the  UK,  while  in  smaller  Member 
States, such as Greece, Belgium or Czech Republic, it accounted for more than 80%. 

The assets-weighted average market share of five largest asset managers in the EU amounted 
to about 50%. The number of relatively small national markets in Europe partly explains why 
the average concentration ratio is higher as compared to the US (ca. 40%).  

Figure 3: Market Share of Top 5 Asset Management Companies (2004) 

100%

97%

94%

80%

60%

40%

20%

0%

87% 86% 84%

79% 78%

74%

68% 67% 64%

62%

EU (weighted average)

54% 52%

46%

41%

28% 28%

Top 5 AMs in the EU

Czech Republic
Slovakia

Belgium

Denmark

Greece

Hungary

Finland

Sweden

Poland

Austria
Netherlands
Portugal

Italy

Spain
Germany

France UK

Ireland

Source: ZEW/OEE database, data from EFAMA, Feri FMI, ZEW calculations 

At the distribution level, the move towards open architecture12 is slow, particularly in closed 
markets  dominated  by  local  banks.  However,  there  is  an  unmistakable  trend  towards  more 
openness. In 2004 third-party distribution accounted for only 15% of all distribution channels 
in  Europe  (compared  to  81%  share  of  captive  distribution).  In  2006,  major  distributors 
evaluated that 55% of their activity was third-party13. 

2.2. 

Reviewing the UCITS framework 

Despite this positive evolution, at the turn of the 21st century, it started to become evident that 
the  rigidity  of  the  Directive  did  not  allow  UCITS  to  fully  exploit  all  of  the  development 
opportunities.  Amendments  made  in  2001  aimed  at  modernising  the  Directive14.  UCITS 
investment  powers  were  enlarged  and  a  passport  for  the  management  company  was 
introduced. Provisions offering greater business opportunities for the European fund industry 
were  coupled  with  reinforced  investor  protection  provisions  (e.g.  minimum  capital  for  the 
management  company  and  risk  management  controls  requirements).  The  Simplified 

12 
13 
14 

The fact for a distributor of offering third-party funds instead or in addition to its 'in house' fund range. 
FERI. 
Please see footnote 4. 

EN 

9 

   EN 

 
 
                                                 
Prospectus  was  created  in  order  to  assist  investors  in  taking  an  informed  decision  when 
assessing the suitability of the fund offered to them.  

However, the 2001 amendments  did not respond to the supply side bottlenecks  and  barriers 
that  hampered  industry  efficiency.  Some  of  the  2001  novelties  (notably  the  management 
company  passport  and  the  simplified  prospectus)  had  either  failed  to  produce  any  positive 
effect or been implemented in such a way that they had ended up being an additional source 
of  unnecessary  costs  for  the  fund  industry.  A  series  of  deeply  rooted  inefficiencies  were 
therefore  hindering  the  working  of  the  European  investment  fund  market.  These  severely 
handicap  the  fund industry  and  prevent it from successfully facing its main challenges. The 
box below summarises these challenges. 

UCITS main challenges 

The scope of the UCITS framework. UCITS was designed as a retail product. However, over 
the  years  a  growing  range  of  non-UCITS  funds  have  developed.  These  cannot  comply  with 
the prescriptive investment rules of the Directive but many are available to retail investors at 
national  level.  Extending  the  UCITS  framework  to  cover  these  funds  would  broaden  cross-
border opportunities for the fund industry and enrich the fund offer to investors.  

Competition  from  other  forms  of  financial  product.  UCITS  compete  with  other  similar 
investment products – such as (unit-linked) life insurance or structured notes and certificates – 
for  investors'  savings.  (In  2006,  for  example,  net  sales  of  UCITS  fell  5%  while  those  of 
structured  products  and  unit-linked  insurance  products  increased  by  18.5  %  and  50% 
respectively.)  It  is  often  argued  that  their  more  restrictive  regulation  handicaps  UCITS' 
competitiveness.  There  exists  therefore  the  risk  that  investors  will  be  directed  to  cheaper 
forms of investment but which often offer lower levels of investor protection.  

Global competition. UCITS authorisation has won wide global recognition as a guarantee of 
sound product and effective regulation. However, competition from other fund jurisdictions is 
starting to build. To continue to attract custom from around the world, it will be necessary to 
eliminate unnecessary cost and to support innovation.  

Financial  innovation.  The  Directive's  strict  product  design  means  that  UCITS  investment 
powers need to be continually revisited in order to keep pace with financial innovation. It has 
often  been  argued  that  a  risk-based  (instead  of  a  product)  approach  could  overcome  that 
problem. 

In 2004, the recommendations of the expert group on asset management (AM)15 were the first 
important contribution to the review of the working of the UCITS framework that has led to 
the legislative proposal. This review process is summarised in figure 2. 

The  expert  group's  report  identified  a  list  of  issues  requiring  action.  Responses  to  the  open 
consultation  that  followed  showed  that  there  was  a  widespread  consensus  that  there  was 
considerable room for improvement in the area of investment funds. 

One year later, the Commission Green Paper on investment funds16 launched a public debate 
on the need for EU level action (and its scope). First of all, a strategic choice needed to be 

15 

"Financial  Services  Action  Plan:  Progress  and  prospects",  Asset  Management  Expert  Group  Report, 
May 2004. 

EN 

10 

   EN 

 
                                                 
made: could targeted measures respond to stakeholders' expectations or was a more wholesale 
reform of the investment funds legislative framework needed?  

Both  Commission  services  research  and  stakeholders  consultation  led  to  the  same 
conclusion17:  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 within the single market18.  

Figure 4: The UCITS framework review process 

Once the strategy had been chosen, it remained to determine those areas actually requiring EU 
level action. This was done in the WPIA. The problem areas identified then are listed in the 
box below19. To effectively address these problems the WPIA analysed a series of options and 
assessed them against their impact on a) fund industry's efficiency, b) investor protection and 
c) market integration. 

16 

17 
18 

19 

Green Paper on enhancing the European framework for investment funds, COM(2005) 314 final, 12th 
July 2005. 
Please see the 'Consultations' part in annex 1. 
A complete overhaul of the Directive would have required a more extensive rethinking of the design of 
the UCITS framework and, at that stage, the advantages of that option did not seem compelling enough. 
Please refer to section 3.1 or the IA fiches of the WPIA for a more detailed description. 

EN 

11 

   EN 

 
 
                                                                                                                                                         
Investment fund market: problems identified 

On the supply side:  

(cid:131) Proliferation of funds of a sub-optimal size: This impedes the exploitation of economies of 
scale  and  increases  costs.  As  a  result  the  Total  Expenses  Ratio  of  a  typical  cross-border 
European fund is much higher than that of an American fund.  

(cid:131) Lack of flexibility in organising the industry value-chain: The UCITS Directive restricts the 
ability  of  the  fund  manager/fund  as  to  the  location  of  key  core  functions.  The  UCITS 
Directive  requires  that  the  depositary  is  based  in  the  same  country  as  the  fund.  Also  the 
possibility  for  the  management  company  to  offer  its  services  across  borders  is  restricted  in 
practice. This not only limits the capacity of the industry to achieve economies of scale and 
specialisation, but also leads to a duplication of resources that raises costs.  

(cid:131)  Barriers  in  getting  funds  into  the  market:  UCITS  Authorisation  (by  the  Home  Member 
State)  and  Notification  (to  the  Host  Member  State)  procedures  are  often  long  and 
cumbersome.  While  the  direct  costs  are  limited,  uncertainty  as  regards  the  duration  of  the 
procedure can have an important impact on business opportunities. Both uncertainty and long 
delays seriously handicap the fund industry in competing with other investment products (e.g. 
unit-linked insurance contracts, certificates…)  

(cid:131)  Strict  investment  restrictions:  The  definition  of  the  product  imposed  by  the  Directive  is 
perceived  as  limiting  the  investment  and  business  opportunities  for  both  investors  and 
industry  offered  by  the  financial  innovation.  The  problem  is  compounded  by  the  fact  that 
UCITS compete with other products with similar characteristics but subject to different forms 
of disclosure and intermediary regulation. There is the risk that investment propositions would 
be  repackaged  in  more  convenient  regulatory  forms  offering  lower  levels  of  investor 
protection.  

(cid:131)  Non-standardised  fund  order  processing:  The  treatment  of  a  subscription  or  redemption 
order implies a series of interactions between different actors and varied (often manual) steps. 
The  lack  of  automation  and  standardisation  increases  costs  and  delays  and  can  exacerbate 
operational risks. 

On the demand side: 

(cid:131)  An  ineffective  simplified  prospectus.  This  is  too  long  and  complex  and,  thus  of  limited 
value to the investors. It also entails considerable cost overhead for the fund industry.  

(cid:131) High costs and low transparency at the distributor's end. Limited competition and openness 
have led to sizeable distribution costs. These can amount to up to 75% of total costs in some 
Member States. Distribution networks are gradually becoming more complex and the number 
of intermediaries is increasing. This may exacerbate concerns about the loss of transparency 
and higher costs.  

(cid:131) Development of non-harmonised investment funds: National regulatory regimes have been 
introduced  over  recent  years  in  order  to  provide  a  framework  for  the  development  of  non-
harmonised  funds.  Unfortunately,  divergent  approaches  and  priorities  have  given  rise  to  a 
patchwork of incoherent legislation. For the industry, this translates into an important hurdle 
to the expansion across borders of their business.  

EN 

12 

   EN 

 
In  some  instances,  the  WPIA  report  concluded  that  EU  level  action  did  not  appear  to  be 
sufficiently justified. Industry-led or national-level initiatives were preferred. In other cases, 
however, a common approach appeared necessary to overcome the above described hurdles. 
This  was  clearly  the  case  of  problems  derived  from  inconsistencies  or  deficiencies  of  the 
UCITS  Directive.  The  analysis  therefore  recommended  amendments  to  the  Directive  in  a 
number of areas. To address other problems, EU level tools already existed or more research 
work was needed; non-legislative monitoring measures were then considered to be the most 
cost-effective option. Accordingly the White Paper announced a series of measures. These are 
summarised in the table below.  

Table 1: Measures proposed in the White Paper  

Problem 

Proliferation of funds of a sub-optimal size 

Lack of flexibility in organising the industry 
value-chain: the management company 

Lack of flexibility in organising the industry value-
chain: the depositary 

Barriers in getting funds into the own market: 
UCITS authorisation 

Barriers in getting funds into other MS 
markets: UCITS notification 

Strict investment restrictions 

Non-standardised fund order processing 

An ineffective simplified prospectus 

High level of costs at the distributor's end 

Changes to 
the UCITS 
Directive 

YES 

YES 

(if cost-effective 
solution can be found)

NO 

NO 

YES 

NO 

NO 

YES 

NO 

Development of non-harmonised investment funds

NO 

If no, which  
other measure? 

- 

- 

- 

(Member States 
encouraged to expedite 
authorisations) 

- 

Implementing legislation 
on eligible assets 

(industry-led initiatives) 

- 

Monitoring of MiFID20 
implementation 

report, expert group, 
private placement regime

On 22nd March 2007, DG Markt published "Initial orientations of possible adjustments to the 
UCITS  Directive".  This  document,  also  called  'exposure  draft'  below,  served  as  a  basis  for 
public consultation on the form of those legislative changes. The purpose of the consultation 
was  to  gather  feedback  on  how  to  design  the  measures  announced  by  the  White  Paper  in  a 
way  that  effectively  responded  to  stakeholders'  expectations  and  concerns.  An  overview  of 

20 

Markets in Financial Instruments Directive (2004/39/EC). 

EN 

13 

   EN 

 
                                                 
this  exposure  draft  is  annexed  to  this  report.  Details  of  the  responses  to  the  exposure  draft 
consultation for each of the legislative measures are provided in the relevant IA fiches (annex 
7).  Respondents'  contributions  have  been  an  important  and  valuable  input  to  the  analysis 
developed in this report and to the refinement of the proposed provisions.  

3. 

THE WHITE PAPER IMPACT ASSESSMENT  

As explained above, the WPIA report analysed the main obstacles hindering the development 
of the European fund market and put forward a list of preferred solutions in order to overcome 
them. As shown in table 1, some of those proposed solutions can be implemented without any 
change to the UCITS legislative framework. Work in those areas is evolving along the lines 
described in the White Paper21 but will not be discussed in this report. Many of the announced 
outputs will materialise over the next year. Other solutions, however, require amendments to 
the UCITS Directive. The objective of this section is to recall the WPIA analysis in relation to 
these legislative solutions. A more detailed description of the problems can be found in annex 
7 (and in the relevant annex of the WPIA). 

3.1. 

Problem description 

Problem  1:  Barriers  to  marketing  funds  in  other  Member  States'  (MS)  markets.  The 
notification  procedure  (vis-à-vis  the  host  MS  authority)  introduced  by  the  1985  Directive  is 
often  long  and  cumbersome.  The  host  regulator's  role  often  exceeds  that  defined  in  the 
Directive (i.e. verification of the UCITS marketing arrangements in the host market) and the 
two-month  limit  is  not  always  respected.  The  procedure  has  been  compared  to  a  second 
authorisation  of  the  fund  by  the  host  regulator  instead  of  a  simple  communication  of  the 
UCITS  intention  to  market  its  units  in  the  host  market  (as  provided  for  in  the  Directive). 
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)22. While these costs 
are  relatively  limited23,  uncertainty  as  regards  the  duration  of  the  procedure  can  have  an 
important  impact  on  business  opportunities.  Additionally,  both  uncertainty  and  long  delays 
seriously  handicap  the  fund  industry  vis-à-vis  other  investment  products  (e.g.  unit-linked 
insurance contracts, certificates…) in attracting investors savings. Foreign funds' difficulties 
to  enter  domestic  markets  restrict  competition  forces.  As  a  result,  investors  not  only  could 
have access to a broader fund offer but also bear unnecessarily high fees.  

Accordingly,  the  WPIA  recommended  that  amendments  to  the  Directive  should  a)  reduce 
notification  delays,  b) 
regulator-to-regulator 
communication exchange and c) clarify each MS' authority role and responsibilities. 

the  current  procedure  by  a 

replace 

Problem 2: 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 assets24. The average European fund is more than five times 
smaller than its American counterpart. This size difference has persisted over the years. The 

21 

22 
23 

24 

Please  see  the  White  Paper's  annex  1  for  a  condensed  view  of  the  expected  outputs  and  deadlines  of 
those 'non-legislative' work-streams. 
"A Harmonised, Simplified Approach to UCITS Registration", EFAMA and IMA, April 2005. 
They account for less than 0.25 basis points (i.e. 0.0025%) of the total fund costs for the largest fund 
providers. Please see European Commission (2006e) for more details on these costs. 
And as many as 20% of European funds have a size below €10 million (FERI, Data digest 2007) 

EN 

14 

   EN 

 
                                                 
graph below shows the evolution of European and American fund sizes for the four last years. 
Although some catch up has taken place during that period, this has been quite slow25. 

Figure 5: Average investment fund size in Europe and US 

974

946

739

722

178

166

139

125

2006

2005

2004

2003

1.000

900

800

700

600

500

400

300

200

100

0

US

Europe

Source: EFAMA and ICI. (End of the year €/$ ECB rates)  

Managing large ranges of small funds is costly. It impedes the exploitation of economies of 
scale  and  increases  costs26.  As  a  result,  the  Total  Expenses  Ratio  of  a  typical  cross-border 
European equity fund is twice that of an American fund27. Annual savings of up to € 6bn have 
been identified28. Current market trends risk exacerbating the problem. Fund launches remain 
the  preferred  strategy  for  asset  managers  to  innovate,  raise  new  assets  and  respond  to  new 
investors'  needs  or  preferences.  In  2006,  the  total  number  of  funds  increased  by  1,542 
(compared to an increase of 887 funds in 2005). According to FERI, observed fund closures 
were  sometimes  the  consequence  of  products,  such  as  guaranteed  funds,  reaching  maturity 
rather than the result of fund rationalisation efforts. Some consolidation has been taking place 
at national level. However, the absence of a common EU framework for fund mergers leads to 
the  coexistence  of  different  national  rules,  rendering  cross-border  mergers  expensive, 
complex  and  time  consuming  when  at  all  possible.  Other  amalgamation  techniques  such  us 
entity  pooling29  are  explicitly  ruled  out  by  the  diversification  requirements  of  the  UCITS 
Directive.  

Therefore,  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. 

25 

26 

27 
28 

29 

During  the  period  2003-06,  the  average  size  of  American  funds  has  increased  by  35%  and  that  of 
European funds by 42%.  
According to CRA (European Commission (2006e)), the highest potential for economies of scale lays in 
fund administration and asset management. Although additional scale savings fade out once the fund's 
size has reached €200-300 million, the fact that a high percentage of European funds are far from that 
size as indicated by FERI data above, proves the importance of the economies of scale potential. 
"Economies of scale and consolidation in collective funds", Fitzrovia, March 2005. 
According to a recent Invesco report, this savings would stem from two sources. First, the elimination 
of  the  disappearing  funds'  fixed  costs.  Second,  through  the  economies  of  scale  achieved  by  a  larger 
(resulting) fund. Please see Invesco (2005)  
For more details on this technique please see the corresponding fiche in annex 7. 

EN 

15 

   EN 

 
 
                                                 
Table 2: Problem matrix  

Problem 

Consequences 

•  Missed opportunities for the industry 

1 

Barriers to marketing funds in other 
Member States' markets 

•  Higher  costs  and 

less  choice 

for 

investors 

2  Proliferation of funds of small size 

3 

Lack of flexibility in organising the 
industry value-chain 

•  Less  competition 

in  national 

fund 

markets 

•  Unexploited economies of scale  

•  Confusing fund ranges 

•  Resources duplication  

•  Unexploited economies of scale 

•  Untapped specialisation gains 

4 

Ineffective investor disclosures 
(simplified prospectus) 

•  High costs for industry 

•  Little use for investors 

Problem 3: Lack of flexibility in organising the industry value-chain. Although a passport for 
the  management  company  was  introduced  funds  of  a  corporate  type30  with  the  Directive 
amendments in 2001, the possibility for the management company to offer its services across 
borders  is  restricted  in  practice.  Ambiguities  in  the  Directive  text  and  split  supervision 
concerns  have  rendered  it  non  operational.  The  relevant  Directive  provisions  lack  the 
necessary clarity and safeguards to allow the appropriate supervision by regulators of remote-
managed  structures.  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. This not only limits 
the capacity of the industry to achieve economies of scale and specialisation, but also leads to 
a duplication of resources that raises costs. Between € 381 and € 762 million could be saved 
annually  if  each  European  managing  group  could  carry  out  its  activities  through  a  single 
management company. The fact that the original passport was limited to funds of a corporate 
type  also  reduces  the  potential  benefits  of  the  passport.  Funds  of  a  contractual  form  are  the 
most common type of fund in 18 MS and the only existing type of fund in 13 of them.  

The  WPIA  recommended  exploring  possible  changes  to  the  management  company  passport 
provisions in order a) to eliminate ambiguities, b) to extend it to funds of a contractual type 
and c) to enhance regulators' cooperation mechanisms. 

30 

'Corporate UCITS' or investment companies are UCITS constituted under statute. They generally have a 
Board of directors and investors (shareholders) can be entitled to vote in general assemblies. Corporate 
UCITS have a legal personality. On the other hand, 'contractual UCITS' are constituted under the law of 
contract (common funds) or trust law (unit trusts). They do not have a legal personality. 

EN 

16 

   EN 

 
 
                                                 
Problem 4: An ineffective simplified prospectus. Despite the clarification efforts provided by 
the  Commission  Recommendation  in  200431,  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. 
The information provided is not always easily understood by the average retail investor and it 
does not lend itself to comparison between funds, especially across borders. At the same time 
the  production  of  the  simplified  prospectus  is  relatively  costly  and  time-consuming  for  the 
industry  as  national  requirements  often  add  to  those  of  the  Directive  and  can  differ  widely 
across MS.  

The WPIA suggested pursuing a new approach for the simplified prospectus, i.e. changes to 
the  Directive  focusing  on  the  core  principles  for  investor  disclosures  and  possibility  of 
defining the details (e.g. format and content) at level 2. 

A more detailed description of the identified problems is provided in annex 7. 

3.2. 

Objectives 

The WPIA identified the following objectives. These remain the same for this IA exercise. 

Overall objectives 

The objective is to ensure that all players, asset managers, intermediaries and investors, can 
exercise their respective single market rights. Market players should be in the position to fully 
benefit from the single market freedoms and investor protection safeguards established by the 
UCITS  Directive,  as  well  as  from  the  efficiency  gains  that  an  up-to-date  legislative 
framework should facilitate. These single market opportunities not only concern the freedom 
of the industry to do business but also the freedom and right of investors to participate in the 
market in a fair and transparent way.  

Specific objectives 

The pan-European legal framework for harmonised funds should: 

i)  promote  an  efficient  and  innovative  fund  industry  that  is  attuned  to  the  needs  of  its 
traditional retail investor base, reaping all the commercial opportunities in a fully integrated 
European  market  and  that  is  able  to  compete  globally.  In  doing  this,  particular  attention 
should be given to the need to reduce administrative burden. 

ii) provide an appropriate protection of investors that takes into account market developments 
and changes in investors' needs and preferences, interactions with competing products as well 
as country-specific differences.  

Operational objectives 

The  operational  objectives  are  the  deliverables  that  the  amendment  to  the  UCITS  Directive 
should  produce.  The  legislative  changes  aim  to  produce  economic  benefits,  to  promote  the 
development of the industry and to strengthen the protection of investors.  

31 

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 

17 

   EN 

 
                                                 
The  concrete  specific  and  operational  objectives  of  each  of  the  individual  measures  are 
summarised in tables 4, 6, 8, 10, 12 in section 4. They are also described in detail in annex 7.  

3.3.  White Paper recommendations 

On the basis of the WPIA analysis, the White Paper future work to develop possible changes 
to the Directive in relation to five issues: 1) notification procedure, 2) fund mergers, 3) asset 
pooling,  4)  render  operational  the  management  company  passport  and  5)  simplified 
prospectus.  The  following  table  summarises  the  WPIA  option  analysis  in  relation  to  these 
issues. 

EN 

18 

   EN 

 
Table 3: Summary of impact assessment for individual problem areas  

(Preferred options are marked in bold) 

Available options 

Efficiency

Market 
integration 

Investors' 
protection  

Feasibility 

Assessment of impact on: 

1. Notification 

Service Passport replacing notification 

Amend UCITS Directive: deadlines for procedures; 
regulator-to-regulator notification  

Monitoring and support of CESR work towards more 
efficient and harmonised procedures 

Do nothing 

2. Fund mergers 

Amend Directive: enable fund mergers 

Soft law: support convergence of national approaches

Do nothing 

Taxation  Directive:  ensure  that  mergers  are  not 
treated as taxable events 

Interpret.  Communication:  application  of  national 
rules to cross-border mergers 

Do nothing 

3. Pooling 

Amend Directive to allow entity pooling 

Amend Directive to allow master-feeders 

Do nothing 

4. Management Company Passport 

Amend Directive to make the passport work: fine-
tuning of  existing provisions/elimination of potential 
inconsistencies in the rules 

CESR guidelines to give effect to Art. 6c cooperation 
provisions 

Two-step  approach:  analyse  situation  +  act  on  the 
basis of results 

Do nothing 

5. Simplified Prospectus 

CESR  guidelines  on 
implementation of the SP 

coherent 

and  uniform 

Modify  Recommendation to  clarify  certain  elements 
of the Simplified Prospectus 

Abolish the Simplified Prospectus 

Amend  Directive: 
Lamfalussy approach for future adaptations  

specify 

core 

principles, 

Level 2 measure: clarification of definitions 

Do nothing 

++ 

++ 

+ 

- 

++ 

? 

- 

++ 

+ 

- 

++ 

+ 

- 

++ 

++ 

+ 

- 

++ 

? 

- 

++ 

+ 

- 

++ 

++ 

- 

Doubtful 

Yes 

Yes 

Yes 

Yes 

Doubtful 

Yes 

Yes 

Yes 

-- 

++ 

+ 

- 

++ 

+ 

- 

+ 

+ 

- 

++ 

++ 

+ 

++ 

++ 

++ 

Possible 

? 

+ 

- 

+? 

+? 

++? 

++ 

+? 

- 

? 

+ 

- 

+? 

+? 

? 

++ 

+? 

- 

Doubtful 
effectiveness

Doubtful 
effectiveness

Yes 

Yes 

Doubtful 

Yes 

Yes 

+ 

++ 

+ 

+? 

+? 

-- 

++ 

+? 

- 

Assessment: ++ = strongly positive; + = positive; -- = strongly negative, - = negative; ≈ = neutral; ? = uncertain;  

EN 

19 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lamfalussy approach 

The WPIA also encouraged, as a general rule, to undertake changes to the Directive following 
a  Lamfalussy  logic,  i.e.  focusing  on  core  principles  and  leaving  the  definition  of  more 
technical  details  to  level  2.  This  would  introduce  greater  flexibility  by  allowing  tailored 
adaptations  of  the  legislative  framework  in  line  with  the  evolution  of  financial  markets  and 
both industry's and investors' needs.  

Supervisory co-operation 

The  White  Paper  recognized  that  those  changes  to  the  UCITS  framework  would  encourage 
cross-border  operations  and/or  structures  which  could  be  more  complex.  Implementation  of 
those  changes  will  lead  to  a  situation  in  which  different  regulators  may  be  responsible  for 
different  actors  and  value-chain  functions.  Effective  supervision  will  then  need  to  be 
underpinned  by  an  appropriate  and  timely  cooperation  between  the  relevant  national 
authorities. The White Paper therefore concluded that the final design of the new provisions 
should  include  ways  to  enhance  existing  supervisors'  powers  and  cooperation  mechanisms. 
This  recommendation  has  been  fully  taken  into  account  in  the  analysis.  However,  given  its 
close interaction with all of the other five issues, 'supervisory cooperation' has been dealt in 
this report as an intrinsic element of each of them rather than as a parallel issue32. 

4. 

DESIGNING THE LEGISLATIVE CHANGES PROPOSED IN THE WHITE PAPER 

Ahead  of  the  design  of  the  new  provisions,  a  number  of  choices  (per  issue)  have  been 
considered. These choices and their likely impacts are presented shortly in the sections below. 
Impacts summary tables have been inserted in order to provide a brief indication of the extent 
to  which  the  respective  choice  would  have  an  impact  on  efficiency,  market  integration  and 
investor protection. Together with the accompanying text, these tables offer a very condensed 
summary  of  the  impact  assessments  that  have  been  prepared  for  each  of  the  five  individual 
issues.  More  detailed  analyses  can  be  found  in  annex  7.  The  table  in  annex  2  provides  an 
overview of the impacts for all the issues analysed.  

4.1. 

Addressing barriers to marketing funds in other MS markets (problem 1) 

4.1.1.  The notification procedure  

The WPIA recommended amending the Directive in order to: 

a) significantly reduce notification delays;  

b) replace the procedure by a regulator-to-regulator communication exchange (following the 
example of other financial services Directives); and  

c) remove legal uncertainties regarding regulators respective roles and responsibilities. 

On  that  basis,  the  exposure  draft  published  in  March  2007  presented  an  overhaul  of  the 
notification  procedure.  It  put  forward  a  direct  transmission  from  the  home  regulator  to  the 
host  regulator  of  a  (exhaustive)  list  of  documents;  allowing  marketing  3  days  after  this 

32 

To  facilitate  the  consultation  process  and  the  analysis  of  responses,  the  exposure  draft  (annex  4) 
however treated 'supervisory cooperation' as a stand-alone issue. 

EN 

20 

   EN 

 
                                                 
transmission.  According  to  the  proposal,  the  authorities  of  a  host  MS  could  not  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 
raised  some  investor  protection  considerations.  These  have  been  fully  taken  into  account  in 
the  analysis  carried  out.  Respondents'  expectations  are  also  reflected  on  the  objectives  that 
have guided the assessment of impacts (please see table below). 

Table 4: Problem-Objectives-Solution  

Problem area 

Overall objective & detailed 
specific objectives  

Detailed operational 
objectives 

Recommended solution 

Barriers to 
marketing 
funds in other 
MS markets 

- eliminate barriers to integration 
of the European fund market => 
easier market access; greater 
competition 

- encourage cost and time savings 
=> improved competitiveness of 
UCITS 

- appropriate investor protection 

 - wider national fund offer 

- greater business 
opportunities 

- more levelled playing field 
between UCITS and 
competing products  

- less administrative burden 

- investor protection levels 
maintained 

Streamline the notification 
procedure  

In order to streamline the notification procedure along the lines recommended by the WPIA 
(and informed by the exposure draft consultation) two possibilities have been identified:  

1)  maintain  host  MS  regulator  ex-ante33  verification  of  the  UCITS  marketing  arrangements 
but reducing the period available for that verification;  

2)  allow  immediate  marketing  of  UCITS  in  the  host  market  after  the  notification:  host  MS 
regulator's checks takes then place ex-post on an on-going basis.  

As  explained  in  the  more  detailed  analysis  carried  out  in  annex  7,  the  first  option  (ex-ante 
verification)  would  not  improve  significantly  the  current  situation.  The  costs  linked  to  the 
notification procedure (notably notification and legal fees) would most probably not diminish 
perceptibly.  Uncertainty  about  UCITS  time-to-market  in  the  host  MS  would  also  remain34. 
The  notification  procedure  would  then  continue  to  act  as  an  entry  barrier  to  national  host 
markets. This will reduce the fund offer available to host investors and hold back competition 
forces (as well as their positive effect on the fund charges paid by the investor). 

Accordingly,  only  a  decisive  simplification  of  the  procedure  would  produce  a  significant 
positive effect. This is achieved by the second option (on-going ex-post checks). It has been 
argued  that  eliminating  host  MS  regulator's  ex-ante  controls  may  undermine  investor 
protection. The analysis of impacts however concludes that this risk is fairly small. Even in 
the  absence  of  those  pre-checks,  there  would  still  exist  three  levels  of  protection.  First,  the 
authorisation provided by the fund home regulator who checks compliance with the  UCITS 
Directive provisions. Second, the fact that an important percentage of UCITS distribution in 

33 

34 

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 already marketed in the host MS). 
Requests for clarifications or additional information on the side of the host regulator could actually have 
the effect of prolonging the fixed period given to the host regulator for the verification. 'Stopping-the-
clock'  is  already  a  normal  practice  and  the  two-month  period  currently  provided  for  in  the  UCITS 
Directive not always respected. 

EN 

21 

   EN 

 
                                                 
host  markets  is  done  through  EU  or  national  regulated  actors  (e.g.  around  75%  of  fund 
distribution takes place through actors regulated by the MiFID). Third, the preventive effect 
of ad hoc ex-post checks35 that should deter breaches of the relevant rules. A procedure much 
simpler  than  (costly  and  cumbersome)  systematic  ex-ante  verifications  could  therefore 
achieve the same level of investor protection. A number of parallel (also more proportionate) 
measures could reinforce the attainment of that objective. It has for example been suggested 
that  host  regulators  make  public  the  laws  and  provisions  with  which  UCITS  will  need  to 
comply in their territories. This approach has been already adopted by a number of MS. 

Table 5: Notification: Summary of impacts  

Specific Objectives 

Overall Objective 

Investor protection  administrative 

burden 

sector 
efficiency 

Efficiency36 

Pro Single 
Market? 

Ex-ante 
control 

+ 
(no investor protection 
risk) 

- 
(higher burden) 

- 
(higher costs; less 
business opport.) 

no 
(barrier entry to host 
market) 

Ex-post 
on-going 
control 

+/≈ 
(current protection 
levels maintained) 

+ 
(lower burden) 

+ 
(lower costs; more 
business opport.) 

yes 
(will encourage market 
integration) 

Other  procedural  choices  have  been  made  in  the  detailed  IA  presented  in  annex  7.  Most  of 
them aim to (further) simplify the notification procedure. One that deserves particularly to be 
highlighted is the proposed choice regarding the language regime applicable to the documents 
that the notification file needs to contain.  

The  analysis  recommends  that  only  key  investor  information  would  be  translated  into  the 
official language of the host MS. Translation costs and the long time needed for translations, 
often act as a barrier to entry into other MS markets (particularly small ones). Requiring only 
translation  of  the  key  investor  information  would  entail  a  considerable  reduction  of  the 
administrative burden borne by the industry (and ultimately passed on to investors in the form 
of  higher  fees)  and  improve  UCITS  time-to-market.  It  would  also  effectively  respond  to  a 
practical  reality  (investors  make  generally  little  use  of  most  fund  documents  due  to  their 
complexity).  The  envisaged  review  of  investors'  disclosures  (please  see  section  4.4  below) 
should ensure that even if only the key investor information is translated a proper protection 
of investors is guaranteed. A few voices have however expressed concerns about this choice. 
In  order  to  overcome  them,  a  compromise  solution  could  be  to  indicate  in  the  key  investor 
information in which language(s) the other fund documents would be available. The investor 
could then decide by him/herself whether this poses any problem to him/her. (It should then 
remain  up  to  the  fund  provider  to  decide  what  fund  documents,  other  than  key  investor 
information, need to be translated for commercial reasons.)  

35 
36 

As well as fund promoter's natural interest to minimise reputation risks 
Administrative burden refers to the costs linked to the production/provision of information that would 
have  not  been  collected/provided  in  the  absence  of  a  legal  obligation.  Sector  efficiency  refers  to 
efficiency  gains  derived  from  lower  fund  production  costs,  more  rationalised  processes  or  the  greater 
flexibility and opportunities offered to industry players. 

EN 

22 

   EN 

 
 
 
 
                                                 
4.2. 

Addressing the proliferation of funds of a small size (problem 2) 

The  WPIA  put  forward  two  solutions  in  order  to  achieve  economies  of  scale  in  the 
management  of  assets:  facilitating  fund  mergers  and  enabling  asset  pooling.  The  reason  for 
this was that, although both may pursue a similar  goal, they serve  different business  logics. 
Mergers would be more appropriate for industry players wishing to offer a (cross-border) fund 
range from a single location; while pooling would be the rationalisation technique chosen for 
those offering a range of (national) funds established in several MS. 

4.2.1.  Fund mergers 

The  WPIA  recommended  changes  to  the  Directive  in  order  to  create  the  conditions  for  the 
rationalisation of the fund landscape while, at the same time, ensuring high levels of investor 
protection.  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 diagrams below) and would apply to both domestic  and 
cross-border  mergers.  A  set  of  requirements  for  the  regulatory approval  of mergers  was put 
forward,  the  main  principle  being  that  only  the  regulator  of  the  disappearing  fund  would 
approve (or refuse) the proposed merger. The exposure draft also contained specific investor 
protection provisions, including the right for investors to receive information  on the merger 
(particularly on its potential impact on them) and the right to redeem free of charge if they do 
not agree with the merger operation. 

Figure 6: Fund merger schemes 

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  types  of  stakeholders  (industry, 
regulators and investors). However, some investor protection concerns were voiced in relation 
to  the  proposed  investor  rights  and,  in  particular,  regarding  the  conditions  under  which 
investors  of  the  receiving  fund  could  exercise  them.  Responses  have  proved  very  useful  in 
order to refine the objectives (please see the table below) and the principles of a fund merger 
framework. 

EN 

23 

   EN 

 
 
Table 6: Problem-Objectives-Solution  

Problem area 

Overall objective & detailed 
specific objectives  

Detailed operational 
objectives 

Recommended solution 

Proliferation of 
funds of small 
size 

- eliminate barriers to integration 
of the European fund market 

- encourage cost savings at 
different levels of the value chain 
=> improved competitiveness of 
UCITS 

- appropriate investor protection 

- consolidation of the fund 
industry 

- economies of scale realised 

- simple and swift merger 
procedure  

- properly informed investors 
with the right to dissent 

Enabling framework for 
fund mergers 

In order to address the investor concerns expressed during the consultation, the IA developed 
in  annex  7  analyses  two  possibilities  regarding  the  provision  to  investors  of  information  on 
the merger (the conclusions could then be extended to other investor's rights, such as the right 
to redeem free of charge): 

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 funds37 

The analysis of impacts concludes that none of these options are fully satisfactory from both 
an  efficiency  and  an  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  rationale  behind  the 
first  option  is  based  on  the  practical  reality  of  fund  mergers.  Those  most  affected  by  the 
merger  operation  are  the  investors  of  the  fund  that  will  disappear.  Receiving  fund  investors 
remain  invested  in  the  fund  that  they  had  originally  chosen  and  that  maintains  its  main 
features, notably its investment policy.  

However, the merger can also have an effect on those investors. When the disappearing fund 
is relatively big or when the portfolio composition of both funds is very different, the transfer 
of  assets  into  the  receiving  fund  may  have  a  negative  effect  on  its  performance38.  This 
performance dilution risk does not seem to be significant; there exist well-known techniques 
to  minimise  it  (already  often  used  in  order  to  deal  with  big  subscriptions  or  redemptions 
into/from  a  fund).  However,  although  small,  the  risk  remains.  Providing  receiving  fund 
investors with information on the merger would enable them to protect their interests; but this 
appears  to  be  a  rather  disproportionate  measure.  It  may  also  discourage  fund  mergers 
(particularly cross-border) thus hindering further market integration.  

Therefore, option 1, i.e. informing only investors of the disappearing fund, remains the most 
cost-effective  one.  However,  the  analysis  in  annex  7  concludes  that  this  option  should  be 
accompanied by other parallel investor protection provisions. It is for example recommended 
that  the  regulator  responsible  for  approving  (or  rejecting)  the  merger  proposal  would  assess 

37 

38 

A third option would be 'no information to investors at all' but this is, for obvious investor protection 
reasons, deemed as unrealistic. 
For instance, due to the transaction costs associated to the rebalancing of the receiving fund's portfolio. 

EN 

24 

   EN 

 
 
                                                 
that 

these 

investors  are  also  adequately 

the  potential  impact  of  the  merger  on  the  investors  of  the  receiving  fund  and  decide,  if 
the  merger's 
appropriate, 
characteristics and possible impacts. Since the main negative potential impact on the investors 
of  the  receiving  fund  is  of  a  purely  technical  nature  (i.e.  the  dilution  of  performance 
mentioned above), the regulator of the disappearing fund should be able to asses that risk (as 
it is already currently done for national mergers) independently of where the receiving fund is 
based39. In any event, some form of communication or co-operation between regulators could 
also be considered. For example, the possibility for the regulator of the disappearing fund to 
consult  with  the  regulator  of  the  receiving  fund  before  taking  a  decision.  A  combination  of 
both possibilities (1 and 2) seems therefore the most advisable policy choice. 

informed  about 

Table 7: Fund mergers: Summary of impacts  

Specific Objectives 

Overall Objective 

Efficiency 

Investor protection administrative 

burden 

Only to 
disappearing 
fund 
investors 

To all 
investors 

- 
(protection risk for 
receiving fund investors)

+ 
(lower burden) 

+ 
(all investors duly 
protected) 

- 
(higher burden) 

4.2.2.  Asset pooling 

sector 
efficiency 

+ 
(higher scale 
savings) 

- 
(lower scale 
savings) 

Pro Single 
Market? 

yes 
(potentially more 
mergers) 

no 
(may discourage 
mergers) 

Two types of asset pooling were discussed in the WPIA: virtual pooling and entity pooling40. 
In the case of virtual pooling, the WPIA analysis left the door open to the introduction of a 
common  approach  but  recommended  to  give  further  consideration  to  the  issue.  Subsequent 
research in this area led Commission services to conclude in the exposure draft that it did not 
seem appropriate at that stage to take any measure to create a pan-European environment for 
virtual  pooling.  Important  cross-liability  and  other  investor  protection  concerns  were 
highlighted as the main reason. Additionally, it appeared that the use of virtual pooling was 
rare outside a few MS and that there did not exist cross-border experiences. Besides, there had 
not been strong demand on the industry side for such an environment41. Analysis of the issues 
blocking the cross-border development of virtual pooling should therefore first be discussed 
in appropriate fora. 

With regards to entity pooling, the WPIA report concluded that the UCITS Directive should 
be  changed  to  allow  it.  It  also  provided  a  first  analysis  of  the  scope  of  this  new  UCITS 
freedom.  Two  possibilities  were  considered:  entity  pooling  in  a  broad  sense  and  so-called 
'master-feeder' structures. These concepts are described graphically in the boxes below. 

39 

40 
41 

Given the technical nature of the performance dilution effect, no particular knowledge of the local rules 
in the country of the receiving fund should be required.  
For a description of each of these techniques please refer to the IA fiche on asset pooling in annex 7. 
Contributions  to  the  consultations  on  the  Green  Paper  and  the  Expert  Group  report  on  Market 
Efficiency  had  showed  a  greater  interest  for  entity  pooling  (particularly  master-feeder  structures). 
Responses to the exposure draft have confirmed this position. 

EN 

25 

   EN 

 
 
 
 
                                                 
Figure 7: Entity pooling techniques 

Master-feeder scheme 

Entity pooling in a broad sense 

Master 

Master A

Master B

Master C 

Master D 

(up to) 100 % 

(up to) 100 % 

20%

(up to) 100 % 

20%

60%

50%

50%

30% 

50% 

20% 

Feeder α 

Feeder β 

Feeder γ 

Feeder α 

Feeder β 

Feeder γ 

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.  The  main 
characteristics of that proposed preliminary framework were the following: a) prior regulatory 
approval of the feeder's investment into the master was required, b) pooling structures needed 
to  have  at  least  two  feeders,  c)  the  minimum  investment  of  the  feeder  into  the  master  was 
fixed at 85% (of the feeder's assets); d) proper arrangements between master and feeder (and 
between  its  depositaries  and  auditors)  needed  to  be  in  place;  e)  information  to  investors 
should  clearly  explain  the  implications  of  the  two-layer  investment;  and  f)  both  master  and 
feeder, as UCITS, needed to comply with the Directive provisions. 

Respondents  to  the  exposure  draft  consultation  found  the  suggested  framework  rather 
prescriptive.  They  recommended  to  concentrate  at  level  1  (i.e.  Directive  changes)  on  key 
regulatory  principles,  leaving  details  on  procedure  or  application  of  those  principles  to 
specific  scenarios  to  be  filled  in  through  implementing  legislation  (level  2)  or  common 
supervisory practice. These level 1 principles should however respond to the expectations of 
the different stakeholders as reflected in the objectives listed in the table below. 

Table 8: Problem-Objectives-Solution  

Problem area 

Overall objective & detailed 
specific objectives  

Detailed operational 
objectives 

Recommended solution 

Proliferation of 
funds of small 
size 

- eliminate barriers to integration 
of the European fund market 

- encourage cost savings at 
different levels of the value chain 
=> improved competitiveness of 
UCITS 

- appropriate investor protection 

- economies of scale realised 

- wider fund offer 

- greater management 
flexibility; limited additional 
administrative burden 

- investors properly informed

- easy on-going supervision  

Allow entity pooling 

As  regards  the  entity  pooling  technique  selected  (master-feeders  structures),  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. For some of these, limiting the scope of this new market freedom to master-feeders was 
a  serious  missed  opportunity.  Taking  into  account  the  new  arguments  provided  supporting 
each of the two entity pooling techniques the analysis of impacts has therefore focused on the 
following options: 

EN 

26 

   EN 

 
 
1) Allowing entity pooling in a broad sense. 

2) Allowing master-feeder structures. 

As explained in the detailed IA analysis in annex 7, 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  quicker  their  fund  ranges  to 
changing  trends  and  investors'  demands.  It  could  however  be  argued  that  some  of  the 
advantages  related  to  this  technique  are  already  available  to  industry  players  thanks  to  the 
current funds of funds regime42. Option 1) would entail allowing an UCITS to invest in more 
than 5 other funds. This relaxation of the diversification requirements for fund of funds could 
have  significant  unintended  consequences  for  investors.  Additionally,  if  the  objective  is  to 
achieve  economies  of  scale  through  the  pooling  of  assets,  this  seems  to  be  more  easily 
attained  through  master-feeder  structures  (through  entity  pooling  in  a  broad  sense,  feeder's 
assets would be split into a number of masters). Given the complexity of 'entity pooling in a 
broad  sense'  structures,  additional  investor  information  obligations  may  need  to  be  imposed 
on fund providers. Thus, the impact on administrative burden of option 1) risks been greater. 
The  IA  analysis  therefore  concludes  that  the  master-feeder  option  is  to  be  preferred  both  in 
terms of efficiency and of investor protection. 

Table 9: Asset pooling: Summary of impacts  

Specific Objectives 

Overall Objective

Investor 
protection 

Efficiency 

administrative 
burden 

sector 
efficiency 

Pro Single 
Market? 

Entity 
pooling 
broad sense 

- 

(supervisory concerns) 

- 
(higher burden) 

+ 
(higher flexibility 
lower ec. of scale) 

yes 

(will encourage 
market integration) 

Master-
feeders 

+ 

(more well-known and 
positively tested) 

+ 
(lower burden) 

+ 
(less flexibility; 
higher ec. of scale) 

yes 

(will encourage 
market integration) 

Further to determining the optimal scope of this new single market freedom, the IA fiche also 
provides  concrete  recommendations  on  how  to  simplify  the  design  of  the  framework 
presented  in  the  exposure  draft.  Thus,  the  analysis  recommends  abandoning  the  minimum 
two-feeder requirement (in favour of other more proportionate investor protection solutions) 
and  to  provide  a  certain  degree  of  flexibility  as  regards  requirements  governing  the 
relationship between the different actors.  

42 

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 in at least 5 funds. 

EN 

27 

   EN 

 
 
 
 
 
                                                 
4.3. 

Addressing the lack of organisational flexibility (problem 3) 

4.3.1.  Management Company Passport 

The exposure draft tried to strike a 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 (indicating the functions that should 
remain in that MS) and to enhance the supervisors' cooperation mechanisms. According to the 
exposure draft proposals, the fund domicile would be determined by using two criteria: 1) the 
country  under  whose  laws  the  fund  is  constituted  and  2)  where  the  verification  of  the  fund 
valuation and the maintenance of the unit-holders' register take place. The passport would be 
also extended to funds of a contractual type. The depositary would remain based in the fund 
domicile. 

Contrary  to  the  other  four  topics,  responses  to  the  exposure  draft  consultation  expressed 
divergent views regarding the management company passport proposals. Industry respondents 
voiced  their  disappointment  regarding  the  proposed  scope  of  the  passport.  Others,  mainly 
national authorities, considered that the proposed approach provided neither a clear definition 
of regulators' respective responsibilities nor the means to fulfil their supervisory duties. Some 
concerns were expressed regarding the risk of double taxation and the feasibility of extending 
the passport to contractual funds. 

Table 10: Problem-Objectives-Solution  
Overall objective & detailed 
specific objectives  

Problem area 

Lack of 
flexibility in 
organising the 
industry value-
chain 

- eliminate barriers to integration 
of the European fund market => 
greater cross-border activity 

- encourage savings by 
eliminating costs duplication => 
improved competitiveness of 
UCITS 

- appropriate investor protection 

Detailed operational 
objectives 

- scale and specialisation 
gains realised 

- freedom to organise 
business structures cross-
border  

- effective supervision  

- clear regulators' 
responsibilities 

Recommended solution 

Make the Management 
Company Passport work 

The divergence of positions expressed during the exposure draft shows how difficult the task 
of  conciliating  the  objectives  of  greater  flexibility  and  adequate  supervision.  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 work for corporate funds and extend it to contractual funds  

3) Make the MC passport work for corporate funds 

Commission's  analysis  suggests  that  the  absence  of  a  management  company  passport  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  by  1)  clarifying  the  respective  responsibilities  of  fund  and 
management company 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  management  company  and  its  supervisor  provide  all 
necessary support to the fund supervisor and depositary. 

EN 

28 

   EN 

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

•  Entail  extensive  information  exchange  and  reporting  obligations  between  fund 
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 only for corporate funds appears limited. 

The  IA  therefore  concludes  that  the  type  of  provisions  needed  to  provide  a  management 
company passport would entail extensive bureaucracy and administrative costs. They would 
not fully dispel the supervisory concerns and investor protection risks associated with cross-
border fund management. They would provide neither a cost-effective basis to introduce the 
passport.  Potential  drawbacks  are  considered  to  outweigh  the  expected  benefits.  The 
Commission therefore proposes not to change at this stage the provisions of the Directive in 
this  regard  but  to  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. 

Table 11: Management Company Passport: Summary of impacts  

Specific Objectives 

Efficiency 

Investor 
protection  administrative 

burden 

sector 
efficiency 

Overall 
Objective 

Pro Single 
Market? 

Feasibility 

Do 
nothing 

Passport 
for all 
funds 

Passport 
only for 
corporate 
funds 

+/- 
(some 
operational 
risks) 
-- 
(concerns re. 
split supervision 
and contractual 
funds) 
- 
(split 
supervision 
concerns) 

≈ 
(status quo) 

- 
(untapped 
savings) 

no 
(barrier entry to 
service host market) 

Not applicable 

-- 
(burdensome 
procedure) 

++ 
(lower costs; 
specialisation 
gains) 

yes 
(will foster market 
integration) 

Difficult 
(particularly re. 
contractual 
funds) 

-- 
(burdensome 
procedure) 

+ 

(some cost 
savings/ 
specialis. gains)

yes 
(will facilitate 
market integration) 

Doubtful 

EN 

29 

   EN 

 
 
 
 
4.4. 

Addressing the ineffectiveness of the Simplified Prospectus (problem 4) 

4.4.1.  Key investor information 

The WPIA not only considered an amendment to the UCITS Directive as the most effective 
solution  but  it  also  put  forward  a  list  of  potential  changes.  These  related  to  the  length,  the 
content and even the name of the Simplified Prospectus (considered by some as confusing).  

In line with these recommendations, the exposure draft presented a completely 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,  not  necessarily  embodied  in  a  specific 
document.  KII  would  include  all  the  product  information  relevant  for  the  investor  to  assist 
him/her in taking an informed investment decision, as well as practical information necessary 
for  the  investor  to  be  able  to  exercise  his/her  rights.  The  planned  changes  to  the  UCITS 
Directive  would  concentrate  on  defining  the  high-level  principles  of  the  KII  (purpose  and 
main  characteristics);  the  detailed  provisions  (content  and  format)  would  then  be  designed 
later  (Level  2  measures).  The  table  below  summarises  the  objectives  pursued  with  those 
proposed changes. 

Table 12: Problem-Objectives-Solution  
Overall objective & detailed 
specific objectives  

Problem area 

Detailed operational 
objectives 

Recommended solution 

- eliminate barriers to integration of 
the European fund market 

- greater comparability 
between funds  

Ineffective 
investor 
disclosures 
(simplified 
prospectus) 

- more cost-effective disclosure 
procedures => improved 
competitiveness of UCITS 

- improve competition and 
transparency in distribution 

- reduce risks and improve 
information and choice for 
investors => enhanced investor 
protection 

- effective tool to take an 
investment decision 

- less administrative burden

- clear regulators' 
responsibilities 

Simplify the Simplified 
Prospectus 

The  framework  proposed  in  the  exposure  draft  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  in  annex  7  therefore 
focuses on the impacts of two possible alternatives: 

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 

As  described  in  annex  7,  the  building  block  approach  would  allow  for  greater  flexibility 
regarding  the  presentation  of  the  information.  It  would  then  be  possible  to  better  adapt 
disclosures  to  the  type  of  investor  and/or  to  the  distribution  channels  and  methods  used. 
However,  a  single  document  would  probably  be  simpler  to  use  for  investors.  It  would  be 
easier for them to understand and to assess the virtues/drawbacks of the fund if all the relevant 
(or key) information is provided together. Investors will be able to compare between products 
and therefore to chose the one more in line with their needs. This ability to compare among 
funds should, in the medium term, encourage competitive forces and therefore put pressure on 

EN 

30 

   EN 

 
prices (fees). Additionally, from a compliance costs point of view, it should be noted that the 
building  block  approach  represents  an  important  change  vis-à-vis  the  current  situation.  It 
would therefore probably 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.  Since  it  will  allow  a  easier  comparison 
among  different  MS  funds,  it  should  also  encourage  the  integration  of  the  European  fund 
market. 

Table 13: Key Investor Information: Summary of impacts  

Specific Objectives 

Overall Objective 

Efficiency 

administrative 
burden 

sector 
efficiency 

Pro Single Market? 

Investor 
protection 

+/- 

Building 
blocks 

(adapted 
disclosures but no 
global view) 

- 

- 

no 

(risk of higher 
burden) 

(risk of higher 
costs)  

(less comparability, could 
act as entry barrier to host 
markets) 

Single 
document 

+ 

(more user-
friendly) 

+ 

(lower costs and 
administrative 
burden) 

+ 

(lower costs) 

yes 

(comparability will 
encourage market 
integration) 

Other practical choices have been made in the detailed IA presented in annex 7. Many of them 
aim to reduce the burden associated with the production and delivery of the KII. For example, 
clarifying  the  liability  attached  to  the  KII  would  help  in  reducing  the  complexity  of  the 
document (avoiding thus long and complicated legal disclaimers). Allowing the possibility to 
use  different  KII  distribution  methods  (including  electronic  delivery)  could  have  a  positive 
impact on delivery costs. 

4.5. 

The overall impact of the proposed measures 

4.5.1.  Overall impacts 

The  economic  savings  to  be  expected  from  the  proposed  measures  are  not  negligible.  They 
range  from  the  modest  identified  savings  of  the  new  notification  procedure  (most  of  the 
current € 20 million initial notification costs and probably also the € 25 million annual costs 
of  maintaining  notification)  to  the  several  billion  to  be  saved  annually  if  European  funds 
could  fully  exploit  the  economies  of  scale  derived  from  consolidated  management  through 
fund mergers or asset pooling. The simplification of investors' disclosures, the possibility to 
use electronic transmission means and the recommended language regime (i.e. only KII is to 
be translated into the host MS language) will also entail important savings. These, although 
difficult to quantify, were considered as substantial by many respondents to the exposure draft 
consultation. The overall impact of the proposal on administrative burden is provided in the 
box below. 

EN 

31 

   EN 

 
 
 
 
Impact on administrative burden 

The  guiding  principles  of  this  analysis  have  been  market  efficiency  and  investor  protection. 
However,  particular  attention  has  also  been  given  to  the  need  to  reduce  administrative 
burdens.  

As  regards  to  already  existing  mechanisms,  the  recommended  decisive  simplification  of  the 
notification  procedure  and  of  investors'  disclosures  would  lead  to  a  significant  reduction  of 
those burdens. The recommendation to limit translation (into the host MS official language) to 
solely the KII is one of the key elements with regards to the notification procedure. While the 
corresponding  reduction  of  administrative  burden  is  difficult  to  quantify,  one  of  the  pan-
European players contributing to the consultation on the exposure draft estimated savings of 
approximately one-third of its notification costs. To further alleviate the administrative burden 
linked  to  the  notification  procedure  the  content  of  the  notification  file  should  be  clearly 
determined (and thus rule out host MS' requests for additional information). The shortening 
and standardisation of the contents of the KII will also be an important step forward, although 
savings  are  difficult  to  quantify  at  this  stage  (CESR  is  currently  working  on  a 
recommendation to the Commission on the format and content of the KII). The possibility to 
use  electronic  means  for  the  transmission  of  the  notification  file  and  to  provide  the  KII  to 
investors would also contribute to this savings.  

Two  of  the  proposals  introduce  new  freedoms  but  also  new  obligations  and  therefore 
additional  administrative  burden;  these  are  the  framework  for  fund  mergers  and  for  asset 
pooling. It needs to be noted however that the harmonisation of the merger procedure sought 
by the new provisions would considerably reduce the administrative burden actually borne by 
fund promoters wishing to merger funds cross-border (and who currently need to comply with 
a set of different national requirements). In the case of pooling, the additional administrative 
burden  appears  justified  by  the  need  to  ensure  adequate  levels  of  investor  protection. 
Recommendations in relation to these two areas aim at rationalising the proposed framework 
by clearly identifying the respective responsibilities of the industry and competent authorities.  

While the scale of those savings may not be seem as compelling in certain cases, important 
dynamic effects are also to be expected43: 

•  The shorter time-to-market for funds will enhance their competitiveness vis-à-vis 

other investment products.  

•  A  more  efficient  notification  procedure  could  also  reduce  the  need  to  have 
different  national  fund  ranges.  A  single  cross-border  fund  could  then  pool  the 
assets from investors in several MS and attain more easily economies of scale.  

•  The  greater  openness  of  national  markets  should  encourage  competition  and 

encourage industry's players to pursue economic efficiency.  

•  Rationalised  fund  ranges  through  fund  mergers  should  reduce  confusion  among 
distributors  and  investors  and  render  investment  choices  easier.  The  fund  offer 
will also benefit from the innovation possibilities offered by pooling. 

43 

More details on the impacts per measure are to be found in annex 7. 

EN 

32 

   EN 

 
                                                 
•  Enhanced  disclosures  will  provide  investors  the  necessary  tool  to  take  informed 
decision. The possibility to compare between funds should encourage competition 
and, thus, put pressure on fees. 

Over the long run, these positive effects will contribute to the greater economic efficiency and 
competitiveness sought by the Lisbon strategy. 

4.5.2. 

Synergies and trade-offs of the package of measures 

These  effects  should  however  not  been  seen  in  isolation.  Important  synergies  could  be 
expected of the interaction of the different proposed measures. The most relevant are given by 
the combinations below. Synergies  should reinforce, in the medium to long-term,  the above 
individual impacts.  

Notification  procedure-KII:  As  often  highlighted  during  the  exposure  draft  consultation 
period, a swift notification procedure will up to a certain extent depend on the on-going work 
on  the  KII.  A  number  of  respondents  to  the  exposure  draft  required  the  Directive  to  clarify 
that the KII was not to be considered as marketing material and thus, could be used without 
changes across borders (i.e. without interference of the host MS regulator).  

KII-Fund  mergers/asset  pooling:  Streamlined  KII  could  play  an  important  role  helping 
investors to take an informed decision regarding the merger operation or the pooled structure 
presented  to  them.  In  the  first  case,  it  should  facilitate  the  comparison  between  the  funds 
merging  and  the  understanding  on  how  the  operation  will  influence  their  investment.  In  the 
second, it would help to understand the implications for them of the double-layer investment. 

Fund mergers-asset pooling: As already highlighted in section 4.2, fund mergers and pooling 
pursue similar goals (economies of scale in asset management). However, they are not to be 
considered as alternative but rather as complementary measures. Opting for one or the other 
will depend on the business model adopted: mergers might be more appropriate for industry 
players wishing to offer a (cross-border) fund range from a single location; pooling might be 
more appropriate for those offering a range of (national) funds established in several MS.  

Notification  procedure-fund  mergers:  It  has  been  recommended  that  the  receiving  fund  be 
notified to the relevant authorities in all MS where the disappearing fund is sold to investors. 
A  simplified  notification  procedure  would  make  it  easier  and  quicker  for  the  industry  to 
comply  with  this  requirement.  The  simplification  of  the  notification  procedure  can  also 
reinforce  the  consolidating  effect  of  fund  mergers.  By  achieving  a  greater  openness  of 
national markets, fund promoters will feel less the need to launch parallel ranges of funds in 
other to assure their presence in different MS.  

4.5.3. 

Impact on investors 

Investor  protection:  The  analysis  carried  out  has  systematically  tested  the  impact  of  the 
different  proposed  measures  on  investors.  Contributions  of  investors'  representatives  during 
the whole UCITS review process have been key in order to identify the potential impacts and 
to assess their likelihood and importance. When a possible detriment to investors have been 
identified,  solutions  have  been  put  forward  in  order  to  eliminate  it;  the  objective  being 
maintaining the high levels of protection already enjoyed by UCITS investors. 

EN 

33 

   EN 

 
Economic  benefits:  The  assessment  has  identified  clear  and  direct  benefits  for  stakeholders. 
Often these seem more straightforward in the case of industry players. Investors are however 
also  to  benefit  importantly,  although  in  certain  cases,  advantages  will  only  materialise  over 
time.  The  positive  effects  of  the  package  of  measures  will  flow  to  investors  through  four 
distinct channels: 

a. 

b. 

c. 

d. 

Some  efficiency  savings  will  take  place  directly  at  the  level  of  the  fund.  The 
proposed framework for fund mergers and asset pooling will allow managers to put 
in  the  market  bigger  orders  and  thus,  obtain  better  execution  prices.  Lower 
transaction  costs  will  have  a  positive  effect  on  the  fund's  performance  from  which 
investors will directly benefit. 

Thanks to the streamlining of the notification procedure and the greater competition 
in national markets that this will bring about, fund promoters will need to find new 
ways to attract or keep clients (e.g. through additional services or lower fees) 

Studies  have  shown  that  distribution  is  an  important  source  of  costs  and  that  the 
bargaining power of distributors is high. For the package savings to be passed on to 
investors, it is also necessary to act at the point of sale. MiFID conduct of business 
requirements will oblige distributors to put the interest of investors first.  

Investors have also the possibility of accelerating the process of passing through of 
the  savings.  Improvements  on  investors'  disclosures  (KII)  aim  at  empowering 
investors.  Clear  and  standardised  information  will  help  them  to  compare  among 
funds  and  assist  them  in  taking  an  informed  investment  decision.  This  should 
strengthen their ability to push for more competition between fund providers.  

Finally,  it  needs  to  be  noted  that,  although  'investors'  in  this  report  and  its  annexes  mainly 
refer to the physical person investing in UCITS, institutional investors represent an important 
part of the UCITS' 'client base'. Some, such as insurers and pension funds, invest more than 
20%  of  their  assets  in  UCITS44.  They  will  therefore  not  only  importantly  benefit  from  the 
identified  efficiency  gains  but  also  reinforce  the  positive  dynamic  effects  of  the  package  of 
measures on the economy. 

4.5.4. 

Impacts on the industry organisation and global competitiveness 

Employment level: the European fund industry being a non-labour intensive sector, the impact 
of the package of measures on employment should be minor. The economies of scale pursued 
by the fund merger and asset pooling measures should not lead to a reduction of the relevant 
work force, especially considering that the continued launching of new funds (due to financial 
innovation  and  changes  in  investors'  needs/preferences)  is  an  important  counterbalancing 
trend in this respect. 

Industry organisation: While the package of measures should not have an important impact on 
the  organisation  of  the  European  fund  industry,  greater  integration  and  new  business 
possibilities  should  lead  to  a  concentration  of  certain  activities  in  the  most  efficient  fund 
centres. Well-established centres already enjoying a good repute should be able to make the 
most from the package of measures.  

44 

EFAMA Fact Book 2007. 

EN 

34 

   EN 

 
                                                 
Effects  beyond  EU  borders:  The  proposed  package  of  measures  will  have,  as  explained,  an 
important  positive  effect  on  the  development  of  the  European  fund  industry.  The  identified 
impacts have also a global dimension. On one hand, strong levels of investor protection will 
reinforce the attractiveness of the UCITS brand beyond EU borders. Enhanced efficiency and 
lower  costs  will  also  assist  UCITS  funds  in  facing  global  competition.  This  should  help 
UCITS  to  reinforce  the  privilege  position  they  already  enjoy  in  Latin  America  and  Asia 
markets as well as to enter new ones. On the other hand, a more integrated market will act as a 
magnet for international players wishing to have access to the savings of a pool of 493 million 
investors45. The on-going regulatory dialogue with third countries such as the US, Russia and 
China should ensure that UCITS changes are well understood outside the EU. 

4.6. 

Other general considerations 

Impact on SMEs: EU initiatives have sometimes been criticised for favouring mainly big pan-
European players. The proposed UCITS changes will however have also a positive impact on 
smaller  players  (including  SMEs).  Firstly,  as  investors,  they  would  have  access  to  more 
efficiently  managed  funds  (notably  important  with  respect  to  their  treasury  management). 
Secondly, as fund promoters, they will have easier and cheaper access to new markets from 
where  they  were  excluded  for  economic  reasons  (e.g.  notification  fees,  translation  costs  of 
investor  disclosures  or  management  company  related  costs).  They  could  also  more  easily 
complement 'in-house' expertise thanks to the new pooling possibilities46.  

Impact on the EU budget: The proposed measures do not have an impact on the EU budget. 

Realisation  of  the  impacts:  While  no  specific  transposition  difficulties  are  anticipated, 
realisation of the expected impacts will also depend on the form (and implementation) of the 
more detailed (technical) provisions to be developed through implementing measures at level 
2.  CESR  is  however  developing  its  own  IA  methodology47  along  the  lines  of  the 
Commission's  IA  guidelines.  The  design  of  level  2  provisions  would  therefore  in  the  future 
also benefit from an analysis of the options available and their impacts. 

Environmental  impact:  The  streamlining  of  the  KII  and  the  possibility  to  use  electronic 
transmission means will have a positive environmental impact. However, this should remain 
marginal given the size of the environmental challenges we face. 

5. 

MONITORING AND EVALUATION 

General monitoring of the European investment fund market framework already includes the 
following elements: 

–  Monitoring  of  the  implementation  of  Market  in  Financial  Instruments  Directive  (MiFID) 
and its impact on UCITS. (MiFID-UCITS vademecum to be published in spring 2008) 

45 
46 

47 

Eurostat 2006 data. 
Pooling  is  sometimes  used  to  offer  investors  a  fund  managed  by  another  (well-known)  asset 
management team/group but with the brand of the fund promoter itself ('white labelling'). 
In May, CESR submitted for consultation its proposed IA methodology. CESR is currently reviewing 
its document in line with the contributions received (the consultation deadline was 24th August). 

EN 

35 

   EN 

 
                                                 
–  Study  on  investment  policies  of  harmonised  (i.e.  UCITS)  and  non-harmonised  funds, 
evaluating the use actually made of the enlarged investment powers introduced by the 2001 
amendments (end 2007) 

–  Study on the sale of non- harmonised funds in the EU (end 2008) 

–  Commission  report  on  the  need  and  identification  of  possible  options  for  developing  the 

single market framework for certain retail-oriented non-harmonised funds. 

–  European Financial Integration Report (annually) 

Monitoring of the proposed legislative changes would imply following the indicators listed in 
the table below. 

Table 14: Monitoring indicators  

Issue 

Indicators 

Notification 

Mergers 

Pooling 

Key Investor 
Information 

• Number of funds notified in other MS 
• Notification costs (including regulators' fees) 
• Number of local marketing rules infringement cases
Short-term indicators 
• Number of cross-border mergers 
• Length of the merger process  
Long-term indicators 
• Average fund size 
• Average fund costs 
• Number of investor protection related complaints 
• Number of master-feeder structures 
• Average size of the master 
• Average fund costs 
• Number of investor protection related complaints 
• Length of the KII 
• Comprehensibility of the KII 
• Number of investor protection related complaints 

Source of verification
PWC, FERI data 
Industry organisations 
CESR 

FERI, Lipper data 
Industry organisations 
CESR 

Industry organisations 
CESR 

Stakeholders' 
feedback 
(particularly investors) 

Provisions  of  the  amended  UCITS  Directive  could  also  foresee  a  formal  evaluation  of  the 
changes (e.g. four years after it enters into force). Given the difficulty to measure at this stage 
of  the  legislative  proposal  a  number  of  impacts,  that  evaluation  could  also  focus  on  a  more 
comprehensive quantification of the effects of the Directive amendments.  

EN 

36 

   EN 

 
ANNEX 1: Procedural issues and consultation of interested parties 

Chronology 

The  five-year  Financial  Services  Action  Plan  (FSAP)  launched  in  1999  very  much 
concentrated on the completion of the single market for wholesale services. Towards the end 
of  the  FSAP  period,  it  was  clear  that  other  areas  would  need  close  attention  after  2004.  In 
preparation of the strategy for the post-FSAP, the Commission set up four groups of experts 
of which one focused on improvements to be done in the area of asset management. 

Since  then,  the  Commission  has  launched  a  process  of  analysis  and  design  of  possible 
solutions  on  the  basis  of  inputs  of  a  very  different  nature.  These  ranged  from  bilateral 
informal  meetings  with  stakeholders  to  studies,  further  expert  groups,  open  hearings,  public 
consultations and workshops. Many of these events brought together different stakeholders in 
order  to  better  design  and  assess  the  implications  of  possible  actions  on  each  side  of  the 
market. Most of these exercises have been open and largely documented on the Commission's 
website.  The  openness  and  transparency  of  the  process  has  been  highlighted  and 
acknowledged frequently by stakeholders. The milestones of that process are summarised in 
the table below. 

Table: Chronology of the preparatory process 

Item 

Green Paper on the enhancement of the framework for investment funds 

FSAP Expert Group on Asset Management Report 
End of the expert group report's consultation period 

Open Hearing on the Green Paper 
Start of "Potential Cost Savings" study 
End of the Green Paper's consultation period 
Start of "Current trends" study 

Date 
2004 
May  
10th Sept. 
2005 
14th July 
September   White Paper Roadmap 
13th Oct.  
21st Oct.  
15th Nov.  
21st Dec.  
2006 
31st Jan. 
8th March 
15th May 
19th May 
4th July 
11th July 
18th July 
19th July  
Aug./Sept.  Final report "Potential Cost Savings" and "Current trends" studies 
8th Sept. 
15th Nov. 
16th Nov. 
2007 
6th March 
22nd March  Publication  of  DG  Markt's  working  document  'Initial  orientations  on 

Establishment of two Expert Groups 
1st meeting of the Inter-service Impact Assessment Steering Group 
1st Workshop on the Simplified Prospectus 
2nd meeting of the Steering Group 
Final reports of the Expert Groups published 
2nd Workshop on the Simplified Prospectus 
3rd meeting of the Steering Group 
Open Hearing on the Expert Groups' reports 

4th meeting of the Steering Group 
Adoption of White Paper on investment funds  
Publication of White Paper and Impact Assessment 

1st meeting of the re-established Inter-service IA Steering Group 

changes to the UCITS Directive' (also referred to as 'exposure draft') 

EN 

37 

   EN 

 
26th April 
15th June 
13th July 
18th Sept. 
26th Sept. 
24th Oct. 

Open Hearing on the exposure draft  
End of the exposure draft consultation period 
2nd meeting of the (re-established) Inter-service IA Steering Group 
3rd meeting of the (re-established) Inter-service IA Steering Group 
Submission of draft report to IA Board 
Decision of the IA Board 

Consultations 

As described in the main report, the asset management expert group's report published in May 
2004,  identified  a  list  of  issues  requiring  action.  Reponses  to  the  open  consultation  showed 
that  there  was  a  widespread  consensus  on  the  fact  that  there  was  considerable  room  for 
improvement in the EU legislative framework regulating asset management. 

The  Commission  Green  Paper  (July  2005)  identified  concrete  steps  in  this  direction.  It 
proposed a series of actions in the short-term and launched a debate on the need for a more 
wholesale reform of the investment funds legislative framework in the medium to long-term.  

Views expressed during the Open Hearing on the Green Paper (October 2005) and during the 
open  consultation  (mid-July  to  mid-November  2005)  widely  agreed  with  the  Green  Paper's 
approach  for  the  short-term,  that  is,  improving  the  implementation  of  the  provisions  of  the 
existing framework48.  

The  European  Parliament  has  also  contributed  to  the  debate  with  an  own-initiative  report 
adopted in April 200649. The report main conclusions are that:  

–  there is no need for a complete make-over of UCITS Directive;  

–  it is however necessary to make the UCITS Directive evolve in line with changes 
in  the  market  through  a  combination  of  better  implementation  of  existing 
provisions and targeted adjustments or additions to the Directive; 

–  any  legislative  adjustments  to  the  Directive  should  integrate  the  possibility  for 
adoption  of  detailed  implementing  legislation  via  comitology  (Lamfalussy 
procedure). [please see annex 4] 

In  July  2006  the  recommendations  of  the  Expert  Group50  on  Market  Efficiency  were 
published51. The general public was invited to discuss the reports at the occasion of an open 
hearing which took place 19th July52 or in writing during the following two months.  

The hearing showed that the industry's views on efficiency issues are very much in line with 
the views of the Parliament report. Responses to the consultation provided a valuable input for 
the completion of the WPIA report. 

48 

49 

50 
51 
52 

of 

of 

on 

the 

the 

Green 

summary 

conclusions 

the  Open  Hearing 

at: 
A 
Feedback 
http://europa.eu.int/comm/internal_market/securities/ucits/index_en.htm#hearing 
Statement 
at: 
http://europa.eu.int/comm/internal_market/securities/docs/ucits/greenpaper/feedback_statement_en.pdf 
European Parliament's report on asset management (2006/2037(INI)), March {27/03/2006} 2006 (also 
called the Klinz' report). 
For more information on its mandate please see section 'expert groups' below. 
http://ec.europa.eu/internal_market/securities/ucits/index_en.htm#reports  
http://ec.europa.eu/internal_market/securities/ucits/index_en.htm#060607,  a  flash  report  summarising 
the discussions is also available on this website. 

consultation 

be 
The 

found 

found 

Paper 

can 

can 

be 

EN 

38 

   EN 

 
                                                 
Other  informal  consultations  of  stakeholders  during  2006  have  taken  place  using  ad  hoc 
questionnaires to CESR53 and EFAMA54. These have focused on specific issues such as the 
use of the management company passport or on the taxation of fund mergers. 

In  March  2007,  DG  Markt  published  a  working  document  (exposure  draft)  presenting  its 
initial  orientations  on  the  possible  shape  of  the  amendments  to  the  UCITS  Directive.  The 
overview document published at the same time is provided in annex 3. 

A  well-attended  open  hearing  on  26th  April  provided  stakeholders'  first  reaction  to  the 
exposure draft proposals. A summary of the open hearing discussions was published shortly 
afterwards55.  Written  reactions  to  the  working  document  were  published  on  26th  July.  A 
summary  of  the  responses  were  published  on  7th  September.  Details  on  the  main  comments 
received  per  topic  from  respondents  are  provided  in  the  detailed  IA  fiches  annexed  to  this 
report.  

Table : Compliance with consultations minimum standards56 

Clear content 

Target 
groups 

Publication 

Time 
limits 

Feedback 

AM expert 
group report 

Yes (list of 
recommendations) 

Green Paper 

Yes (list of 
questions) 

Market 
Efficiency 
expert group 
report 

Yes 
(recommendations 
per topic) 

•  Regulator

s 

•  Investors 

•  Industry 

•  Regulator

s 

•  Investors 

•  Industry 

•  Regulator

s 

•  Investors 

•  Industry 

Internet 

06/05 – 
10/09 

Published in 
Nov. 2004 

Internet + 
hard copies 
distributed at 
open hearings 

Internet + 
hard copies 
distributed at 
open hearings 

12/07 – 
15/11 

Published 
on 13/02/06 

04/07 – 
20/09 

Published 
on 16/11/06 

Exposure 
draft 

Yes (possible 
drafting of legal 
provisions) 

•  Regulator

s 

Internet 

22/03 – 
15/06 

Published 
on 07/09/07 

53 
54 
55 
56 

Committee of European Securities Regulators. 
European Fund and Asset Management Association. 
This can be consulted at http://ec.europa.eu/internal_market/securities/ucits/index_en.htm#hearing 
On  the  based  of  the  recommendations  in  the  Commission  Communication  "Towards  a  reinforced 
culture  of  consultation  and  dialogue  -  General  principles  and  minimum  standards  for  consultation  of 
interested parties by the Commission" COM (2002) 704 final 

EN 

39 

   EN 

 
 
                                                 
•  Investors 

•  Industry 

Expertise  

(1) 

Studies:  

In order to complement internal research and public consultations' results with empirical data, 
two studies were launched in 2005:  

–  The  "Current  trends  in  the  European  Asset  Management  industry"  study  aimed  at 
providing  historical  series  of  asset  management  related  data  relevant  to  understand  the 
functioning of the industry and how it has been evolving over the years. It provided useful 
data to develop the 'context' section of the WPIA. 

–  The "Potential cost savings in a fully integrated European investment fund market" study 
aimed to present a detailed comparative description of the main sources of cost in the EU 
investment  fund  value-chain  and  an  estimation  of  the  savings  that  could  be  achieved  by 
enhanced market integration. This study helped to quantify the effect of several barriers to 
the single market for funds and provided some estimates used in the 'assessment of options' 
section of the WPIA. 

(2) 

Expert Groups:  

Expert groups were established at two stages of the process: 

–  Independent  expert  group  on  the  review  of  the  FSAP  (asset  management)  in  2004.  This 
group  identified  a  series  of  actions  needed  in  order  to  improve  the  functioning  of  the 
European fund market. Their work was key for the development of the analysis that led to 
the Green Paper. 

–  Two  expert  groups  were  set  in  2006  to  further  explore  the  need  and  form  of  possible 
measures  with  regards  to  market  efficiency  and  alternative  investments  (namely  private 
equity  and  hedge  funds).  The  first  group  advised  on  how  to  give  effect  to  some  of  the 
actions recommended by the asset management expert group (notably those considered as 
priorities  by  stakeholders  during  the  consultations  on  the  2004  expert  report  and  on  the 
Green  Paper).  Most  of  them  are  covered  by  the  legislative  measures  announced  in  the 
White Paper and are dealt with in this report. The group on alternative investments helped 
in  developing  an  understanding  about  some  forms  of  collective  investment  schemes  that 
are growing outside the UCITS framework. 

(3) 

Committee of European Securities Regulators (CESR): 

(Although  the  UCITS  Directive  as  a  whole  is  not  a  so-called  Lamfalussy  Directive  some 
"Lamfalussy"  elements  were  introduced  with  the  2001  amendments.  These  allow  for 
clarifications  of  definitions  to  be  developed  through  (level  2)  implementing  legislation, 
adopted via comitology procedures. For details on the Lamfalussy approach to legislation see 
Annex 4. ) 

EN 

40 

   EN 

 
 
CESR  has  contributed  to  and  supported  the  Commission's  efforts  to  improve  the  legislative 
framework for UCITS with various consultations and advice on different subjects as well as 
with fruitful discussions and contributions. Concretely, CESR has provided the Commission 
with advice on UCITS eligible assets and adopted guidelines on the transitional provisions of 
the  2001  changes  to  the  Directive  and  on  the  notification  procedure.  The  work  on  eligible 
assets was translated into implementing measures (adopted in March 2007). The notification 
guidelines represent a first step towards a more streamlined procedure. Their effectiveness is 
however restricted by their voluntary nature and by the fact that they were developed within 
the limits of the existing Directive (and can therefore not solve the problems inherent to the 
Directive's current drafting). CESR is currently working on the contents of the new simplified 
prospectus  (please  see  'key  investor  information'  section).  This  is  an  important  preparatory 
effort ahead of the level 2 work that would be required once changes to the Directive in this 
area are introduced.  

In April 2007, Commission services presented their exposure draft to CESR members. One of 
the  main  conclusions  of  the  discussion  was  that  substantial  work  still  needed  to  be  done  in 
order  to  enhance  supervisory  trust  and  cooperation.  Exchanges  within  CESR  on  this  issue 
during the following months have importantly contributed to the development of the relevant 
provisions  of  the  draft  legislative  proposal,  notably  in  the  areas  of  notification  and 
management company passport. 

(4) 

Financial Services Consumer Group, FIN-USE 

One of the challenges faced in financial services consultations (particularly when the subject 
is  as  technical  as  in  the  UCITS  case)  is  the  risk  of  not  receiving  the  views  of  all  relevant 
stakeholders.  In  fact,  investors  representatives'  responses  are  often  less  numerous  than 
industry's  ones.  In  order  to  reinforce  the  input  of  investors  into  the  process,  Commission 
services have worked closely with several groups representing investors' interest. 

Thus,  the  Green  Paper  and  the  Commission's  preparatory  work  were  presented  in  the  first 
meeting of the Financial Services Consumer Group57 in June 2006. The White Paper and its 
IA  was  presented  to  the  group  in  December  2006.  Members  of  the  group  were  invited  to 
provide the Commission with their views. 

Commission  services  have  also  actively  sought  the  input  of  FIN-USE,  the  Forum  of  user 
experts  in  the  area  of  financial  services.  Participation  to  FIN-USE  meetings  (in  December 
2005, June 2006, December 2006, June 2007 and July 2007) has aimed to present experts the 
developments in the asset management area, encourage their contribution to the process and 
exchange  views  on  the  proposals.  FIN-USE  produced  responses  to  the  consultation  on  the 
Asset  Management  expert  group  report,  the  Green  Paper  on  investment  funds,  the  market 
efficiency and alternative investments expert groups' reports and the exposure draft. 

(5) 

IA Steering Group  

A steering group was established in February 2006 in the framework of the WPIA. It was re-
confirmed  early  in  2007  to  assist  in  the  preparation  of  this  report.  Colleagues  from 
Directorates General Competition, Economic and Financial Affairs, Enterprise and Industry, 

57 

The  Financial  Services  Consumer  Group  (FSCG)  is  a  sub-group  of  the  already  existing  European 
Consumer Consultative Group (ECCG). The overall objective of the FSCG is to ensure that consumer 
interests are properly taken into account in EU financial services policy development. 

EN 

41 

   EN 

 
                                                 
Health and Consumer Protection, Internal Market and Services, Taxation and Customs Union, 
and the Secretariat General participated in the discussions. The Group met three times in 2007 
ahead of the finalisation of this report. 

EN 

42 

   EN 

 
ANNEX 2: 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 

43 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 3: The exposure draft's overview 

WORKING DOCUMENT DG MARKT SERVICES 

Initial orientations of possible adjustments  
to UCITS Directive (85/611/EEC) 

Overview of key features 

Important note: This document is a working document of DG MARKT services which is 
published for discussion purposes only. It presents DG MARKT services preliminary 
reflections on possible future adjustments to the UCITS Directive. It does not necessarily 
reflect the views of the European Commission. The Commission retains full autonomy and 
discretion as regards the content of any subsequent legislative proposal. 

EN 

44 

   EN 

 
1. 

GUIDE TO CONSULTATION PROCESS AND MATERIAL 

Initial orientations of possible adjustments to UCITS Directive (85/611/EEC) 

The  following  extensive  body  of  material  has  been  prepared  as  the  basis  for  public 
consultation  on  the  form  of  future  possible  adjustments  to  the  UCITS  Directive.  The  basic 
case  for  introducing  these  changes  was  analysed  in  the  Commission  White  Paper  on 
investment  funds  and  the  supporting  impact  assessment.  The  White  Paper  set  out  the 
Commission's view that changes to the UCITS Directive were urgently needed: 

(6) 

(7) 

(8) 

(9) 

To remove administrative obstacles and delays to the cross-border marketing of funds 
through overhaul of the current UCITS notification procedure; 

To allow fund managers to manage funds which are domiciled in other Member States 
(management company passport); 

To facilitate consolidation through fund mergers; 

To  provide  for  centralised  management  of  assets  gathered  through  local  funds  by 
allowing master-feeder structures; 

(10)  To refocus and improve the quality and usefulness of product disclosures provided to 
retail  investors  when  considering  investment  in  UCITS  (reworking  of  Simplified 
Prospectus); 

(11)  To  strengthen  supervisory  powers  and  supervisory  cooperation  to  ensure  effective 

oversight of the increasingly integrated European fund market.  

The purpose of the present consultation is to gather feedback on preliminary thinking of DG 
MARKT  services  on  how  to  give  effect  to  these  objectives.  This  material  is  preliminary  in 
nature  and  without  prejudice  to  any  decision  that  the  Commission  as  a  whole  may 
subsequently  adopt  in  respect  of  these  issues.  The  Commission  retains  full  autonomy  and 
initiative  in  determining  the  form  and  content  of  its  ultimate  proposal.  The  consultation 
exercise  should  provide  technical  and  hands-on  insight  as  regards  the  usefulness  and 
practicability  of  the  envisaged  possible  adjustments  which  DG  MARKT  services  and 
Commission as a whole can take into account when preparing its formal legislative proposal. 

The following documents are published as the basis for the consultation: 

–  The present overview document which provides a brief statement of the desired outcome 
from  the  changes,  a  summary  presentation  of  the  guiding  principles  and  content  of  the 
envisaged adjustments. 

–  For  each  of  the  envisaged  changes,  a  detailed  presentation  of  the  envisaged  possible 
adjustments is published. This presents the main options considered for realising the stated 
objective.  It  undertakes  a  preliminary  analysis  of  these  options  from  a  cost-effectiveness 
and investor protection perspective. It sets out the working assumptions which inform the 
envisaged  adjustments.  It  also  includes  a  more  detailed  presentation  of  the  shape  of 
possible provisions supported by free-format commentary. 

In publishing this material, the services of DG MARKT hope to receive considered feedback 
and views from interested parties in respect of the following  

EN 

45 

   EN 

 
–  the design and scope of the preliminary approach: do the envisaged adjustments represent 

an effective way of achieving the desired result?  

–  the coherence of the envisaged adjustments with the overall UCITS framework and related 

legislation; 

–  the appropriate borderline between high level principles which should be enshrined in the 
modified UCITS Directive and more detailed measures which should be adopted through 
implementing legislation; 

–  any unintended consequences for stakeholders – particularly investors; 

–  the cost-effectiveness of the envisaged adjustments. 

Each  working  document  includes  a  number  of  specific  questions  on  which  views  would  be 
welcome. The basic case for proceeding with the envisaged adjustments has been established 
in the White Paper and supporting impact assessment. However, respondents may also wish to 
comment  on  the  case  for/against  continuing  with  the  envisaged  adjustments  having  had  an 
opportunity to consider the possible concrete measures for giving effect to them. 

The deadline for responses to the initial orientations is 15 June 2007. Feedback should be 
sent to: 

–  e-mail: markt-ucits-exposure-draft@ec.europa.eu.  

–  post:  MARKT  G4,  Directorate-General  for  the  Internal  Market  and  Services,  European 

Commission, B-1049 Brussels, Belgium. 

A public hearing on these initial orientations will be held in Brussels on 26 April 2007. 

In the light of reactions to the initial orientations and views expressed at the open hearing, DG 
MARKT  will  review  its  impact  assessment  and  cost-effectiveness  analysis,  and  prepare  its 
draft  Commission  proposal  for  legislation.  The  Commission  proposal  will  be  finalised 
towards the end of 2007/early 2008. 

2. 

INTRODUCTION: 

The White Paper on investment funds concluded that there were no grounds, at this stage, to 
revise the scope of UCITS Directive or overhaul rules on investment policy. Any decision on 
the need for a wider reshaping of the Directive is deferred pending the results of systematic 
analysis and preparation. Instead, the short-term focus should be on boosting efficiency and 
facilitating  market-driven  restructuring  of  the  investment  fund  market  through  targeted 
amendments to the Directive.  

In the White Paper, the Commission undertook to prepare a set of targeted modifications to 
the UCITS Directive to: (1). Remove delays and administrative obstacles to placing funds on 
other  EU  markets;  (2).  Permit  fund  mergers;  (3).  Allow  pooled  management  of  assets 
gathered  by  different  funds;  (4).  Enable  fund  managers  to  manage  funds  in  other  Member 
States;  (5).  Simplify  and  improve  product  disclosures  and  (6).  Strengthen  supervisory 
cooperation mechanisms.  

The first 4 sets of adjustment should enable fund managers and other actors to better exploit 
business  opportunities  across  the  single  market.  Fund  managers  will  be  able  to  restructure 
their  fund  complexes  (via  mergers  and  pooling),  and  export  their  funds  and  their  services 

EN 

46 

   EN 

 
more  easily.  In  the  case  of  the  Simplified  Prospectus,  the  objective  is  to  refocus  and  scale 
back product disclosures so that they are more relevant and meaningful for investors.  

DG  MARKT  services'  preparatory  work  is  based  on  extensive  preparation  and  lengthy 
consultation of all stakeholders. This includes responses to the Green and White Papers (2005, 
2006),  the  work  of  the  expert  group  on  market  efficiency  (2006);  two  open  hearings  (2005, 
2006), workshops, studies, ad hoc meetings with industry, regulators and investors, as well as 
ad hoc fact finding missions.  

DG  MARKT  services  believe  that  this  work  can  provide  the  basis  for  extensive  use  of 
relevant  new  single  market  freedoms.  However,  strong  investor  protection  safeguards  are 
foreseen to ensure continued smooth functioning and sustained investor confidence in UCITS 
funds.  DG  MARKT  services  also  contemplate  stronger  provisions  on  cross-border 
enforcement and cooperation among regulators to limit the risk that cross-border operations or 
structures operate to the detriment of investor or markets.  

EN 

47 

   EN 

 
3. 

THE FUND PASSPORT (NOTIFICATION PROCEDURE): 

Strategic objective: Ensure the smooth functioning of the product passport by eliminating 
administrative obstacles, delays and uncertainty to the marketing of UCITS in host Member 
States.  

3.1 

Why should the cross-border pass-porting procedure be reviewed? 

Procedures  for  cross-border  marketing  are  cumbersome,  costly  and  subject  to  undue 
supervisory interference. Directive deadlines for completing review of fund notifications have 
frequently  been  exceeded.  Difficulties  have  also  taken  the  form  of  intrusive  checks  of  the 
UCITS during the notification procedure, additional information requirements or requests to 
modify  documentation  or  certain  fund  features  (e.g.  name/denomination  of  fund).  These 
difficulties undermine the effectiveness and credibility of the fund passport. 

The types of control currently undertaken by host competent authorities do not materially add 
to the protection of investors or the achievement of other policy objectives. The soundness of 
the product stems from the compliance of the fund and its manager with the requirements of 
the  Directive,  as  already  certified  by  the  home  country  authorities.  Protracted  delays  and 
administrative  impediments  associated  with  the  current  notification  procedure  destroy  value 
and impose significant opportunity costs. 

DG MARKT services envisage a complete overhaul of the notification procedure. This should 
significantly  reduce  delays  and  transform  the  procedure  into  a  straightforward  regulator-to-
regulator filing. Under the modified procedure, a host Member State would have no ex ante 
grounds  on  which  to  prevent  a  UCITS  authorised  in  another  Member  State  from  being 
marketed  on  its  territory.  The  new  procedure  would  rely  heavily  on  a  regulator-to-regulator 
approach,  as  in  the  Prospectus  Directive.  The  UCITS  would  submit  a  defined  set  of 
documents to its home authority. The latter would be responsible for verifying completeness 
of this information, certifying that the UCITS is duly authorised and transmitting the specified 
information to relevant host Member State counterparts. Information covered by the previous 
'marketing  arrangements'  document  would  now  be  subsumed  in  a  notification  letter.  The 
content and form of local marketing information would be subject to harmonisation at level 2. 
The  right  to  place  UCITS  on  the  market  of  a  host  Member  State  would  become  effective  3 
days after transmission of required documents by the authorities of the UCITS home Member 
State to those of the host Member State.  

3.2 

Initial orientations for work on cross-border fund notifications: 

1. 

2. 

In  the  event  that  a  fund  manager  wishes  to  market  units  of  its  UCITS  in  another 
Member  State,  it  should  be  required  to  submit  a  set  of  relevant  information  and 
documents to its home competent authorities. This set of information should include 
the notification letter with the description of arrangements for marketing (cf. section 
3 below).  

The  documentation  to  be  filed  should  include  a  translation  of  key  investor 
information  (cf.  section  on  envisaged  new  approach  on  simplified  prospectus/ 
product disclosure) into the local language of the target host Member States. These 
translations  should  be  prepared  under  the  responsibility  of  the  UCITS.  Other 
documents which should be filed for the purposes of notification (prospectus, rules of 
the  fund  or  instruments  of  incorporation,  annual  report)  could  be  provided  in  the 

EN 

48 

   EN 

 
3. 

4. 

5. 

6. 

7. 

local  language  of  the  target  host  Member  States  or  a  language  whose  use  is 
customary  in  the  sphere  of  international  finance.  This  language  regime  for  UCITS 
notification is modelled on the approach laid down in the Prospectus Directive. 

The notification letter should provide, inter alia, details relating to local subscription 
and redemption facilities for local unit-holders, paying agent facilities, facilities for 
distribution  of  obligatory  disclosures  to  investors,  general  information  about 
proposed  distribution  channels  and  a  contact  point  where  list  of  distributors  can  be 
obtained.  This  letter  should  be  produced  in  the  language  common  in  the  sphere  of 
international  finance.  Envisaged  adjustments  would  provide  for  the  adoption  of 
detailed implementing legislation to harmonise its scope and form.  

The authorities of a home Member State should verify that no document is missing 
before transmitting it to the host authorities. They should enclose in the information 
package  to  be  sent  to  the  host  Member  State  the  attestation  that  the  fund  is  duly 
authorised as a UCITS and obligatory disclosure documents (documents already filed 
with authorities of UCITS home Member State according to its national procedures 
including  prospectus,  fund  rules  or  instruments  of  incorporation,  key  investor 
information on product, financial reports).  

The fund manager could begin the marketing of the UCITS in the host Member State 
three days after the transmission of the notification by the home authorities. 

The authorities of a host Member State would have no grounds to ex ante oppose the 
marketing  of  duly  authorised  UCITS  in  the  host  Member  State.  They  could  check 
and  enforce  compliance  with  applicable  national  rules  on  an  ongoing  basis.  The 
Directive would be modified to confer on host authorities the power to intervene and 
suspend  marketing  of  a  UCITS  under  certain  circumstances.  In  particular  the  host 
Member State  competent  authorities would be able to invoke emergency powers in 
the  event  of  clear  and  demonstrable  ground  that  a  UCITS  domiciled  in  another 
Member State and marketing its units within its territory is in breach of the Directive, 
and  a  potential  source  of  investor  detriment.  The  use  of  these  emergency  powers 
would  be  subject  to  necessary  checks  and  balances  and  review  by  the  European 
Commission (see Section 8 on supervisory powers/cooperation). 

Any  concerns  on  the  part  of  host  country  authorities  relating  to  compliance  of 
proposed  organisation  of  advertising  or  distribution  methods  with  non-harmonised 
provisions of national law should not constitute a reason to refuse ex ante the right to 
place the UCITS on the host country market.  

EN 

49 

   EN 

 
4. 

FUND MERGERS: 

Strategic  objective:  Lay  down  clear  and  common  requirements  and  procedures  for  funds 
wishing  to  merge,  so  as  to  ensure  effective  protection  of  the  rights  of  unit-holders  in  the 
merging/dissolving fund(s) and remove any regulatory grounds for competent authorities to 
object to the proposed merger besides the fulfilment of such requirements and procedures. 

4.1 

Why should the UCITS Directive provide for mergers of UCITS funds?  

54% of European funds manage less than € 50 million of assets. The average European fund 
size is less than one fifth of that of an American fund. The cost of running and selling these 
micro-funds  is  significantly  higher  than  for  larger  funds.  Recent  research  found  that,  in  a 
leading European fund domicile, the average TER of a fund with assets under US $ 5 million 
was more than double that of a fund with over US $ 250 million. Annual scale savings of up 
to 6 billion€ have identified by other studies in this area. 

In order to facilitate the rationalisation of the fund landscape and to foster economies of scale 
the exposure draft includes provisions to create a framework for fund mergers.  

4.2 

Initial orientations for work on fund mergers: 

1. 

2. 

3. 

4. 

5. 

Scope: The new regime would require Member States to provide for the possibility to 
merge/amalgamate two UCITS funds (or investment compartments thereof) through 
three typical methods of merger/amalgamation ((i) merger by way absorption or (ii) 
by creation of a new fund, which are techniques mainly used in civil law countries; 
or  (iii)  merger  by  way  of  a  scheme  of  amalgamation,  which  is  widely  used  in 
common  law  jurisdictions).  Other  national  techniques  used  for  mergers  between 
funds  remain  untouched  by  the  proposal  and  would  remain  valid  in  a  domestic 
context. 

Coverage  of  cross-border  and  domestic  mergers:  it  is  considered  preferable  not  to 
limit the scope of the envisaged mergers provisions to mergers of UCITS established 
in  different  Member  States.  Given  the  increasingly  cross-border  investor  base  of 
many UCITS, a merger between two widely pass-ported funds domiciled in a single 
Member State may have implications for a large population of investors outside that 
country. Consequently, DG MARKT foresees applying the envisaged measures and 
related investor safeguards to both cross-border and domestic mergers. 

Both  the  merging/dissolving  and  receiving  fund  should  be  authorised  as  UCITS 
before the merger can proceed. In addition,  the  receiving  fund  must  be  notified  for 
marketing in each Member State where the merging/dissolving fund was notified. 

There would be no requirement/restriction as  regards  comparability  or  similarity  of 
the investment policies of the merging/dissolving and receiving fund. 

Regulatory approval: The envisaged provisions foresee that the competent authorities 
of  the  merging/dissolving  fund(s)  would  have  to  give  their  approval  before  the 
merger could be presented to unit-holders (including for a vote where this is required 
under national law). The competent authorities could only refuse this approval in the 
the  envisaged  measures.  They  should  grant 
case  of  non-compliance  with 

EN 

50 

   EN 

 
6. 

7. 

8. 

9. 

authorisation  within  15  working  days  of  submission  of  a  complete  file  by  the 
merging/dissolving fund(s). 

The competent authorities of the receiving fund would not be required to approve the 
merger  and  could  not  veto  the  operation.  Fund  mergers  are  expected  to  have  less 
significant  consequences  for  the  unit-holders  of  the  receiving  fund  (principal  risk 
would be dilution of fund performance through increased transaction costs associated 
with portfolio rebalancing: this economic impact can be managed and monitored in 
other ways, in particular through adequate disclosure to unit-holders by the receiving 
fund and the latter's right to exit the fund free of charge). 

The  competent  authorities  of  the  merging/dissolving  fund(s)  would  receive  the 
common  draft  terms  of  the  merger,  the  envisaged  disclosure  to  unit-holders  of  the 
merging/dissolving 
the 
the  written  approval  of 
merging/dissolving fund and a draft  report  of an independent auditor, as  a basis  on 
which  to  grant  their  approval.  The  depositary  should  ensure  that  the  terms  of  the 
merger  are  in  conformity  with  the  law;  the  independent  auditor  should  draw  up  a 
valuation report.  

the  depositary  of 

fund, 

Investor information: Investors of the merging/dissolving fund would have the right 
to receive  all  relevant  information  regarding the proposed merger in order to allow 
them  to  take  an  informed  decision  on  the  impact  of  the  proposed  merger  on  their 
individual  situation.  In  certain  cases,  investors  of  the  receiving  fund  would  also  be 
entitled to receive information about the merger. 

Investor  voting  rights:  Whether  or  not  investors  have  the  right  to  vote  on  the 
proposed  merger  would  be  determined  by  reference  to  national  law.  Where  such  a 
vote  is  provided,  it  is  envisaged  to  impose  a  maximum  limit  on  the  percentage  of 
votes  in  favour  required  (i.e.  maximum  75%  of  the  votes  cast)  in  order  to  prevent 
excessively demanding voting thresholds from impeding merger completion.  

10. 

Investors  would  have  the  possibility  to  exit  the  merging/dissolving  fund  without 
having  to  bear  redemption  or  any  other  type  of  charges  prior  to  merger 
completion/within a fixed period of merger completion. In certain cases, investors of 
the receiving fund would have the same right. 

11. 

Legal, advisory or administrative costs related to the preparation and completion of 
the merger should not be borne, directly or indirectly by unit-holders. 

EN 

51 

   EN 

 
Diagram: Main steps of the possible merger procedure 

Decision on merger by 
management of the 
UCITS involved 

Depositary 
approval 

Auditor 
draft report

Submission of merger 
dossier to the dissolving 
UCITS' competent 
authority  

Approval by 
competent authority

Information to 
investors

vote 

n
i

n
e
e
s
e
r
o
f

e
t
o
v

o
N

n
o
i
t
a
l
s
i
g
e
l

l
a
n
o
i
t
a
n

Possibility  for 
to 
investors 
free 
redeem 
of charge 

Merger 

 (depositaries responsible 
for transfer of assets and 
exchange of shares) 

EN 

52 

   EN 

 
 
 
 
 
 
 
 
5. 

ASSET POOLING/MASTER-FEEDER STRUCTURES: 

Strategic objective: Allow several funds (feeder funds) to pool their assets in a single fund 
(master fund). 

5.1 

Why should the UCITS Directive provide for asset pooling? 

Proliferation  of  funds  of  a  small  size  creates  a  heavy  burden  on  the  fund  industry  and 
ultimately investors. Economies of scale are not realised and inefficiencies are passed on to 
investors. Increasing fund size through mergers is not the only route to achieve economies of 
scale.  Nor  is  it  necessarily  the  preferred  route  for  fund  managers  who  wish  to  adapt  fund 
features  to  local  investor  preferences  (e.g.  charging  structure).  Asset  pooling  may  provide  a 
more  appropriate  solution.  However,  fund  pooling  is  currently  ruled  out  by  the  Directive's 
diversification  rules.  Master-feeder  structures  should  allow  the  following  benefits  to  be 
realised: 

•  Economies of scale (especially for small funds with high charges); 

•  Reduction of charges or better performance for the investor as a result of scale savings; 

•  Centralisation  of  core  investment  management  in  a  single  high-performing  team  (either 
within the same financial group or among different financial groups (“white labelling”)); 

•  Allowing  a  financial  group  to  commingle  similar  funds  designed  for  different  types  of 

investors (institutional or retail) and with different fee structures in one entity  

•  Local presence of the feeder funds providing advantages in terms of servicing client needs, 

and greater tax-efficiency for the end-investor; 

•  Two merging financial groups may pool similar funds of both groups in one master fund 

(and thereby reduce management costs) while preserving the different fund labels; 

•  Complementary economies of scale alternative to fund mergers.  

DG  MARKT  services  have  focussed  on  traditional  master-feeder  structures.  The  possibility 
for a feeder to invest into several masters has  been examined but rejected for the following 
reasons. There is limited practical experience with and demand for that approach. Supervision 
would become more complex and the prevention of operational risks or possible investment 
policy breaches more difficult. Such a regime would also be hard to distinguish for legal and 
supervisory purposes from the existing UCITS 'fund of funds' regime. DG MARKT services 
have also decided not to pursue further the technique of virtual pooling at this stage. Further 
research  has  highlighted  potentially  important  cross-liability  and  other  investor  protection 
concerns.  This  technique  is  not  widely  used  –  and  there  are  supervisory  concerns  about  its 
application in cross-border contexts. 

5.2 

Initial orientations for work on master-feeder structures: 

1. 

While  the  general  UCITS  prohibition  on  funds  investing  solely  in  another  fund 
would  remain,  a  special  regime  should  be  created  for  master-feeder  structures 
complying  with  a  new  set  of  requirements.  The  competent  authorities  should  not 
refuse  authorisation  to  any  proposed  master-feeder  structure  meeting  these 
requirements  –  including  situations  where  the  master  or  one  or  more  feeders  is 
located in another Member State. 

EN 

53 

   EN 

 
2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

11. 

The  feeder  fund  should  invest  almost  all  (at  least  85%)  of  its  assets  into  a  single 
master fund. The investment of a feeder fund in more than one master is prohibited. 
Both funds should consequently have the same/near-identical investment policies. 

The  feeder  fund  would  have  no/limited  investment policy role  of  its own. It would 
have  some  limited  possibility  to  use  derivatives  to  modify  fund  performance  with 
respect to the master fund or to hedge currency risks. It has some power to use cash 
to satisfy redemptions or meet other requirements. 

Both master and feeder are UCITS. Both master and feeder must be fully compliant 
with all provisions of the UCITS Directive – as regards the provisions governing risk 
management  controls,  governance  structures,  appointment  of  depositaries  etc.  It 
would  be  possible  for  master  and  feeder  UCITS  to  appoint  the  same  management 
board/trustees,  and  employ  the  same  management  company  (including  on  the  basis 
of  the  management  company  passport),  depositary  (where  domiciled  in  same 
jurisdiction) and auditor. 

Provided the envisaged provisions are complied with, the investment of a feeder into 
a master would have to be permitted by competent authorities. 

The competent authorities should allow existing UCITS to be converted into a feeder 
UCITS  –  subject  to  requirements  to  inform  investors  of  the  pending  change  in 
investment policy and offering them the right to redeem free of charge. 

The  investment  of  a  feeder  into  a  master  would  not  affect  the  obligations, 
responsibility and liability of the feeder, or its management company/depositary. In 
particular,  the  feeder  would  need  to  comply  with  its  obligations  vis-à-vis  its 
investors.  

Information  to  the  feeder's  investors  should  clearly  explain  the  implications  of 
investing  into  the  master  from  both  an  investment  policy  and  a  fees  point  of  view. 
Disclosures about feeder investment policy and costs should be harmonised as part of 
the  work  on  key 
(see  section  7  on  simplified 
prospectus/investor disclosures). 

information  disclosures 

The master fund would only need to be authorised as a normal UCITS: no specific 
authorisation is required to enable it to assume the role of master fund. 

The master can receive assets from non-UCITS asset gathering vehicles, institutional 
or individual investors: these non-UCITS investors in the master fund would not be 
subject to any harmonised requirements under the UCITS Directive. 

the  master  should 
Regulatory  co-operation:  The  competent  authorities  of 
communicate without delay any decision or measure taken with regards to the master 
to  each  of  the  feeders'  competent  authorities  (as  that  may  have  an  impact  on  the 
feeder). 

EN 

54 

   EN 

 
6. 

THE MANAGEMENT COMPANY PASSPORT: 

Strategic  objective:  to  allow  fund  managers  to  manage  funds  (of  either  contractual  or 
corporate  type)  domiciled  in  another  Member  State,  without  generating  fiscal  or 
supervisory uncertainty which might undermine the effective oversight or tax-efficiency of 
the management company/fund chain. 

6.1 

Why should the UCITS Directive provide for an effective management company 
passport? 

Currently,  management  groups  must  establish  a  fully  functional  management  company  in 
each  country  where  they  domicile  their  funds.  This  considerably  adds  cost  and  hinders 
specialisation gains. The White Paper impact assessment estimated savings of € 381 to €762 
million/year  if  each  asset  management  group  would  be  allowed  to  operate  from  only  one 
location. 

The White Paper and supporting impact assessment concluded that the management company 
passport was  a worthwhile  objective, and that the Directive should be  amended  to  that end. 
The White Paper and impact assessment highlighted the need to give further consideration to 
definition  of  the  scope  of  the  management  company  passport.  In  particular,  should  the 
management  company  be  allowed  to  provide  the  full  range  of  collective  portfolio 
management services on a remote basis or should some functions be considered as an integral 
part of the fund administration/operation? Advocates of the first approach argue that only the 
right to passport the full range of collective portfolio management activities would allow full 
exploitation of the benefits of the single market. However, it has also been observed that such 
an  approach  could  empty  the  fund  domicile  of  all  substance.  This  could  have  detrimental 
consequences on two counts: 1). It could undermine the capacity of the fund supervisor and 
depositary to assume certain responsibilities with respect to the administration and operation 
of  the  fund;  2).  It  could  lead  to  the  tax  authorities  of  the  management  company  domiciles 
claiming jurisdiction over the income and revenues of the fund, in addition to taxation in the 
fund domicile itself.  

In  the  exposure  draft,  DG  MARKT  services  seek  to  provide  clear  and  operational  tests  to 
identify the respective domiciles of the management company and of the fund in cases where 
the  management  company  passport  is  employed.  Without  that  clarity,  the  jurisdictional 
uncertainty  which  has  sabotaged  previous  attempts  to  introduce  a  management  company 
passport would persist.  

DG  MARKT  services  believe  that  the  envisaged  approach  would  also  limit  the  danger  of 
overlapping  tax  jurisdictions,  i.e.  of  the  fund  and  its  management  being  both  taxed  in  their 
respective domiciles. This risk arises only in respect of non-fiscally transparent funds (some 
contractual  funds,  trusts  and  partnerships):  funds  of  a  corporate  type  and  many  contractual 
funds  from  a  wide  range  of  jurisdictions  would  not  be  subject  to  the  risk  of  competing  tax 
claims. Where a residual risk remains, it would be for the different national tax authorities to 
align their taxation policy with the regulatory approach presented below. Should they fail to 
do so, fund managers in their jurisdiction would not be able to manage some types (of fiscally 
non-transparent)  structure  in  other  Member  States.  It  then  falls  to  each  Member  State  to 
ensure that its tax policy does not deprive its fund management industry of the opportunities 
offered  by  the  management  company  passport.  Experience  from  related  sectors  (e.g. 
investment manager exemption  in UK for overseas non-transparent structures) demonstrates 
that tax authorities can be responsive to these considerations. 

EN 

55 

   EN 

 
6.2 

Initial orientations for management company passport: 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

58 

The  right  for  the  fund  manager  to  manage  funds  of  corporate  and  contractual  type 
which  are  domiciled  in  other  Member  States  would  be  clearly  enshrined.  The 
Directive  would  also  provide  for  the  corresponding  right  for  a  UCITS  to 
appoint/designate a management company in another Member State. 

Clear  tests  would  be  introduced  to  determine  the  domicile  of  the  management 
company and of the fund. Clear tests to determine jurisdiction would be necessary to 
avoid  uncertainty  over  the  relevant  tax  or  regulatory  jurisdictions.  For  the  same 
reasons,  the  tests  should  also  ensure  that  there  is  'substance'  in  the  fund  domicile. 
Fund  domicile  would  be  determined  by  reference  to  the  country  under  whose  laws 
the fund is constituted. It would also be stipulated that the shareholder register and 
that reporting of valuations should be maintained/completed in this country. 

UCITS  management  companies  would  be  allowed  to  undertake  the  full  range  of 
collective  portfolio  management  services  in  respect  of  funds  domiciled  in  other 
Member States. No changes are envisaged to the list of functions that are covered by 
collective  portfolio  management  (apart  from  decision  to  clarify  that  this  list  is 
exhaustive). 

However,  where  a  management  company  manages  a  fund  domiciled  in  another 
Member State via the freedom to provide services, it should ensure that performance 
of  activities  related  to  maintenance  of  shareholder  register  and/or  completion/filing 
of  fund  valuation  reports  actually/physically  take  place  in  the  Member  State  of  the 
fund, and subject to direct reporting to the local competent authorities. It could not 
perform  these  functions  on  a  remote  basis.  However,  it  could  undertake  these 
the  freedom  of 
through 
activities 
establishment under the management company passport) or delegation arrangements.  

through  branching  (i.e. 

the  exercise  of 

The depositary would be domiciled in the Member State where the UCITS is located, 
as is currently the case. 

Management companies would be subject to a notification procedure when wishing 
to managing funds in another Member State (on a remote basis or via branches). The 
management  company  home  competent  authorities  should  remain  exclusively 
responsible for those services provided on a remote basis58. This procedure would be 
distinct from and not cumulated with the separate procedure for marketing UCITS in 
another Member State.  

The  provisions  governing  co-operation  between  regulators  would  be  reinforced  to 
underpin  the  effective  and  seamless  oversight  of  situations  where  the  fund  and  its 
manager  are  located  in  different  Member  States.  The  envisaged  adjustments  would 
provide  for  mechanism  for  competent  authorities 
to  carry  out  on-the-spot 
verifications in the other Member State; to enumerate strictly any grounds to refuse 
cooperation; and to stipulate conditions for competent authorities to take emergency 
measures in the event of demonstrable concerns.  

With the exception of the rules of conduct applicable to individual portfolio management, investment 
advice  and  custody  when  performed  by  the  management  company  via  a  branch,  where  the  Directive 
confers certain powers to the host Member State (article 6b(3) and 6c(3)). 

EN 

56 

   EN 

 
                                                 
7. 

SIMPLIFIED PROSPECTUS/PRODUCT DISCLOSURES: 

Strategic  objective:  Ensure  that  product  disclosures  made  by  fund  managers  provide 
relevant  and  meaningful  information  to  potential  investors;  reconfigure  these  disclosures 
so that they can be used in the different sales channels through which investors buy funds; 
remove unnecessary legal or regulatory information which create information overload and 
excess compliance cost.  

7.1 

Why does the Simplified Prospectus need to be reviewed? 

The  Simplified  Prospectus  was  meant  to  provide  investors  with  concise  and  understandable 
information about the investment policy, risks and associated charges of a fund. However, it 
has suffered from national gold-plating and divergent implementation. The result is a lengthy 
user-unfriendly  document  that  is  a  source  of  costs  to  the  industry  and  of  limited  utility  to 
investors.  

The exposure draft introduces a completely new approach. The Simplified Prospectus is now 
referred  to  as  "key  investor  information"  -  not  necessarily  to  be  embodied  in  a  specific 
document. Level 1 provides for principles only. Further details on content and format are to 
be  decided  at  Level  2,  hence  Schedule  C  of  the  current  Directive  (contents  of  the  SP)  is 
deleted. 

The  approach  seeks  to  adapt  product  disclosures  to  take  account  of  the  different  means 
through which UCITS are sold to end investors – direct sales (which accounts for only a small 
fraction of sales), intermediated sales, wrapping or structuring of products in other wrappers. 
The  envisaged  measures  would  require  fund  managers  to  make  available  information 
concerning their product. However, a joined-up approach is needed whereby this information 
would  be  used  in  a  timely  and  effective  way  by  the  intermediaries  which  sell  the  bulk  of 
UCITS  or  other  institutions  which  integrate  UCITS  into  hybrid  products  (unit-linked  life 
insurance). This would require complementary work on 'point of sale' disclosures outside the 
framework  of  the  UCITS  Directive  to  ensure  that  these  disclosures  are  effectively  used  by 
banks/investment  advisors  which  sell  UCITS;  and  to  extend  comparable  disclosure 
obligations  to  intermediaries  selling  UCITS  wrapped  in  other  products  (insurance  contracts, 
tax wrappers, individual savings accounts).  

7.2 

Initial orientations for work on Simplified Prospectus/key investor disclosures: 

1. 

2. 

3. 

The  envisaged  adjustments  should  distinguish  clearly  between  prospectus, 
annual/semi-annual reports (these would continue to be produced and made available 
on request as at present), and “key investor information” disclosures which should be 
provided to potential retail investors prior to purchasing units in a fund. 

The  key  investor  information  disclosures  should  be  fair,  clear  and  not  misleading. 
Key  investor  information  should  be  consistent  with  the  relevant  parts  of  the  (full) 
prospectus. Liability issues should be made clear.  

The  key  investor  information  should  define  the  product  information  which  fund 
managers must make available, free of charge. This would include information about 
costs relating to the purchase of units, risks and other essential characteristics which 
would have an important bearing on the investment. The information to be provided 
would  be  confined  to  those  disclosures  which  are  meaningful  and  useful  to  the 

EN 

57 

   EN 

 
potential investor. Fund would not be held responsible for disclosure of advisory or 
sales  related  fees  which  are  charged  separately  from  the  product.  It  should  be  for 
intermediaries  to  disclose  costs  or  fees  arising  from  their  role  in  the  sales/advisory 
process. 

The key investor information should also define the practical information that should 
be  conveyed  to  investors  to  enable  them  to  adequately  exercise  their  rights.  Some 
information  points  could  differ  according  to  the  domicile  of  the  investor  in  certain 
well-defined cases (subscription/redemption facilities, tax treatment).  

The  envisaged  adjustments  would  not  prescribe  the  detailed  content  and  form  of 
investor  disclosures.  Instead,  they  foresee  the  adoption  of  detailed  implementing 
legislation  (at  level  2)  to  flesh  out  the  guiding  principles.  The  proposed  approach 
envisages  particular  attention  at  level  2  to  the  disclosures  that  should  be  provided 
where the fund manager is issuing units of UCITS with different sub-funds or share 
classes, funds of funds, master or feeder units.  

Product  information  should  not  be  altered  when  UCITS  are  marketed  in  another 
Member  State  (under  the  notification  mechanism  provided  for  in  Article  46  of  the 
UCITS  Directive).  Only  translations  into  the  local  language  of  the  home  Member 
State should be allowed.  

through 

the  product)  when  funds  are  sold 

The envisaged adjustments would seek to clarify the obligations of the fund manager 
independent  advisors  or 
(for 
intermediaries. However, the envisaged adjustments to the UCITS Directive should 
not be the means through which direct obligations are imposed on investment firms, 
insurance  brokers  or  other  non-UCITS  entities  to  make  effective  use  of  mandatory 
fund  disclosures.  While  attention  must  be  given  to  how  authorised  entities  use  this 
information, the UCITS Directive does not regulate these actors. Regulation of how 
this  information  is  used  at  the  point  of  sale  is  better  addressed  in  the  relevant 
intermediary regulation (e.g. MiFID, Insurance Mediation Directive). 

the 

relevant  disclosures  available 

The  envisaged  adjustments  would  impose  a  clear  obligation  on  fund  managers  to 
to  other 
make 
issue 
parties/intermediaries  who  may  execute  orders  (i.e.  sell  UCITS)  or 
recommendations on UCITS (i.e. advice on UCITS), or integrate UCITS into another 
product/wrapper (e.g. insurance contract). 

in  appropriate 

form 

The  envisaged  adjustments  should  consider  the  different  nature  of  investors  and 
provide for a possible waiver of the required key investor information disclosures for 
UCITS taking account of the professional nature of investors. 

4. 

5. 

6. 

7. 

8. 

9. 

EN 

58 

   EN 

 
8. 

SUPERVISORY COOPERATION: 

The envisaged possible adjustments to the UCITS Directive accentuate the need for enhanced 
cooperation  framework  between  authorities.  These  adjustments  could  facilitate  growth  in 
cross-border fund sales and the organisation of fund complexes on a cross-border basis. These 
transactions  and  operations  should  be  undertaken  in  a  way  that  supports  high  levels  of 
investor protection, supervisory confidence and the smooth functioning of the UCITS market. 
To this end, the current UCITS provisions on supervisory powers and supervisory cooperation 
should be strengthened. This could be done largely by aligning the relevant UCITS provisions 
on comparable provisions in the MiFID Directive and other recent securities legislation. 

Accordingly, the existing provisions of the UCITS Directive dealing with these issues should 
be strengthened to:  

1. 

2. 

3. 

ensure equivalence of powers for competent authorities; 

develop existing mechanisms relating to exchange of information; 

create arrangements which allow competent authorities of a Member State to, in the 
exercise  of  their  responsibilities  under  the  Directive,  carry  out  on  the  spot 
verification  of  information  and  investigation  on  the  territory  of  another  Member 
State,  or  have  them  carried  out  by  the  competent  authorities  of  another  Member 
State/ third parties.  

In addition, the envisaged adjustments recognise the possibility for host competent authorities 
to intervene in the event of demonstrable and material detriment to local investors or market 
conditions resulting from a breach of provisions of the Directive by UCITS or management 
companies from another Member State. The right of the host authority should be a 'last resort' 
in the event of failure of the home authority of the UCITS or management company to take 
effective  and  timely  corrective  action.  The  exercise  of  such  right  would  be  subject  to 
notification to and review by relevant committee structures and/or the European Commission. 

EN 

59 

   EN 

 
ANNEX 4: The Lamfalussy process 

The  new  regulatory  structure  of  the  so-called  Lamfalussy  process  has  been  initiated  by  the 
Stockholm  European  Council  Resolution  of  23  March  2001  on  “more  effective  securities 
market  regulation”.  The  Lamfalussy  process  is  based  around  the  four-level  regulatory 
approach  recommended  by  the  Committee  of  Wise  Men  on  the  Regulation  of  European 
Securities Markets, chaired by Baron Alexandre Lamfalussy59. 

The Lamfalussy process was designed to make Community legislation on securities markets 
more flexible, so that it can be agreed and adapted more quickly in response to innovation and 
technological  change  in  financial  markets;  to  allow  the  Institutions  to  benefit  from  the 
technical  and  regulatory  expertise  of  European  securities  regulators  and  from  better 
involvement  of  external  stakeholders;  and  to  focus  more  on  even  implementation  and 
enforcement of Community law in the Member States. 

One of the key innovations of the Lamfalussy process is the creation of two Committees to 
advise  the  Commission  on  Level  2  implementing  measures  –  the  European  Securities 
Committee (ESC) representing the Member States and functioning as a so-called ‘regulatory 
committee’  under  the  Comitology  arrangements60  –  and  the  Committee  of  European 
Securities  Regulators  (CESR).  The  two  Committees  were  set  up  by  Decisions  of  the 
Commission  on  6 June  200161.  The  ESC  acts  in  its  capacity  as  a  regulatory  committee, 
assisting the Commission in the exercise of its delegated executive powers, within the terms 
defined in the Directives adopted at Level 1. 

Transparency  is  another  important  feature  of  the  process.  The  Lamfalussy  process  has 
established  a  rigorous  mechanism  whereby  the  Commission  seeks,  ex-ante,  the  views  of 
market  participants  and  end-users  (companies,  investors  and  consumers)  by  way  of  early, 
broad  and  systematic  consultation,  with  particular  regards  to  Level  1  proposals,  but  also  at 
Level 2.  

As the UCITS Directive has been adopted long before the Lamfalussy process has been put in 
place, it can not directly take advantage of these procedures. However, some of the structures 
have been successfully implemented with the 2001 amendments to the Directive. 

59 

60 

61 

The  Lamfalussy  report,  published  on  15  February  2001,  can  be  found  on  the  Commission’s  website: 
http://europa.eu.int/comm/internal_market/securities/lamfalussy/index_en.htm 
See  Council  Decision  1999/468/EC  of  28  June  1999  laying  down  the  procedures  for  the  exercise  of 
implementing powers conferred on the Commission, OJ L 184, 17.7.1999, p. 23. 
See  Commission  Decision  of  6  June  2001  establishing  the  Committee  of  European  Securities 
Regulators (2001/527/EC), amended by Commission Decision of 5 November 2003 (2004/7/EC), and 
Commission Decision of 6 June 2001 establishing the European Securities Committee (2001/528/EC), 
amended by Commission Decision of 5 November 2003 (2004/8/EC). 

EN 

60 

   EN 

 
                                                 
•  Graph: The four-level regulatory approach under the Lamfalussy process62 

62 

SEC(2004) 1459; the Level 2 phase will be modified following the entry into force of new comitology 
arrangements, anticipated for the end 2006/ beginning 2007. 

EN 

61 

   EN 

 
 
                                                 
ANNEX 5: List of acronyms 

Insurance  and  Occupational  Pensions 

AFG: 
ALFI: 
AM: 
AMF: 
AuM: 
bn: 
CA 
CEIOPS: 

Association Française de la Gestion Financière 
Association of the Luxembourg Fund Industry 
Asset Management 
Autorité des Marchés Financiers 
Assets under management 
billion 
Competent Authority/ies 
Committee  of  European 
Supervisors 
Committee of European Securities Regulators 
Collective investment schemes 
Collective portfolio management 
European Fund and Asset Management Association, formerly FEFSI 
Fédération Européenne des Fonds et Sociétés d´Investissement 
European Securities Committee 
European Private Equity and Venture Capital Association 
Forum of European Asset Managers 

CESR: 
CIS: 
CPM: 
EFAMA: 
FEFSI: 
ESC: 
EVCA: 
FEAM: 
FIN-USE:  Forum of user experts in the area of financial services 
FSA: 
FSAP: 
GDP: 
IA: 
ICI: 
IFA: 
IMA: 
IOSCO: 
LDI: 
MC: 
MiFID: 
MS: 
REF: 
TER: 
TNA: 
UCITS: 
UCITS III:  Directive with 2001 amendments 
White Paper Impact Assessment 
WPIA 

Financial Services Authority (UK) 
Financial Services Action Plan 
Gross Domestic Product 
Impact Assessment 
Investment Company Institute (US) 
Independent Financial Advisors  
Investment Management Association 
International Organization of Securities Commissions 
Liability-driven investment 
Management company 
Markets in Financial Instruments Directive 2004/39/EC 
Member State 
Real estate funds 
Total expense ratio 
Total net assets 
Undertakings for collective investment in transferable securities 

EN 

62 

   EN 

 
 
ANNEX 6: References 

•  European  Commission  (2004):  Financial  Services  Action  Plan:  Progress  and  prospects, 
2004; 
Group, 

Asset 
May 
http://ec.europa.eu/internal_market/finances/docs/actionplan/stocktaking/report-
assetmgnt_en.pdf  

Management 

Report, 

Expert 

Final 

•  European Commission (2005): Green Paper on enhancing the European framework for 

investment funds, COM(2005) 314 final, 12th July 2005; 
http://ec.europa.eu/internal_market/securities/docs/ucits/greenpaper_en.pdf 

•  European Commission (2006a): Feedback Statement on the Green Paper consultation; 

http://europa.eu.int/comm/internal_market/securities/docs/ucits/greenpaper/feedback_state
ment_en.pdf 

•  European Commission (2006b): Financial Integration Monitor FIM 2006; 

http://ec.europa.eu/internal_market/finances/fim/index_en.htm 

•  European Commission (2006c): Report of the Expert Group on Investment Fund Market 

Efficiency, July 2006 
http://ec.europa.eu/internal_market/securities/ucits/index_en.htm#experts 

•  European  Commission  (2006d):  Report  on  Current  trends  in  asset  management,  lot  2; 

prepared by Oxera Consulting 

•  European  Commission  (2006e):  Report  on  Current  trends  in  asset  management,  lot  1, 

prepared by ZEW/OEE 

•  European Commission (2006f): Report on Potential savings in a more integrated European 

fund market, prepared by CRA (these three studies can be found 
at:http://ec.europa.eu/internal_market/securities/ucits/index_en.htm#ecs) 

•  European  Commission  (2006g):  White  Paper  on  the  enhancing  the  single  market 

framework for investment funds, COM (2006) 686 final, 15th November 2006 

•  European  Commission  (2006h):  Impact  Assessment  to  the  White  Paper  on  investment 

funds, Commission staff working document, 16th September 2006. 

•  European  Commission  (2007):  'Initial  orientations  on  possible  adjustments  to  the  UCITS 
Directive', Working document of DG Internal Market; (also referred to as 'exposure draft') 
http://ec.europa.eu/internal_market/securities/ucits/index_en.htm#ini 

•  European Parliament (2006): Report on asset management (2006/2037(INI)), March 2006 

(also called the "Klinz' report") 

•  Invesco  (2005):  "Building  an  Integrated  European  Fund  Management  Industry:  cross-

border mergers of funds, a quick win?", Invesco, January 2005 

•  Invesco (2006): "Building an Integrated European Fund Management Industry: Putting the 

wheels in motion for cross-border mergers of funds", Invesco Think Tank 2006 

•  IMA/EFAMA  (2005):  "A  Harmonised,  Simplified  Approach  to  UCITS  Registration", 

April 2005. 

•  IMA  (2005):  "Pooling:  how  can  fun  managers  respond  efficiently  to  different  investor 

needs?", July 2005. 

•  PriceWaterhouseCoopers (PwC) (2006): "Pan-European UCITS Distribution 2005" 

EN 

63 

   EN 

 
Data sources 

•  EFAMA (2005): "EFAMA Fact Book 2005" 

•  EFAMA (2006): "EFAMA Fact Book 2006" 

•  EFAMA (2007): "EFAMA Fact Book 2007" 

•  EFAMA (2007): Quarterly statistical releases n° 28 (March 2007) and n° 29 (June 2007) 

•  European Central Bank; http://www.ecb.eu/home/html/index.en.html  

•  FERI Fund Market Information: European Fund Market data digest 2007; FERI FundFile; 

http://www.feri-fmi.com/FERIFMI/ 

EN 

64 

   EN 

 
ANNEX 7: Detailed Impact Assessment Fiches 

Notification…………………………………………... 64 

Fund mergers………………………………………… 79 

Asset pooling………………………………………… 92 

Management company passport…………………….. 107 

Key investor information…………………………… 117 

EN 

65 

   EN 

 
 
 
 
 
 
Problem description 

Notification 

The  UCITS  Directive  introduced  in  1985  the  first  financial  product  passport.  Investment 
funds authorised in accordance with the Directive requirements could be sold in other MS. A 
notification  procedure  was  however  foreseen.  This  requires  UCITS  to  send  the  regulator  of 
the  country  targeted  (host  MS)  a  file  including  the  planned  marketing  arrangements  and  a 
series  of  fund  related  documents,  such  as  the  fund  rules,  prospectuses,  authorisation 
certificate… Marketing in the host MS can start two months after this notification; unless the 
host  MS  regulator  considers  that  the  marketing  arrangements  do  not  comply  with  national 
rules63.  

The  idea  of  the  fund  passport  relies  on  the  mutual  trust  between  national  regulators  that 
recognise the UCITS authorisation given by another MS regulator. Having the fund notified 
instead of authorised in every MS where the fund provider wishes to market it was aimed to 
create a single market for funds that would considerably reduce costs and delays in bringing 
new funds to the public across the EU. Investor protection was guaranteed at different levels. 
First, through the authorisation given by the fund home MS regulator. Then, by the host MS 
regulators  who  verified  the  compliance  of  marketing  arrangements  with  applicable  national 
rules. 

However,  host  MS  regulators  have  adopted  different  approaches  in  implementing  the 
notification  provisions.  Some  request  additional  documents  to  those  listed  in  the  Directive, 
impose  additional  translation  requirements  or  ask  for  changes  to  documents  such  as  the 
simplified  prospectus.  Some  cases  have  also  been  reported  in  which  regulators  verified  or 
questioned  the  authorisation  given  in  another  MS.  As  a  result,  the  UCITS  notification  has 
turned in many cases into a kind of second authorisation, rendering pan-European distribution 
of funds a time-consuming, cumbersome and costly task64.  

According to a survey carried out in 2006 for the European Commission65, notification costs 
in terms of internal resources and use of external lawyers are often limited. It accounts for less 
than  0.25  basis  points66  of  the  total  fund  costs  for  the  largest  providers.  Despite  this  small 
figure,  regulatory  processes  were  nonetheless  one  of  the  key  areas  where  fund  managers 
expressed most concern in the interviews conducted. Fund managers regarded the differences 
between  MS  in  respect  of  notification  as  one  area  where  cost  savings  could  be  achieved 

63 

64 

65 
66 

Marketing arrangements need to comply with national rules governing issues falling outside the scope 
of  the  Directive  and  issues  for  which  national  rules  apply  under  the  UCITS  Directive.  Host  Member 
State verification covers i.a. distribution infrastructure, marketing techniques and channels, facilities for 
making payments, repurchase, redemption of units of UCITS, facilities for distribution of compulsory 
information to investors. The scope of host Member States' residual powers has been discussed in the 
Commission  Interpretative  Communication  on  respective  powers  retained  by  the  Home  and  the  Host 
Member State in the marketing of UCITS pursuant to section VIII of the UCITS Directive, published on 
19th March 2007 (COM(2007) 112 final. 
A  practical  example  showing  to  which  extend  MS  regulators  see  the  notification  procedure  as  a  re-
authorisation  is  the  level  of notification  fees  that  equal  authorisation  ones  in  a  number  of  MS.  Time-
wise, in some cases, the notification procedure even takes longer than the authorisation one. (Please see 
European Commission 2006e (CRA study)) 
CRA study 
Measure used in financial services. 100 basis points is equivalent to 1%. 

EN 

66 

   EN 

 
                                                 
relatively  easily  and  rapidly.  A  report  in  2005  by  EFAMA/IMA67  estimated  direct  annual 
costs  for  the  fund  industry  for  maintaining  notification  of  about  €25  million  (in  addition  to 
more than €20 million for the initial notification).  

However,  many  consider  that  even  more  important  than  those  savings  are  the  business 
opportunities missed. For newly developed products there is a race to the market in order to 
benefit from the first mover advantage resulting from the early recognition of the product by 
distributors and investors. Time-to-market is key, not only vis-à-vis other funds but also vis-à-
vis  competing  products.  Numerous  voices  during  the  exposure  draft's  open  hearing  (April 
2007) and consultation highlighted 'level playing field' concerns. Notification of other similar 
financial  products,  such  as  structured  notes,  certificates  and  shares  of  closed-ended  funds, 
covered  by  the  Prospectus  Directive  is  done  within  three  days.  This  difference  might 
encourage financial services providers to focus their offer more on these products. However, 
these  products  are  often  subject  to  less  restrictive  information  and  other  investor  protection 
requirements. There is therefore a risk that investor protection would be undermined. 

Delays in notification are regarded as having a severe impact on competition. It results in fund 
promoters  being  frustrated  and  retreating  from  the  respective  (host)  market  (notably  small 
ones). This is a cost in terms of dynamic competition with the impact of competitive forces 
being reduced. This translates in higher costs and a more reduced fund choice for the investor. 

Host  regulators'  attitudes  are  often  seemed  as  a  disproportionate  way  to  protect  investors. 
Only  the  incorrect  application  of  the  UCITS  Directive  in  the  authorisation  process  by  the 
home Member State could justify any need for "double-checking". That said, even if that were 
the  case,  infringement  procedures  seem  a  more  appropriate  way  to  deal  with  a  mis-
implementation of the Directive. 

However, the current situation is not only due to over-zealous host authorities. It is also the 
result  of  unclear  or  incomplete  provisions  regarding  important  aspects  such  as  the  residual 
powers  of  the  host  MS  regulator  or  translation  requirements.  Additionally,  in  view  of  new 
technical  means,  more  could  be  done  to  enhance  efficiency.  Modern  transmission  methods 
could be used to considerably reduce delays. 

The  adoption  in  June  2006  of  CESR  guidelines  on  the  notification  procedure  has  been  an 
important step to improve the situation (a summary of its recommendations is provided in the 
box  below).  However,  without  a  decisive  change  of  the  Directive  related  provisions,  the 
improvements risk to remain marginal68. Also, the effectiveness of many of those non-binding 
recommendations  would  very  much  benefit  from  new  provisions  in  the  Directive 
underpinning them.  

67 
68 

"A Harmonised, Simplified Approach to UCITS Registration", EFAMA and IMA, April 2005. 
e.g. recommendations to speed up the procedure as much as possible may have little effect if the two-
month deadline remains in the Directive.  

EN 

67 

   EN 

 
                                                 
Box : CESR main recommendations 

•  A  standardised  notification  letter  should  be  prepared.  It  may  be  submitted  in  a 
language common in the sphere of international finance and by electronic means. 

•  If marketing arrangements comply with the relevant provisions, the passport needs 

to be respected. 

•  The  two-month  period  is  to  be  respected;  unless  host  regulator  establishes 
(reasoned  decision)  that  marketing  arrangements  don't  comply  with  the  relevant 
provisions.  The  period  starts  when  the  notification  file is  complete.  It  should  be 
shortened whenever possible. 

•  Self-certification  by  the  UCITS  (that  the  submitted  versions  are  the  last  ones) 

should be accepted. 

•  Host regulator can approve the use of languages other than the official one(s). 

•  Procedure for notification of sub-funds of an umbrella fund may be simplified and 

shortened. 

•  The  notification  file  should  contain:  UCITS  attestation,  notification  letter,  fund 
rules,  prospectuses,  annual  report  and  marketing  arrangements.  Changes  or 
updates need to be submitted without delay to the host regulator. 

•  Regulators  to  publish  overview  of  non-harmonised  national  provisions  in  their 

websites. 

In  March  2007,  the  Commission  adopted  an  implementing  Directive  clarifying  whether 
certain  financial  instruments  are  eligible  for  inclusion  in  a  UCITS  fund's  portfolio.  At  the 
same  time,  the  Commission  also  issued  guidance  (in  the  form  of  an  Interpretative 
Communication)  on  how  host  country  authorities  should  exercise  their  limited  scrutiny 
powers  when  UCITS  are  notified  for  sale  in  their  country.  In  that  Communication,  the 
Commission reaffirmed that the fund's home supervisory authority has sole responsibility for 
monitoring compliance with UCITS rules, and that the notification procedure cannot be used 
by Member States to challenge authorisation of UCITS granted in another Member State. 

These  two  sets  of  clarifications  aimed  to  ensure  consistency  in  the  authorisation69  and 
marketing  of  UCITS  across  the  EU.  However,  as  announced  in  the  White  Paper  a  more 
fundamental  redesign  of  the  UCITS  passport  is  indispensable.  In  this  respect,  the  WPIA 
recommended amending the Directive in order to a) reduce notification delays, b) replace the 
current procedure by a regulator-to-regulator communication exchange70 and c) remove legal 
uncertainties regarding regulators' respective roles and responsibilities. 

69 

70 

This  should  help  reducing  host  regulators'  reticence  to  accept  the  authorisation  given  by  home 
regulators. 
This  communication  between  authorities  follows  the  example  of  other  more  recent  financial  services 
Directives. It also aims to avoid that the process is delayed by additional documents or clarifications' 
requests  to  the  UCITS.  Implications  on  the side  of  regulators  should  be limited  since  communication 
and information channels between regulators are already in place.  

EN 

68 

   EN 

 
                                                 
On  that  basis,  the  exposure  draft  published  in  March  2007  presented  a  real  overhaul  of  the 
current notification procedure. It put forward a direct transmission from the home regulator to 
the  host  regulator  of  a  (exhaustive)  list  of  documents;  allowing  marketing  3  days  after  this 
transmission.  According  to  the  proposal,  the  authorities  of  a  host  MS  could  not  oppose  the 
marketing  of  duly  authorised  UCITS  in  the  host  Member  State.  They  would  check  and 
enforce compliance with applicable national rules on an on-going basis. They could, however, 
invoke emergency powers in certain cases. Finally, a new language regime was suggested in 
order  to  reduce  the  burden  of  producing  investors'  disclosures:  only  the  key  investor 
information would need to be translated into the host investor's language.  

Responses to the Exposure Draft consultation 

General principles: The revamped notification procedure proposed in the exposure draft was 
considered a significant step forward (also by non-industry stakeholders). Some respondents 
were  however  concerned  about  the  elimination  of  the  host  MS  regulator  ex-ante  controls. 
They considered that this may be detrimental to investor protection. On the other hand, others 
opined that the risk is limited since distribution was generally done by authorised actors and 
regulated by MiFID.  

Procedure  length:  Although  most  respondents  welcome  the  time  reduction  of  the  proposed 
procedure,  a  few  questioned  the  need  for  the  three-day  delay  following  transmission  of  the 
notification file. Others considered this three day delay as too short. A few asked to provide 
also a fixed period for the home regulator to check (and transfer) the notification file. 

Local  marketing  rules:  Many  contributions  asked  for  regulators  to  publish  national  rules 
regarding  the  non-harmonised  issues  with  which  notified  funds  must  comply.  Clarifications 
were also requested regarding the residual powers of the host MS regulator.  

Language  regime:  proposals  relating  to  the  translation  of  documents  were  very  much 
appreciated  by  contributors  to  the  consultation.  Many  anticipated  substantial  cost  savings. 
Some national authorities and investors' associations however defended the right of the host 
MS investor to have access to all documents in his/her language (as the investor in the fund's 
home MS has). 

Other  procedural  proposals:  The  possibility  to  use  electronic  communication  means  was 
broadly welcomed. 

Objectives 

A new notification procedure should properly respond to the different stakeholders' concerns 
and expectations and thus should: 

a) from a single market perspective: 

•  Facilitate the entry into a national market of foreign UCITS (therefore widening 

the offer and fostering competition) 

•  Promote  the  development  of  funds  raising  assets  from  across  the  EU  (and  thus 

encourage scale savings and specialisation gains) 

b) from an industry angle: 

EN 

69 

   EN 

 
•  Improve  UCITS'  time-to-market  into  other  MS  (thus,  enhancing  funds  ability  to 

compete with other similar investment products) 

•  Create the minimum (administrative) burden 

•  Reduce the costs associated to the procedure 

c) from the regulators' point of view: 

•  Be clear as regards regulators' respective responsibilities 

d) as well as, ensure that investors: 

•  Have access to an enlarged fund offer 

•  Are adequately protected 

Benefits  

The main benefits of a new notification procedure would be the following: 

For investors 

For the industry 

Short-term 

A greater fund choice 

Long-term 

Lower costs  

More business 
opportunities; lower 
costs 

More business 
opportunities; lower 
costs  

Although  the  short-term  costs  savings  derived  from  the  simplified  procedure  would  most 
probably not be outstanding, the dynamic effects triggered by an easier access of UCITS to 
other  MS  markets  will  have  an  important  and  decisive  positive  impact.  Both  industry  and 
investors are to benefit from it. New business opportunities by the industry will be matched 
by a greater choice for investors. In the long-run, fund providers would be able to pool in a 
smaller number of funds the assets raised from a number of MS (achieving thus economies of 
scale). The increased number of funds in national markets should encourage competition and, 
therefore, lower costs for investors. 

EN 

70 

   EN 

 
 
 
Design of the new notification procedure 

Preferred choices are presented in bold and italics.  

a) (First) notification 

Possibilities 

Host regulator checks marketing 
arrangements before the fund 
starts marketing in the host MS  

(ex-ante control) 

Host regulator checks on an on-
going basis marketing 
arrangements after the fund has 
started marketing  

(on-going ex-post control) 

b) Subsequent notifications 

Comments 
Verification  of  marketing  arrangements  ex-ante  will  not 
change  significantly  the  current  situation.  This  option  would 
need  then  to  be  accompanied  by  a  firm  time  reduction  and 
clear provisions as regards host regulator competences in order 
to  make  a  difference.  On-going  ex-post  controls  would  allow 
to  considerably  improve  funds'  time-to-market.  This  option 
may however give rise to some investor protection concerns if 
marketing arrangements do not comply with national rules. On 
the  other  hand,  some  consider  that  UCITS  are  generally 
distributed  through  regulated  intermediaries  and  there  should 
then be no need for the host regulator to pre-check the fund's 
marketing  arrangements.  Giving  the  complexity  of  these 
options  a  more  in-depth  analysis  (please  see  the  following 
section) seems therefore necessary. 

Relevant 
aspects 

New sub-
funds in an 
umbrella 
fund71 

New share 
classes 

Possibilities 

Comments 

No notification required 
(unless changes of marketing 
arrangements) 

Reduced notification 
requirements 

Normal notification 
requirements 

No notification required 
(unless changes of 
marketing arrangements) 

Reduced notification 
requirements 

Normal notification 
requirements 

Even within the same umbrella fund, sub-funds often 
pursue completely different investment policies. It 
seems therefore appropriate that new sub-funds would 
be notified (please see above). On the other hand, part of 
the information would have already been submitted. A 
simplified procedure could then be envisaged. It remains 
however to be decided whether clarification of such 
details should not be left for Level 2 (Level 1 would 
then focus on main principles). 

Creation of new share classes within a fund does not 
most often substantially change its main characteristics 
or distribution method. Therefore, requiring notification 
for the shares of an already notified fund may be seemed 
as a disproportionate (and onerous) measure. Whether 
clarification of such details should not be left for Level 
2 remains however to be decided. 

71 

An  umbrella  fund  is  an  investment  term  used  to  describe  a  collective  investment  scheme  which  is  a 
single legal entity but has several distinct sub-funds which in effect are traded as individual investment 
funds (definition from http://en.wikipedia.org). 

EN 

71 

   EN 

 
 
                                                 
Home regulator provides 
host regulator with updates

UCITS provides host 
regulator with updates 

Updates are made 
available in home 
regulator's website 

Home regulator provides 
host regulator with updates

UCITS provides host 
regulator with updates 

Updates are made 
available in home 
regulator's 
website/database 

Since the host regulator will need to check changes to 
marketing arrangements, simply relaying on its 
publication in the home regulator's website may (from 
an investor protection point of view) not be appropriate. 
On the other hand, introducing a direct UCITS to host 
regulator transmission will somehow go against the new 
regulator to regulator approach. However, this would 
seem the most cost-effective solution (particularly if the 
host regulator needs clarifications or requires changes to 
the arrangements) 

Providing for a regulator to regulator transmission 
would considerable burden the process for not 
significant benefits. Introducing a direct UCITS to host 
regulator transmission will still impose a certain 
administrative burden on both the UCITS and the host 
authority. Since those documents don't need to be 
checked by the host regulator, their posting on the home 
regulator's website/database may be sufficient. 
Modalities could be then determined at level 2.  

Possibilities 

Comments 

Marketing 
arrange-
ments 
updates 

Other 
documents 
updates 

Relevant 
aspects 

No notification required  

(unless changes of marketing 
arrangements) 

New funds 
of the same 
provider 

Reduced notification 
requirements 

Normal notification 
requirements 

It can be argued that if marketing arrangements remain 
the same, new funds would not need to go through a 
full notification procedure. Notification could serve 
other purposes though, such as letting host regulators 
know about the funds sold in their jurisdiction. Besides, 
the additional benefits of 'reduced' notification 
requirements appear limited if these still imply 
providing the host regulator with prospectus, simplified 
prospectus and annual report (different from a fund to 
the other) or if notification delays have been (as 
intended) significantly reduced.  

EN 

72 

   EN 

 
 
 
 
 
c) Other procedural choices 

Possibilities 

Comments 

Relevant 
aspects 

Transmis-
sion delay 

Fixed period of time for 
home regulator to check 
the notification file  

No deadline is imposed 
on the Home regulator 

All disclosures are 
translated into local 
language 

Language 
regime73  

Only the key investor 
information is 
translated into local 
language  

The Prospectus Directive provides for a maximum period 
of 3 days, after submission by the issuer of the notification 
file, for the home regulator to transmit it to the host 
regulator. Imposing a similar deadline would ensure a 
swift notification procedure and would partly re-level the 
playing field between UCITS and competing products. It 
would reduce also uncertainties re. the duration of the 
procedure. However, it should be noted that there is not a 
particular interest for the home regulator to unduly delay 
the transmission72. EU level intervention in this respect 
may then be of little effectiveness and rather unnecessary. 
The requirement to translate all obligatory disclosures into 
a host MS language considerably adds to the industry's 
administrative burden and leads to delays in the marketing 
of the fund. It is an important entry barrier into certain 
markets (particularly small ones) that has important 
implications on investors' side: additional costs are 
ultimately passed on to investors; smaller fund ranges are 
available to them. It is often argued that investors do not 
make use of most of those documents due to their 
complexity. Requiring only translation of the 'key investor 
information'74 appears then a cost-effective measure to 
ensure the protection of investors75 and, at the same time, 
shorten delays and allow costs savings76. It has been 
argued that in order to enhance investor protection the key 
investor information should clearly indicate in which 
language(s) the other fund documents are available. It 
would then be advisable to give the fund provider the 
possibility to decide (for commercial reasons) which other 
documents would be translated77.  

72 

73 
74 

75 

76 

77 

A 'healthy competition' among CA (as the observed in the recent past with regards to the authorisation 
procedure)  could  be  expected.  Systematic  long  delays  could  encourage  fund  promoters  to  base  their 
new funds in other jurisdictions. 
The option 'no translation at all' is ruled out for evident investor protection reasons. 
This  is  consistent  with  the  approach  followed  by  the  Prospectus  Directive  (which  covers  other 
investment products that compete directly with UCITS funds). 
'Key Investor Information' is aimed to provide all the information the investor needs in order to make an 
informed  decision  as  regards  to  the  fund  offered  to  him/her.  Subsequent  monitoring  of  his/her 
investment is facilitated by the fact that UCITS have the obligation to update the KII. 
A  respondent  to  the  exposure  draft  consultation  estimated  savings  amounting  to  a  third  of  its  total 
notification costs if translation of the full prospectus was not required anymore. 
It  has  also  been  proposed  to  provide  for  a  delayed  translation  of  such  other  fund  documents  or  for  a 
translation upon request only. 

EN 

73 

   EN 

 
                                                 
 
Possibilities 

Comments 

Relevant 
aspects 

Local 
marketing 
rules 

Full harmonisation 

Different local rules apply 
(status quo) 

Distribu-
tion of 
disclosures 
in host MS  

Full harmonisation 

Host MS rules apply 

Home MS rules apply 

Impacts analysis 

A full harmonisation of local marketing rules would 
reduce uncertainty and costs, as well as, ensure an 
equivalent level of investor protection in different MS. 
However, achieving this harmonisation would be a real 
challenge. The existence of different rules often reflects 
cultural or investor protection preferences. Efforts may 
then prove to be fruitless. Besides, the UCITS Directive 
may not be the most adequate framework for this 
harmonisation (MiFID could be a more appropriate 
one). 
According to the current art. 47 of the Directive, the 
distribution of disclosures follows home MS rules. 
These may differ from those of the host MS. A full 
harmonisation of disclosures distribution methods would 
reduce uncertainty and costs as well as ensure an 
equivalent level of investor protection in different MS. 
However, to achieve this harmonisation may prove 
difficult. The existence of different methods often 
responds to national cultural or investor protection 
preferences. However, if different distribution rules for 
disclosures remain, it seems more appropriate, for the 
sake of investor protection, that the rules with which 
host investors are more familiar apply. 

The  tables  above  provide  an  overview  of  the  main  recommended  features  for  a  new 
notification  procedure.  Many  of  the  choices  are  uncontroversial.  However,  as  shown  during 
the exposure draft consultation, the moment (and time available for it) in which the host MS 
regulator will be able to check the fund's marketing arrangements is considered by many as 
key in order to ensure investor protection. Thus, as indicated above, the following options will 
be analysed in more detail in this section:  

Option 1: Ex-ante control of marketing arrangements 

Description: Following transmission (by the home regulator) of the notification file, the host 
regulators  will  have  2  weeks  to  check  marketing  arrangements.  Home  regulator  will  inform 
the UCITS of the date of transmission. Problems identified (or clarifications needed) by the 
host regulator should be communicated to the fund promoter within those 2 weeks. The clock 
can be stopped only if those arrangements are not in line with national rules (or incomplete). 
After 2 weeks, the UCITS can start marketing its units in the host MS unless formal refusal 
has been provided.  

Option 2: On-going ex-post control of marketing arrangements 

Description:  The  UCITS  can  start  marketing  its  units  in  the  host  MS  immediately  after 
transmission (by the home regulator) of the notification file. Home regulator will inform the 
UCITS of the date of transmission. The host regulator checks 'ex post' on an on-going basis 
that marketing is conducted in accordance with national rules.  

EN 

74 

   EN 

 
Option 1: Ex-ante control 

Impacts from the point of view of: 

a)  Industry:  The  resulting  situation  would  most  probably  differ  very  little  from  the  current 
one. The need to check the marketing arrangements may be used to justify current notification 
fees. Also hiring a local team of consultants to prepare the notification file and to deal with 
the host regulator may most probably still be required. This is often not a negligible cost. One 
of the respondents to the exposure draft consultation estimated at some €300,000 their annual 
legal  expenditure  related  to  notification.  Also  the  2005  EFAMA/IMA  report  showed 
examples in which legal costs amounted to some 40% of the total costs of (initial) notification 
(i.e. some € 8 million). Thus, the expected economic savings of this option are small (if any at 
all).  Uncertainty  about  UCITS  time  to  market  in  the  host  MS  would  also  remain78.  The 
notification procedure would then continue to act as an entry barrier to national markets. This 
may  in  the  medium-term  protect  the  national  fund  players.  However,  it  will  also  restraint 
competition  forces  and  therefore  hinder  national  industry's  incentives  to  pursue  economic 
efficiency. 

b)  Investors:  From  the  point  of  view  of  investor  protection,  the  reduction  of  the  time 
available  to  the  host  MS  regulator  to  check  marketing  arrangements  (from  the  current  2 
months to 2 weeks) should not have any negative impact. An important proportion of the sales 
in a market of foreign funds are done through regulated distributors. Around 75% of funds are 
sold  through  MiFID  authorised  entities  such  as  banks  or  investment  firms79.  (The  rest  is 
basically sold through insurance providers [covered by the Insurance Mediation Directive] or 
other  nationally  regulated  entities.)  The  MiFID  sets  the  minimum  rules  that  intermediaries 
should comply with. From an economic point of view, a burdensome notification procedure 
restricts  the  entry  into  national  markets  of  foreign  funds  and,  thus,  reduces  the  choice 
available  to  investors.  It  also  restrains  healthy  competition  forces  that  could  otherwise  push 
prices  (fees)  down.  The  additional  costs  imposed  by  the  procedure  would  be  passed  on  to 
investors  at  the  end  of  the  day.  It  is  also  argued  that  UCITS  long  time-to-market  limits 
industry's  ability  to  exploit  financial  innovation  possibilities  and  to  respond  timely  to 
investors' needs. There is therefore the risk that faced with products both more costly and less 
adapted  to  their  preferences;  investors  will  turn  to  other  similar  investment  products 
(generally  subject  to  less  strict  investor  protection  obligations).  In  that  case,  investor 
protection could be at risk. This is not a mere theoretical possibility. Regulators and investors 
start  to  voice  this  concern.  Concretely,  during  the  exposure  draft  consultation  some 
consumers'  associations  highlighted  the  problem  of  "unlevelled  playing  field"  between 
financial  products  and  asked  for  "consistent  standards  of  investor  protection  throughout  the 
different  investment  options  available  to  them"80.  The  Green  Paper  on  Retail  Financial 
Services recognises the need for greater coherence. While this is something that the UCITS 
Directive  cannot  address  alone81,  Commission  services  are  reflecting  on  the  extent  of  the 
potential risks and the need and form of possible measures. A call for evidence on this issue 
has been launched by Commission services on 26th October 2007. 

78 

79 
80 
81 

There  exists  the  risk  that  the  two-week  deadline  would  be  abused  (and  'stopping-the-clock'  could 
become a normal practice for host regulators in order to be able to check fund documents other than the 
marketing arrangements). 
Estimation based on FERI distribution data (end 2006) 
e.g. FIN-USE response to the exposure draft consultation. 
Also, the Green Paper concluded that 'it would be a retrograde step for investors if UCITS disclosures 
were scaled back as a result of regulatory competition'. 

EN 

75 

   EN 

 
                                                 
c)  Regulators:  Additional  resources  may  be  needed  on  the  side  of  the  host  regulator  to 
comply  with  the  two-week  deadline.  (However,  in  many  cases,  this  could  just  imply  a 
reallocation  of  resources  from  those  currently  used  to  check  fund  documents  other  than 
marketing arrangements.) On the other hand, the new role of the home regulator will require 
new  resources.  These  would,  however,  not  be  substantial  if  its  role  is  limited  to  checking 
completeness of the notification file and if transmission is done electronically. Further needs 
for additional resources are not to be excluded though. Mis-trust between regulators may still 
require  a  strengthening  of  regulators'  powers,  as  well  as  of  cooperation  mechanisms. 
However, this could take place within existing cooperation frameworks and should, therefore, 
not be exceptionally onerous. 

Option 2: Ex-post on-going control 

The  rationale  behind  this  option  lays  on  the  fact  that  marketing  of  UCITS  generally  takes 
place  through  regulated  intermediaries  and,  therefore,  the  justification  for  pre-checking 
marketing arrangements is lesser.  

The following table provides an overview of the percentage of fund sales taking place through 
different distribution channels. 

Table: Distribution channels (end 2006) 

retail 
bank 

private 
bank 

pension/ 
insurance 
wrapper 

Austria 

51,5% 

31,0% 

2,0% 

France 

25,9% 

11,0% 

Germany 

47,5% 

13,4% 

Italy  

63,0% 

8,7% 

Nordic 

55,0% 

7,0% 

Spain 

64,6% 

5,9% 

19,5% 

18,7% 

15,2% 

27,0% 

3,0% 

IFA¹ 
advised 

super-
market 

direct 

fund of 
funds 

institutional 

other 

1,0% 

4,0% 

0,5% 

0,2% 

13,3% 

0,5% 

0% 

0,4% 

0,3% 

12,7% 

26,0% 

0,20%

11,4% 

1,0% 

0,5% 

2,9% 

10,2% 

0,5% 

0,2% 

1,5% 

3,0% 

1,0% 

1,5% 

4,5% 

0,5% 

2,4% 

0,10%

0,20%

0,10%

0,2% 

0,0% 

11,1% 

11,0% 

0,00%

3,0% 

4,3% 

UK 

8,0% 

6,0% 

16,2% 

50,2% 

5,0% 

1,0% 

1,7% 

11,5% 

0,40%

Source: FERI data digest 2007; ¹ Independent Financial Advisors 

Impacts from the point of view of: 

a)  Industry:  In  the  absence  of  a  pre-check  of  the  marketing  arrangements,  the  current  €  20 
million  initial  notification  costs  could  be  saved82.  More  dynamic  effects  are  also  to  be 
expected.  The  shorter  time-to-market  for  funds  will  enhance  their  competitiveness  vis-à-vis 
other  investment  products.  Besides,  a  more  efficient  passport  could  also  reduce  the  need  to 
have  different  national  fund  ranges.  A  single  cross-border  fund  could  then  pool  assets  from 
investors in several MS. This should, in the medium to long-term, promote economies of scale 
and reduce costs. 

82 

It  has  been  argued  that  this  would  imply  more  responsibilities  (and  possibly  a  higher  burden)  for 
distributors.  Additional  costs  for  those  could  then  be  passed  back  to  the  fund  promoter  through 
distribution  agreements  and,  at  the  end  of  the  day,  to  investors.  Nevertheless,  most  of  this  additional 
burden would probably already have been incurred by the implementation of the MiFID. 

EN 

76 

   EN 

 
 
                                                 
b) Investors: In the short-term, the new procedure will lead to an increase in the number of 
funds and, thus, allow a better match between investors' needs and preferences and the offer 
available  to  them.  In  the  long-term,  the  increase  in  the  number  of  funds  should  foster 
competition and therefore put pressure on fees. Some investor protection concerns have been 
expressed during the exposure draft consultation though. It is argued that, in the absence of 
prior  verification  by  the  host  regulator,  the  interest  of  its  country's  investors  would  be 
endangered83. This argument however does not take into consideration that another regulator 
has already verified the UCITS' compliance with the Directive's provisions. UCITS also need 
to  comply  with  all  host  country  legislation  relating  to  the  fields  not  covered  by  the  UCITS 
Directive  and  ex-ante  checks  of  marketing  arrangements  is  not  the  only  tool  available  to 
regulators  in  this  respect.  National  rules  on  publicity,  misleading  information…would  still 
apply.  Additionally,  the  implementation  of  MiFID  will  ensure  that  conflicts  of  interests  or 
mis-selling risks are reduced84. Other on-going initiatives, such as the Simplified Prospectus 
planned  repair  work  (please  see  the  'key  investor  information'  fiche)  would  ensure  that 
investors are better  informed and, therefore, allow  them  to  be  more  critical. Host  regulators 
on-going 'ex-post' checks should also ensure a certain discipline. If a fund promoter does not 
comply  with  the  applicable  local  rules  of  a  home  Member  State,  it  will  risk  infringement 
procedures and penalty payments. Additionally, fund promoters have an interest to avoid such 
procedures and penalties since these could endanger their image. 

c)  Regulators:  The  new  procedure  should  not  have  a  significant  impact  on  host  regulators' 
resources.  Resources  used  until  now  to  check  marketing  arrangements  (and  other  UCITS 
related  documents)  will  be  freed  for  the  new  tasks  (e.g.  'ex-post'  checks).  As  already 
indicated, the need for the home regulator to comply with its new obligations should not have 
a  significant  impact  on  its  resources.  As  also  explained  above,  the  introduction  of  greater 
powers85  and  new  cooperation  mechanisms  should  not  have  a  considerable  impact  either. 
Additionally,  this  modus  operandi  will  not  be  completely  at  odds  with  current  supervisors' 
practices.  In  fact,  a  number  of  MS  already  carry  out  ex-post  checks.  Some  of  them  have 
moved away from ex-ante controls which were considered too burdensome. The publication 
of  guidelines  by  the  regulator  appears  often  as  an  effective  way  to  help  industry  players  to 
comply with the rules. (Publication of relevant local rules was also recommended in a number 
of industry and regulators' responses to the exposure draft consultation) 

Other effects  

Impact on SMEs: A positive impact on smaller cross-border industry players can be expected 
under the second option.  Burdensome host requirements  and practices prevent the access of 
smaller fund providers to certain national markets. Due to their more limited resources, they 
are  then  forced  to  confine  their  cross-border  expansion  to  markets  of  easier  access.  Option 
two would thus create greater business opportunities for a larger number of fund providers. 

Administrative burden: In addition to the savings in notification fees and legal costs the new 
notification  procedure  will  have  an  important  impact  on  the  administrative  burden  borne 

83 

84 

85 

Some  respondents  to  the exposure draft  consultation  stressed  that,  in  the  case  of  breaches of national 
rules, the regulator's intervention risks taking place once the damage has already be done (please see the 
responses of the Financial Services Consumer Panel. 
As shown in the table above, an important percentage of funds distribution (notably through banks) is 
covered by the MiFID. 
In  particular,  emergency  powers  for  the  host  MS  authorities  (e.g.  when  the  home  MS  regulator's 
measures prove inadequate or when that regulator fails to act) may need to be considered. 

EN 

77 

   EN 

 
                                                 
currently  by  the  fund  industry.  The  recommendation  to  limit  translation  (into  the  host  MS 
official language) to solely the KII will considerably reduce that burden. While this reduction 
is difficult to quantify, one of the pan-European players contributing to the consultation on the 
exposure  draft  estimated  savings  of  approximately  one-third  of  its  notification  costs.  Other 
recommendations  to  further  alleviate  the  administrative  burden  linked  to  the  notification 
procedure would be to clearly determine the content of the notification file (and thus rule out 
host MS' requests for additional information) and to allow for its electronic transmission. 

Summary table 

Specific Objectives 

Overall Objective 

Investor protection  administrative 

burden 

sector 
efficiency 

Efficiency86 

Pro Single 
Market? 

Ex-ante 
control 

+ 
(no investor protection 
risk) 

- 
(higher burden) 

- 
(higher costs; less 
business opport.) 

no 
(barrier entry to host 
market) 

Ex-post 
on-going 
control 

+/≈ 
(current protection 
levels maintained) 

+ 
(lower burden) 

+ 
(lower costs; more 
business opport.) 

yes 
(will encourage market 
integration) 

Preferred option 

As  showed  in  the  above  summary  table,  option  2  (ex-post  on-going  checks)  is  a  superior 
solution  from  an  efficiency  and  single  market  point  of  view.  It  should  not  be  either 
detrimental  to  investor  protection.  As  explained  above,  marketing  of  UCITS  does  not  take 
place  in  a  vacuum,  national  and  EU  rules  exist.  Compliance  with  those  is  facilitated  by  the 
fact  that  a  high  proportion  of  UCITS  are  marketed  to  the  public  through  EU  or  national 
regulated  channels.  Therefore,  the  correct  enforcement  of  the  rules  set  by  national  law  or 
Directives such as the MiFID appears a more effective way to minimise any potential investor 
protection  risk  (than  to  foreseen  systematic  ex-ante  checks  in  the  UCITS  Directive).  There 
remains however a risk that distribution through non-regulated intermediaries/channels would 
breach relevant rules and cause investor prejudice. However, as shown by the figures in the 
'distribution  channels'  table  (this  category  of  intermediaries  is  included  in  the  percentage 
displayed  in  the  column  'other'),  the  likelihood  (and  magnitude)  of  this  risk  should  be 
minimal. 

Other (general) considerations 

As  often  highlighted  during  the  exposure  draft  consultation  period,  a  swift  notification 
procedure  will  up  to  a  certain  extent  depend  on  the  on-going  work  on  the  simplified 
prospectus/key  investor  information.  A  number  of  respondents  required  the  Directive  to 

86 

Administrative burden refers to the costs linked to the production/provision of information that would 
have  not  been  collected/provided  in  the  absence  of  a  legal  obligation.  Sector  efficiency  refers  to 
efficiency  gains  derived  from  lower  fund  production  costs,  more  rationalised  processes  or  the  greater 
flexibility and opportunities offered to industry players. 

EN 

78 

   EN 

 
 
 
 
                                                 
clarify  that  the  KII  was  not  to  be  considered  as  marketing  material87  (but  just  as  product 
information)  and  thus,  could  be  used  without  changes  across  borders.  If  the  KII  does  not 
include  local  (marketing)  information,  the  justification  for  ex-ante  checks  by  the  host 
regulator will be further weakened.  

Changes  to  the  notification  procedure  can  also  have  an  impact  on  other  of  measures  the 
measures analysed in this IA. For example, one of the evident conditions for the approval of 
fund  mergers  is  that  the  receiving  fund  be  notified  in  all  MS  were  the  disappearing  fund  is 
sold.  A  streamlined  and  quick  notification  procedure  will  make  it  easy  to  comply  with  this 
requirement. It should also be noted that the simplification of the notification procedure can 
also  reinforce  the  consolidating  effect  of  fund  mergers.  By  achieving  a  greater  openness  of 
national markets, fund promoters will feel less the need to launch parallel ranges of funds in 
other to assure their presence in different MS.  

87 

Please see the response by IMA and the joint position of UK FSA and HM Treasury. 

EN 

79 

   EN 

 
                                                 
Impact table 

Option 

Affected 
parties 

Effect 
Direct: D 
Indirect: I 

Industry 

D 

Ex-ante 
control 

Investors 

D 

I 

Regulators 

D 

Industry 

D 

Ex-post 
on-going 
control 

Investors 

D 

I 

Regulators 

D 

Impacts 
Positive: + 
Strongly positive: ++ 
Negative: - 
Strongly negative: -- 
Neutral/marginal: ≈ 

Impact 
Timing 
One-off 
Short-term 
Medium-term 
Long-term 
On-going 

Impact 
Nature 

Dynamic 
Static 

Impact 
Likelihood
Certain 
High 
Medium 
Low 

-  

(limited costs 
reduction) 

--  

(less cross-border 
opportunities) 

++ 

(high investor 
protection) 

-  

(maintenance of cost 
levels) 

≈  

(more resources 
needed) 

+  

(greater costs 
reduction) 

+  

(more business 
opportunities) 

+/ ≈ 

(protection level 
maintained) 

+  

(lower costs) 

+ 

(better resources 
management) 

on-going 

dynamic 

high 

static 

on-going  

high 

dynamic 

one-off 

static 

medium 

medium-term 

dynamic 

medium 

high 

on-going  

static 

low 

long-term 

dynamic 

medium 

on-going 

static 

high 

EN 

80 

   EN 

 
 
Problem description 

Fund mergers 

The European fund landscape is characterised by an ever increasing number of funds. Large 
fund  ranges  may  render  management  more  complex  and  require  more  investments  in  time, 
means and/or human resources at different levels of the industry value-chain. However, funds 
are not only numerous but also relatively small. At the end of 2006, 54 % of European funds 
managed less than € 50 million in assets; 20% less than € 10 million88. In fact, at the end of 
2006,  the  average  size  of  a  European  fund  was  less  than  a  fifth  of  that  of  its  American 
counterpart (please see graph below). As a result, the Total Expenses Ratio (TER) paid by the 
investor  of  a  typical  cross-border  European  equity  fund  is  twice  as  much  as  that  borne  by 
American fund investors89.  

Num ber of funds

31.915

8.117

US

EU

35.000

30.000

25.000
20.000

15.000

10.000

5.000

0

Source: ICI, EFAMA, ECB 

AuM (€ bn)

7.907

5.784

8.000

6.000

4.000

2.000

0

Average size (€ m illion)

974

181

1.000

800

600

400

200

0

US

EU

US

EU

The  reason  is  that  small  sizes  impede  the  exploitation  of  economies  of  scale  and  increase 
costs. The potential for economies of scale in fund management is not negligible. A study by 
Fitzrovia  in  2005  showed  that  the  TER  of  actively  managed  funds  considerably  diminishes 
with the size of the fund. According to this study funds with up to $25 million assets had an 
average  TER  15%  higher  than  that  of  a  fund  with  up  to  $  100  million  assets90.  A  study 
conducted  more  recently  by  CRA91  also  found  evidence  of  economies  of  scale  in  the 
European  fund  industry  (the  greater  scope  for  scale  savings  being  at  the  level  of  fund 
administration and asset management). Although, according to CRA, additional scale savings 
would  fade  out  once  the  fund's  size  has  reached  €200-300  million,  the  fact  that  a  high 
percentage  of  European  funds  are  far  from  that  size  (as  shown  by  the  FERI  data  above), 
proves the importance of the economies of scale potential. 

Several  studies  have  tried  to  assess  and  quantify  the  missed  opportunities.  The  so-called 
"Heinemann  report"  estimated  that  €  5  bn  could  be  saved  annually  if  the  European  average 
fund size would converge to that of an American mutual fund92. In 2005, an Invesco report 
considered that European investors were charged an estimated € 2-6 bn in annual fees more 

88 
89 
90 

91 

92 

FERI, Data digest 2007 
"Economies of scale and consolidation in collective funds", Fitzrovia, March 2005. 
Funds  with  up  to  $  25  million  assets  were  reported  to  have  an  average  TER  of  2.01%  compared  to 
1.75%  for  a  fund  with  up  to  $  100  m.  ("Economies  of  scale  and  consolidation  in  collective  funds", 
Fitzrovia, March 2005.) 
"Potential  cost  savings  in  a  fully  integrated  European  investment  fund  market",  CRA,  August  2006. 
Study  based  on  a  sample  of  European  countries  representing  90  %  of  the  UCITS  market  (European 
Commission (2006f)). 
"Towards a single European market in asset management", ZEW, May 2003. 

EN 

81 

   EN 

 
 
                                                 
than  they  would  if  scale  economies  could  be  fully  exploited93.  According  to  CRA  annual 
savings  of  up  to  17  basis  points  could  be  attained  if  European  equity  fund  sizes  would 
converge to that of the average US fund94.  

Finally, in addition to these unnecessary extra costs, it should be noted that the existence of 
broad  fund  ranges  also  creates  confusion  among  distributors  and  investors  rendering  choice 
more difficult. 

The  WPIA  considered  that  inaction  was  not  a  valid  option;  fund  proliferation  is  set  to 
continue.  Fund  launches  remain  the  preferred  strategy  for  asset  managers  to  innovate,  raise 
new assets and respond to new investors' needs or preferences. In 2006, the number of funds 
increased  by  1,542  (compared  to  an  increase  of  887  funds  in  2005).  According  to  FERI, 
observed  fund  closures  were  sometimes  the  consequence  of  products,  such  as  guaranteed 
funds, reaching maturity rather than the result of fund rationalisation efforts.  

But where does the problem lie? Fund mergers do take place, notably among funds based in 
the same country ('domestic' mergers in the table below). However, the absence of a common 
EU  fund  merger  framework  has  been  identified  as  one  of  the  main  obstacles  to  further 
consolidation  across  borders.  The  coexistence  of  different  national  approaches  and  rules 
renders cross-border mergers, when at all possible, expensive, complex and time consuming. 
The  Commission's  Expert  Group  on  market  efficiency  reported  that  often  18  months  were 
needed  to  complete  cross-border  mergers,  i.e.  much  more  than  the  3  months  generally 
required  for  domestic  fund  mergers95.  Difficulties  derive  mainly  from  divergences  in 
regulatory requirements. Some criteria are seen as overly prescriptive. For instance, in some 
countries  100%  of  unit-holder  approval  is  required.  Uncertainty  regarding  the  outcome  and 
important delays discourage pan-European industry players as is evidenced in the table below. 
As a result, parallel similar ranges of funds develop in different MS markets. 

Table : Fund mergers in the EU 

Type of merger 

2002 

2003 

2004 

2005 

2006 

Domestic 

Cross-border 

452 

1 

804 

26 

583 

57 

764 

28 

644 

7 

Source: Feri FundFile 

The WPIA therefore recommended changes to the Directive in order to create the conditions 
for the rationalisation of the fund landscape while, at the same time, ensuring high levels of 
investor  protection.  The  WPIA  also  examined  carefully  the  options  available  in  order  to 
overcome  the  potential  adverse  tax  consequences  of  (cross-border)  fund  mergers.  It 
considered  the  option  of  adopting  a  Directive  on  the  'Taxation  of  Fund  Mergers'  (as 
recommended by the Expert Group) and compared it to other options, including the adoption 
of  a  Communication  (and  the  'no  action'  one).  The  WPIA  concluded  that  adopting  a 

93 

94 
95 

"Building of an integrated European Fund Management: Cross border merger of funds, a quick win?", 
Invesco, January 2005. 
CRA study (European Commission (2006f)). 
"Report  of  the  Expert  Group  on  Investment  Fund  Market  Efficiency",  European  Commission,  July 
2006. 

EN 

82 

   EN 

 
 
                                                 
Communication was the most proportionate and cost-effective measure. This conclusion was 
motivated by the fact that domestic mergers have already a neutral tax treatment in many MS 
and  that  this  could  be  extended  to  cross-border  mergers  on  the  basis  of  existing  European 
Court of Justice case law.  

The exposure draft published in March 2007 presented stakeholders with a preliminary design 
of an EU framework for UCITS mergers. This framework would cover a series of commonly 
used  merger  techniques  (please  see  the  diagrams  below)  and  would  apply  to  both  domestic 
and cross-border mergers. A set of requirements for the regulatory approval of mergers was 
put forward, the main principle being that only the regulator of the disappearing fund would 
approve (or refuse) the proposed merger. The exposure draft also contained specific investor 
protection provisions, including the right for investors to receive information  on the merger 
and the right to redeem free of charge if they do not agree with the merger operation. 

Merger by absorption / 
Scheme of amalgamation 

A 

B 

Disappearing  
fund

Receiving  
fund

The disappearing fund transfers its assets 
(scheme of amalgamation) or assets and 
liabilities (merger by absorption) to the receiving 
fund in exchange of units issued by the receiving 
fund to the investors of the disappearing fund.  

Merger by creation of a new 

C

Receiving  
fund

A

B 

Disappearing  
fund

Disappearing 
fund

Both the disappearing funds transfer their 
assets and liabilities to the receiving fund in 
exchange of units issued by the receiving fund 
to the investors of the disappearing funds.  

Responses to the Exposure Draft consultation 

General  principles:  The  proposed  approach  was  generally  supported  by  all  types  of 
stakeholders (industry, regulators and investors). Some respondents however considered that 
mergers should only be allowed between UCITS having similar investment policies.  

Authorisation procedure: Respondents generally supported the proposal that the regulator of 
disappearing  UCITS  decides  on  the  merger,  although  its  exact  role  might  need  further 
clarification.  Some  respondents  advocated  greater  involvement  of  the  regulator  of  the 
receiving  UCITS  in  respect  of  disclosure  items.  Several  contributions  also  stressed  that  15 
days was too short a period for approving the merger. 

Third party control: Several respondents asked that the exact role and responsibilities of the 
depositary be clarified. Their main concern was that the depositary should not decide on the 
merits of the merger. A few contributors also asked to eliminate the requirement regarding the 
independent auditor, or at least to clarify its role.  

Information  to  unit-holders:  Responses  offered  mixed  views.  Some  respondents  considered 
that investors of the receiving UCITS should not be informed at all (or only at the discretion 
of the fund promoters), while others argued that they should always be informed or that they 

EN 

83 

   EN 

 
 
should  only  be  informed  if  there  was  a  "substantial"  impact.  Some  considered  that  the 
proposed assessment of the potential "negative" impact on the receiving UCITS unit-holders 
by the UCITS itself was not the right approach. Investors generally considered that the form 
and content of the information should be made clear and that such information should be sent 
to all investors automatically and not merely "on request".  

Unit-holders' rights: The proposed approach to follow national regimes to determine whether 
or  not  unit-holders  could  vote  on  the  proposed merger  was  broadly  accepted.  The  proposed 
threshold of 75% of votes cast was generally welcomed. Some respondents indicated that in 
practice  the  right  to  redeem  free  of  charge  might  not  necessary  provide  the  most  optimal 
solution for investors, taking into account possible tax consequences and the loss of entry fees 
already  paid.  They  therefore  suggested  to  offer  investors  also  the  possibility  to  switch  to 
another fund of the same promoter with similar investment policies. Views regarding the right 
for receiving fund investors to exit free of charge diverged. Some believed that it should be 
automatic;  others  only  if  the  merger  would  have  a  negative/substantial  impact  on  them. 
Various respondents (industry and regulators) considered that under certain circumstances, the 
costs of the merger could also be (partially) born by the fund/investors and not merely by the 
management company/promoter. This view was not shared by investors. 

Finally, a non negligible number of contributions expressed concerns regarding the potential 
adverse  tax  implications  of  fund  mergers.  It  was  argued  that,  particularly  in  cross-border 
situations, mergers may be treated as a disinvestment (by the disappearing fund unit-holders) 
and therefore subject to capital gain taxes.  

Objectives 

A common EU fund merger framework will need to comply with the general objectives of the 
UCITS Directive (enhanced market efficiency and adequate investor protection). In addition, 
the design of such framework should properly respond to the different stakeholders' concerns 
and expectations. The framework should therefore: 

a) from a single market perspective: 

•  Encourage the pan-European consolidation of the fund industry 

•  Foster economies of scale  

•  Promote competition  

b) from an industry angle: 

•  Clearly state industry's obligations 

•  Create the minimum (administrative) burden 

•  Be swift  

c) from the regulators' point of view: 

•  Allow an adequate supervision 

•  Clearly indicate the involved regulators' respective responsibilities 

•  Ensure that the interests of investors are adequately protected 

d) as well as, ensure that investors: 

EN 

84 

   EN 

 
•  Are properly informed 

•  Have the right to dissent 

•  Do benefit 

Benefits  

The main benefits of such a framework would be: 

For investors 

For the industry 

Medium-
term 

A rationalised choice 
(less confusion between 
funds) 

More manageable fund 
ranges 

Long-
term 

A share of costs savings 
(e.g. lower fees or higher 
performances) 

More manageable fund 
ranges; cost savings 

Advantages will take some time to materialise. At a first stage, rationalised fund ranges will 
benefit both investors (and distributors), who will be presented with a less overlapping (and 
often  confusing)  fund  offer,  and  fund  providers,  for  whom  fund  ranges  will  be  easier  to 
manage.  In  the  longer  term,  savings  from  economies  of  scale  (and  from  the  elimination  of 
maintenance  costs  of  the  disappearing  funds)  would  considerably reduce  the  costs  of  funds. 
Under the appropriate competition conditions, part of those savings will be passed on to the 
investor. 

Design of the optimal framework 

There is a certain consensus on the main features of the required fund merger framework. The 
analysis  presented  in  the  IOSCO's  report  on  Collective  Investment  Schemes'  mergers96  and 
the  recommendations  of  the  Expert  Group  on  market  efficiency's  report  are  largely 
convergent. The following table summarises the conclusions of both reports.  

IOSCO review 

Expert Group 

Regulatory 
approval 

Unit-holder 
approval 

Information 
disclosure 

•  Before presented to unit-holders 

•  Before presented to unit-holders 

•  Verification of requirements 

•  Disappearing 

fund 

regulator 

decides 

Generally  in  line  with  national 
company law 

•  Following national legislation 

•  Threshold max. 75% of votes cast 

•  Sufficient for informed decision 

•  Prior submission to regulator  

•  Accurate and well balanced 

•  In the language of investor's MS  

96 

"An examination of the regulatory issues arising from CIS mergers", IOSCO, November 2004 

EN 

85 

   EN 

 
 
 
                                                 
•  On merger rationale, continuing 
fund, tax implications, costs 

•  On 

investment  policy,  charges, 

valuation, voting process 

Costs 

•  Clearly disclosed 

•  Borne by the manager 

─── 

Redemption 

Dissenting unit-holders: possibility 
to redeem free of charge 

Dissenting  unit-holders:  possibility  to 
redeem free of charge 

Third-party 
monitoring 

Disappearing 
depositary reviews proposal 

fund 

audited; 

Valuation 
responsible for assets transfer 

audited; 

depositary 

On the basis of the above comparative table, it could be concluded that an ideal framework 
would have two basic elements: a) the approval by the competent authority (CA), and b) the 
right of the investor to be appropriately informed and to protect his/her interests. However, in 
order  to  efficiently  implement  these  basic  principles,  some  choices  need  to  be  made.  The 
following  tables  identify  possible  alternatives.  Preferred  choices  are  presented  in  bold  and 
italics.  

a) Regulatory approval 

Relevant 
aspects 

Timing 

Competent 
authority 
(CA) 

Possibilities 

Comments 

Before submission to 
investors 

After investors' approval 

In line with the general practice, the first possibility 
should be retained. It would ensure higher investor 
protection since it allows the CA to check the 
information to be provided to investors 

Disappearing fund authority

Both disappearing and 
receiving fund authorities 
(common decision) 

Both disappearing and 
receiving fund authorities 
(independent decision) 

Approval 
criteria 

Merger file completeness 

Similarity of investment 
policies 

These 3 options were analysed in the exposure draft 
published in March 2007. A majority of 
respondents favoured the first one, as the most cost-
effective. Additionally, the concerns of those asking 
for a more active role for the receiving fund 
authority could be addressed with other investor 
protection measures developed below. 

A mere formal check (1st possibility) would shorten 
the procedure. It is also a more objective criterion. 
However, it could give rise to investor protection 
concerns. Basing the regulatory decision on criteria 
such as the similarity of investment policies could 
increase uncertainty (difficult to define what similar 
policies are). On the other hand, considering only 
investors' interest could be redundant (if investors 
are given the means to protect their interests and/or

EN 

86 

   EN 

 
Investors' interest 

are given the means to protect their interests and/or 
third parties have an oversight role). A certain 
balance between criteria 1 and 3 could however be 
found (e.g. if CA assesses the risk of potential 
[negative] impact of the merger on investors) 

Relevant 
aspects 

Coverage 

Possibilities 

Comments 

Only cross-border fund 
mergers 

All fund mergers (cross-
border and domestic)  

There seems to be few obstacles to merging funds 
domestically. Consolidation at national level is 
already quite intense in certain countries, such as 
France where 600 domestic mergers take place 
every year. Therefore a framework covering only 
cross-border mergers could be seen as a logical 
choice. However, domestic mergers may have 
cross-border effects (e.g. in the case of the merger 
of two Luxembourg funds widely notified for 
selling across the EU). It would therefore appear 
appropriate to ensure that a minimum set of 
coherent investor protection provisions would apply 
to all type of mergers (cross-border and domestic). 

Merger 
techniques 
covered 

By absorption 

By creation of a new fund 

Schemes of 
arrangement/amalgamation 

An  appropriate  approach  seems  to  include  the 
possibility  of  both  mergers  by  absorption  and  by 
creation  of  a  new  fund.  This  would  follow  the 
example  of  the  Cross-Border  Mergers  Directive97. 
However,  these  merger  techniques  are  not  often 
used  for  merging  funds  in  certain  MS  (particularly 
common 
therefore  be 
necessary  to  include  some  other  commonly  used 
schemes  of 
such 
merging 
arrangement/amalgamation98. 

law  countries).  It  may 

techniques, 

as 

Other  relevant  aspects  would  be  the  content  of  the  merger  file  on  which  the  competent 
authority will need to base its decision. Many different combinations of required documents 
could have been identified in the above 'possibilities' column. However, comparing all those 
possibilities  would  have  not  been  quite  meaningful  nor  would  have  it  added  much  to  the 
analysis. Instead, it is recommended to retain the list of required documents proposed in the 
exposure  draft.  This  had  been  drawn  up  in  line  with  national  practices  and  was  considered 
appropriate by respondents to the consultation.  

97 

98 

Directive  2005/56/EC  of  the  European  Parliament  and  of  the  Council  of  26  October  2005  on  cross-
border mergers of limited liability companies. 
This is the merger technique most used in common law countries. It implies a transfer of assets from the 
disappearing into the receiving fund. The liabilities are not transferred but discharged at a latter stage. 
Only then, the disappearing fund will be wound up. Inclusion of this merger technique was explicitly 
recommended by the Expert Group on market efficiency. 

EN 

87 

   EN 

 
 
 
                                                 
b) Investors' rights 

Relevant 
aspects 

Possibilities 

Comments 

Information 

Possibility 
to redeem 
free of 
charge 

Only to disappearing 
fund investors 

To both funds' investors 

Only for disappearing 
fund investors 

To both funds' investors 

Only disappearing fund 
investors 

Vote on the 
merger 

Both funds' investors 

According to national 
law 

Not charged to 
investors 

Shared between fund 
manager and investors 

Costs of the 
merger 

Impacts analysis 

Investors will need to be informed about the merger's 
and its potential impacts in order to take a decision. 
Considering that investors of the disappearing fund will 
be the most affected by the merger, the less burdening 
measure would be to inform only those. However, in 
certain cases, information to the receiving fund 
investors may also be appropriate (particularly if the 
merger risks having a negative/substantial impact on 
them). Both options deserve therefore to be carefully 
looked at in the following section. 

Again, as the investors of the disappearing fund are 
those most affected by the merger, it seems logical that 
at least such investors would have the possibility to 
redeem without charge if they don’t agree with the 
merger. However, it may also be appropriate to give the 
same possibility to receiving fund investors 
(particularly if the merger risks having a 
negative/substantial impact on them). 

All investors should be able to decide on the merger of 
the fund they invested in with another. However, an 
investor vote is not always the normal practice (in some 
MS and/or for some fund types) and voting rules often 
are linked to company law provisions. In addition, 
investors rarely play an active role. Other investor 
protection issues seem therefore more cost-effective 
without interfering with national laws and practices. 

Fund mergers are often the result of a commercial 
decision by the fund provider. It would therefore appear 
appropriate that the costs associated to the merger are 
borne by the fund provider and not by investors. On the 
other hand, investors should also benefit in the medium 
to longer-term from the efficiency savings achieved. 
The second option would then need to be reinforced 
with provisions guaranteeing the passing on to investors 
of some of the savings. This may be, however, difficult 
to implement in practice and risks creating legal 
uncertainty. 

The tables above provide an overview of the main features a fund mergers legal framework 
should  ideally  have.  In  some  cases,  the  choice  among  the  different  available  possibilities  is 
uncomplicated. In others, a more in-depth analysis is required. This is particularly the case for 

EN 

88 

   EN 

 
the obligation to send information on the merger to investors and the right to redeem free of 
charge. In both cases the options are the same and the implications similar (particularly from 
an investor protection point of view). The following analysis will thus focus on only one of 
these  cases,  more  specifically  the  information  obligation.  The  conclusions  can  then  be 
extended to the "right to redeem free of charge" case. 

As indicated, two options have been identified: 

(Note: the option "no information at all" is for obvious investor protection reasons ruled out)  

Option 1: Only to disappearing fund investors 

The rationale behind this option is that the investors of the disappearing fund are those most 
affected by the merger. The merger should in principle not have any significant implications 
on investors  of the  receiving  fund. The investment policy of the  receiving fund remains the 
same and the merger would usually have an impact similar to that of a big subscription into 
the fund.  

Option 2: Always to both funds' investors 

The  rationale  behind  this  option  is  that  both  the  disappearing  fund  and  the  receiving  fund 
investors  have  a  right  to  be  informed  of  the  possible  impacts  of  the  merger  on  them. 
(Additionally, information to the receiving fund investors will need to be provided for in any 
case if national law foresees their vote on the merger.)  

This option was vehemently supported by investor associations (FIN-USE, Financial Services 
Consumer  panel,  Test-achats,  Verbraucherzentrale  Bundesverband)  in  their  responses  to  the 
exposure  draft  consultation.  Some  national  authorities  also  considered  that  receiving  fund 
investors  should  receive  the  information  whatever  the  impact  of  the  merger  on  them  was 
(Finnish Ministry of Finance, Dutch regulator). On the other hand, industry players tended to 
favour a facultative approach, i.e. leaving to the fund promoter the decision to inform or not 
investors in the receiving fund (e.g. AFG, JP Morgan, Pioneer, Unitcredit Group) or imposing 
it  as  a  requirement  only  if  the  impact  on  the  receiving  fund  investors  would  be  substantial 
(e.g. ALFI, State Street). 

Option 1: Only to disappearing fund investors 

Impacts from the point of view of: 

a)  Industry:  Preparing  information  adapted  to  both  types  of  investor  should  not  be  overly 
onerous  (often  the  relevant  information/documents  will  be  similar).  However,  distributing  it 
will definitely be onerous. Requiring the provision of information only to disappearing fund 
investors  would  considerably  limit  the  administrative  burden  on  industry  players.  Lower 
merger costs should then encourage further fund consolidation99.  

b)  Investors:  For  the  receiving  fund  investors,  the  merger  would  most  often  have  no 
perceptible impact. There is a risk of performance dilution due to the transfer of assets from 
the  disappearing  fund  into  the  receiving  fund,  but  this  could  be  mitigated  with  techniques 

99 

If, as recommended in the 'investors' rights' table above, these costs cannot be passed on to investors, 
fund providers will be more reluctant to propose fund mergers. 

EN 

89 

   EN 

 
                                                 
already  well-known  by  fund  providers100.  A  'dilution  levy'  could  be  applied  to  reduce  the 
impact of cash transfers (as is already commonly done for big subscriptions). With regards to 
the securities transferred, these may need to be sold in order to rebalance the portfolio of the 
receiving fund. This could be done during a long enough period in order to alleviate potential 
negative  effects  on  the  performance.  In  some  cases  a  realignment  of  the  portfolio  of  the 
disappearing fund in line with that of the receiving fund takes place before the merger in order 
to  mitigate  any  potential  performance  dilution101.  The  risk  however  exists  that,  particularly 
when investment policies differ significantly, the rebalancing of portfolios would still have a 
definite  negative  impact  on  the  performance.  If  receiving  fund  investors  are  not  properly 
informed  of  this  risk  they  will  not  be  able  to  act  consequently  and  would  therefore  not  be 
adequately protected.  

c)  Regulators:  Providing  merger  information  only  to  the  disappearing  fund  investors  could 
give rise to supervisory concerns. The authority responsible for the receiving fund may feel 
unable  to  fulfil  its  obligations  towards  investors.  To  mitigate  these  concerns  greater 
safeguards would be required. The decision of the disappearing fund regulator may then need 
to be based not only on a formal/completeness check of the merger file but would also need to 
take into consideration the interest of investors. (This would require a greater reliance on the 
judgement of the disappearing fund regulator by the other regulators involved). 

Option 2: Always to both funds' investors 

Impacts from the point of view of: 

a) Industry: A considerably high administrative burden will need to be assumed by industry 
players.  Distribution  and  translation  costs  may  be  considerable102,  notably  if  the  receiving 
fund has been notified for marketing in several MS. (According to PWC/Lipper data, at the 
end of 2006 the typical cross-border fund is notified for selling in at least 7 countries103.) A 
longer  preparation  period  (for  the  drafting  and  translation)  will  most  probably  also  be 
necessary. This would delay the completion of the merger and therefore the achievement of 
the savings pursued.  

b)  Investors:  Although  the  impact  to  receiving  fund  investors  most  often  would  not  be 
important,  the  risk  of  performance  dilution  as  explained  above  remains  in  certain  cases 
(notably when the investment polices of the funds merging significantly differ). In such cases, 
receiving  fund  investors  would  only  be  properly  protected  by  receiving  information  on  the 
merger  (so  as  to  allow  them  to  exercise  their  rights)104.  On  the  other  hand,  this  information 
requirement could be seem as burdensome by the industry and effectively discourage mergers. 
In  the  absence  of  fund  consolidation  activity,  investors  would  then  continue  to  pay 
unnecessarily high fees (please see problem description above).  

100 
101 
102 

103 
104 

Please see Pioneer's response to the exposure draft consultation. 
Please see State Street's response to the exposure draft consultation. 
These costs would be extremely difficult to quantify even for a single merger since it would depend on 
the  number  of  investors  and  from  how  many  MS  they  are  from  (which  determines  the  distribution 
method and the language of communication). Extrapolating this quantification to the estimated number 
of potential mergers would make little sense. 
"Global Fund Distribution 2007", Price Waterhouse Coopers and Lipper, 2007. 
Information  should  also  obviously  be  provided  whenever  the  receiving  fund  investors  are  entitled, 
under the relevant national provisions, to vote on the merger. 

EN 

90 

   EN 

 
                                                 
c) Regulators: Having to check the information prepared for the receiving fund's investors in 
addition  to  that  prepared  for  the  disappearing  fund's  ones  should  not  add  a  significant 
additional  burden  to  the  regulators'  work.  As  explained  above,  contents  would  be  largely 
similar. Regulators would however also need to verify whether the information on the merger 
has  been  provided  to  investors  according  to  the  (language  and  distribution)  requirements  in 
the  Directive.  When  the  information  is  provided  to  both  disappearing  and  receiving  funds' 
investors,  more  resources  should  be  deployed  on  the  side  of  regulators.  If  investors  of  the 
receiving  fund  are  not  to  be  affected  by  the  merger,  the  deployment  of  additional  regulator 
resources may not be adding much to their protection. 

Other effects  

Administrative burden: although the choices in the above sections have been made with the 
objective to minimise the administrative burden for the industry, the creation of a legislative 
framework for mergers could be seen as introducing additional (administrative) requirements. 
It  needs  to  be  noted  however  that  the  harmonisation  of  the  merger  procedure  sought  by  the 
new provisions would considerably reduce the administrative burden actually borne by fund 
promoters wishing to merger funds cross-border (and who currently need to comply with a set 
of  different  national  requirements).  Under  the  proposed  framework,  a  single  merger  dossier 
for a single regulator (that of the disappearing fund) will need to be prepared.  

Summary table 

Specific Objectives 

Overall Objective 

Efficiency 

Investor protection administrative 

burden 

Only to 
disappearing 
fund 
investors 

To all 
investors 

- 
(protection risk for 
receiving fund investors)

+ 
(lower burden) 

+ 
(all investors duly 
protected) 

- 
(higher burden) 

sector 
efficiency 

+ 
(higher scale 
savings) 

- 
(lower scale 
savings) 

Pro Single 
Market? 

yes 
(potentially more 
mergers) 

no 
(may discourage 
mergers) 

Preferred option 

Under certain circumstances (please see above) the performance of the receiving fund may be 
negatively  affected by the  transfer of assets. In those cases, it would appear  normal, for  the 
sake of investor protection, that all involved investors would be adequately informed of that 
risk. Additionally, all investors should be also given the means to opt-out of the merger (e.g. 
by  offering  them  the  possibility  to  redeem  free  of charge or to switch with no entry fees to 
another fund). However, considering that in many cases the risk of detriment for the receiving 
fund investors is limited and that measures exist to mitigate the merger potential performance 
dilution,  it  would  be  unnecessarily  burdensome  to  require  that  receiving  fund  investors  are 
systematically informed. Thus, neither of the options seems to be optimal: the first one from 
the investor point of view, the second from the efficiency point of view. 

A  combination  of  both  options  would  therefore provide a more proportionate solution. This 
could require that information is always provided to disappearing fund investors but that the 

EN 

91 

   EN 

 
 
 
 
need to send it also to receiving fund investors would be assessed by the regulator responsible 
for  the  merger  approval105,  i.e.  the  regulator  of  the  disappearing  fund.  This  regulator's 
decision  could  be  then  based  on  the  potential  impact  of  the  merger  on  the  receiving  fund 
investors.  Since  the  main  negative  potential  impact  on  them  is  of  a  purely  technical  nature 
(i.e.  the  dilution  of  performance  explained  above),  the  regulator  of  the  disappearing  fund 
should be able to asses that risk (as it is already currently done for national mergers)106. In any 
case,  some  form  of  communication  or  co-operation  between  regulators  could  also  be 
considered. For example, the possibility for the regulator of the disappearing fund to consult 
with the regulator of the receiving fund before taking a decision. 

Other (general) considerations 

A  number  of  stakeholders  during  the  exposure  draft  consultation  have  highlighted  the 
possibility  of  negative  tax  implications  of  cross-border  mergers.  It  needs,  however,  to  be 
pointed  out  that  no  new  arguments  have  been  provided  (nor  the  conditions/situation  have 
changed)  to  justify  a  revision  of  the  WPIA  conclusion  in  this  respect.  A  Commission 
Communication remains therefore the preferred option.  

Fund mergers will often be considered as mere internal restructuring operations. However, in 
certain  cases107,  they  may  give  rise  to  competition  related  considerations.  In  such  cases, 
attention should be paid to compliance with national or EU competition rules (if the merger 
has an EU dimension108).  

'Merger' and 'rationalisation' are often associated with negative social impacts. In the case of 
fund  mergers,  the  constant  high  rhythm  of  launching  new  funds  should  compensate  for  any 
such  impact.  (If  redundancies  are  to  be  expected  in  the  asset  management  business,  they 
would most probably be rather linked to the automatisation of functions and processes than to 
fund mergers.) 

It could also be argued that the greater overall size of UCITS may have some effects in terms 
of  investment  strategies.  The  Directive  concentration  rules  (article  25),  could  then  oblige 
managers to change their investment focus, particularly if the fund invests in specific or less 
liquid  sectors/markets  or  in  small  companies.  However,  it  can  be  expected  that  most  often 
managers  will  tend  to  increase  the  diversification  of  their  portfolios  rather  than  changing 
strategies. Also, considering the global size of capital markets (the world market capitalisation 
for equities and bonds was $51 tr. and $ 30 tr. respectively at the end of 2006) and the current 
average size of European funds (€ 181 million as showed in the graph at the beginning of this 
section), greater fund sizes should not importantly change investment strategies.  

105 

106 

107 

108 

Unless this is in any case mandatory because the merger requires a vote by the receiving fund investors, 
in  which  case  information  on  the  merger  is  to  be  provided  prior  to  the  unit-holders'  meeting  in 
accordance with national rules. 
Given the technical nature of the performance dilution effect, no particular knowledge of the local rules 
in the country of the receiving fund should be required.  
e.g.  the  merger  of  two  funds  of  two  different  asset  management  companies  (without  those  asset 
management companies merging themselves). It could therefore been argued that the merger may lead 
to concentrations that may be not fully compatible with effective competition in the common market. 
The  'EU  dimension'  of  the  merger  would  need  to  be  assessed  taking  into  account  turnover  and  other 
requirements. Given the required level of the turnover thresholds and the small size of average EU fund, 
it is however quite unlikely that the merger of respective funds would fall in the above category. 

EN 

92 

   EN 

 
                                                 
Finally,  there  is  a  close  relation  between  fund  mergers  and  some  of  the  other  measures 
discussed  in  this  impact  assessment.  First  of  all,  asset  pooling.  Although  fund  mergers  and 
pooling may pursue similar goals (economies of scale in asset management), they are not to 
be  considered  as  alternative  but  rather  as  complementary  measures.  Opting  for  one  or  the 
other  will  depend  on  the  business  model  adopted:  mergers  might  be  more  appropriate  for 
industry  players  wishing  to  offer  a  (cross-border)  fund  range  from  a  single  location;  while 
pooling might be more appropriate for those offering a range of (national) funds established in 
several  MS.  Second,  given  the  need  to  provide  appropriate  information  to  investors  on  the 
proposed  merger  operation,  a  streamlined  Simplified  Prospectus  (or  Key  Investor 
Information)  could  play  an  important  role  in  facilitating  the  comparison  between  the  funds 
merging.  Finally,  it  would  be  advisable  that  the  receiving  fund  be  notified  to  the  relevant 
authorities  in  all  MS  where  the  disappearing  fund  was  sold  to  investors.  A  simplified 
notification procedure would make it easier for the industry to comply with this requirement. 

Impact table 

Option 

Affected 
parties 

Effect 
Direct: D 
Indirect: I 

Industry 

D 

Only to 
disappearing 
fund 
investors 

Investors 

D 

I 

Regulators 

D 

Industry 

D 

To all 
investors 

Investors 

D 

Regulators 

D 

Impacts 
Positive: + 
Strongly positive: ++ 
Negative: - 
Strongly negative: -- 
Neutral/marginal: ≈ 

++  
(lower merger costs) 
++  
(greater potential for 
scale savings) 
-  
(performance dilution) 
+  
(lower costs) 
+/- 
(easier supervision; 
investor protection 
concerns) 
--  
(higher merger costs) 
-  
(lower potential for 
scale savings) 
++  
(maximum protection) 
-  
(higher costs) 
+/-  
(more resources for 
supervision; lower inv. 
protection concerns) 

Impact 
Timing 
One-off 
Short-term 
Medium-term 
Long-term 
On-going 

short-term 

medium-term 

short- to 
medium-term 

Impact 
Nature 

Dynamic 
Static 

Impact 
Likelihood
Certain 
High 
Medium 
Low 

dynamic 

high 

dynamic 

low 

long-term 

dynamic 

medium 

one-off 

static 

medium 

short-term 

medium-term 

dynamic 

medium 

on-going 

static 

high 

dynamic 

low 

one-off 

static 

medium 

EN 

93 

   EN 

 
 
 
Problem description 

Asset Pooling 

The  above  IA  fiche  on  fund  mergers  describes  in  detail  the  difficulties  derived  from  the 
proliferation of funds in the European fund market. Management of growing ranges of small 
funds  becomes  increasingly  difficult.  As  explained,  that  proliferation  does  not  only  lead  to 
greater  operational  risks  but,  most  importantly,  it  hinders  the  exploitation  of  economies  of 
scale.  Ultimately,  this  results  in  important  (unnecessary)  costs  for  investors.  Missed 
economies of scale annual savings amount to billions of euros109.  

The WPIA identified asset pooling as a complementary solution to mergers. In fact, in certain 
business  cases,  mergers  may  not  be  the  optimal  (or  the  most  desirable)  way  to  achieve 
economies of scale. Cross-border fund mergers will lead to the disappearance of less efficient 
(and overlapping) funds based in different domiciles while helping fund promoters to develop 
big  funds  serving  several  MS  markets  from  a  single  location.  However,  local  presence  may 
sometimes be preferred. This would allow fund promoters to better adapt fund features (e.g. 
charging  structure)  to  investors'  preferences  in  different  national  markets.  In  that  case  asset 
pooling  would  provide  a  more  appropriate  solution.  Pooling  also  facilitates  product 
innovation and a manager of managers' approach since it allows leveraging the know-how of 
a set of specialised fund managers110. The most common pooling techniques are described in 
the box below111. 

Main asset pooling techniques 

Entity  pooling  is  the  technique  that  allows  for  the  co-management  of  the  assets  of  different 
funds (sometimes called feeder funds) through the creation of pools of assets (master funds). 
Those pools are typically collective investment schemes. Participating funds hold units in the 
pool(s).  The  value  of  these  units  depends  on  the  net  asset  value  of  the  pool's  portfolio. 
Participating  funds  enjoy  the  same  economic  risks  and  benefits  as  if  they  were  directly 
invested in the underlying assets of the pool. 

Virtual pooling uses information technology to commingle the assets of two or more funds (or 
sub-funds of an umbrella) in an (virtual) investment pool. However, the investment pool does 
not  constitute  an  own  legal  entity.  The  participating  funds  remain  the  legal  and  beneficial 
owners of the assets.  

Pooling  have  been  widely  used  in  some  EU  jurisdictions  but  limited  to  funds  in  the  same 
domicile.  However,  to  better  exploit  potential  scale  economies  the  Expert  Group  report  on 
Market Efficiency recommended developing pooling on a cross-border basis. 

Pooling  savings  could  be  achieved  at  three  different  levels:  1)  front-office:  pooling  lowers 
managers'  overheads  since  a  single  manager  could  manage  a  higher  number  of  assets;  2) 
middle  and  back-office:  higher  average  transaction  sizes  and  fewer  trading  accounts  benefit 

109 

110 
111 

Please  refer  to  the  merger  fiche  for  further  details  on  the  consequences  of  the  proliferation  of  sub-
optimal sized funds. 
FEAM response to the Green Paper consultation, 31st October 2005. 
For  a  more  detailed  description  of  the  different  pooling  techniques  please  see  the  Appendices  to  the 
report of the Expert Group on Investment Funds Market Efficiency (European Commission (2006c). 

EN 

94 

   EN 

 
                                                 
from  lower  service-provider  fees;  and  3)  trading  execution:  grouped  trades  face  more 
competitive  spreads.  Since  many  of  these  savings  occur  at  the  fund  level,  they  are 
automatically passed on to investors. 

Obstacles to cross-border pooling in the UCITS framework were analysed in the WPIA. In the 
case of virtual pooling, these structures are not prohibited by the UCITS Directive. They are 
nevertheless  regarded  as  complex  and  requiring  important  investment  in  IT  systems.  As 
regards to entity pooling, it would seem easier to implement and to supervise. However, entity 
pooling is prevented by the Directive's diversification requirements. Withholding taxes could 
also have a negative impact if the entity pooling the assets is not fiscally transparent112.  

In  the  case  of  virtual  pooling,  the  WPIA  analysis  let  the  door  open  to  the  introduction  of  a 
common  approach  but  recommended  to  give  further  consideration  to  the  issue.  Subsequent 
research on this area led Commission services to conclude in the exposure draft that it did not 
seem appropriate at that stage to take any measure to create a pan-European environment for 
virtual  pooling.  Important  cross-liability  and  other  investor  protection  concerns  were 
highlighted as the main reason. Additionally, it appeared that the use of this technique was not 
much  extended  outside  a  few  MS  and  that  there  did  not  exist  cross-border  virtual  pooling 
experiences.  Besides,  there  had  not  been  strong  demands  on  the  industry  side  for  such  an 
environment113.  Analysis  of  the  issues  blocking  the  cross-border  development  of  virtual 
pooling  should  therefore  be  first  discussed  in  appropriate  fora.  More  detail  on  these 
considerations is provided at the end of this fiche.  

On the other hand, the WPIA report concluded that the UCITS Directive should be changed to 
allow  entity  pooling.  However,  no  detailed  analysis  was  provided  on  the  scope  of  this  new 
freedom;  i.e.  should  entity  pooling  in  a  broad  sense  be  allowed  or  should  changes  to  the 
Directive be limited to allow only the so-called 'master-feeder' structures? These concepts are 
described graphically in the boxes below. 

Master-feeder 

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 

Each feeder invests all (or the majority) of 
its assets in a single master. 

Feeders are allowed to invest their 
assets in several different masters. 

112 
113 

"Pooling: how can fund managers respond efficiently to different investors needs?", IMA, July 2005. 
Contributions  to  the  consultations  on  the  Green  Paper  and  the  Expert  Group  report  on  Market 
Efficiency  had  showed  a  greater  interest  for  entity  pooling  (particularly  master-feeder  structures).  As 
explained below responses to the exposure draft have confirmed this position. 

EN 

95 

   EN 

 
 
                                                 
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.  The  main 
characteristics of that proposed preliminary framework were the following: a) prior regulatory 
approval of the feeder's investment into the master was required, b) pooling structures needed 
to  have  at  least  two  feeders,  c)  the  minimum  investment  of  the  feeder  into  the  master  was 
fixed at 85% (of the feeder's assets); d) proper arrangements between master and feeder (and 
between  its  depositaries  and  auditors)  needed  to  be  in  place;  e)  information  to  investors 
should  clearly  explain  the  implications  of  the  two-layer  investment;  and  f)  both  master  and 
feeder, as UCITS, needed to comply with the Directive provisions 

Responses to the Exposure Draft consultation 

Scope:  Almost  half  of  those  commenting  on  the  issue  supported  the  proposed  focus  on 
master-feeder  structures.  Others,  while  also  in  favour  of  master-feeders,  said  to  welcome  in 
the  future  the  possibility  of  using  entity  pooling  in  a  broad  sense.  Several  respondents 
defended  the  creation  of  a  framework  for  entity  pooling  in  a  broad  sense.  They  considered 
that  limiting  the  scope  only  to  master-feeders  was  a  missed-opportunity.  Very  few 
respondents pleaded for provisions to permit virtual pooling. 

Approach:  Commentators  found  the  framework  rather  prescriptive.  They  recommended  to 
distil  the  key  regulatory  principles  from  the  exposure  draft,  leaving  details  on  procedure  or 
application of principles to specific scenarios to be filled in through implementing legislation 
or common supervisory practice. 

Two-feeder  requirement:  The  vast  majority  of  respondents  considered  it  unnecessary  to 
require that a master should have at least two feeders.  

Agreement between feeder and master: Several industry stakeholders pleaded for the removal 
of the envisaged requirement for a formal agreement between master and feeder funds. On the 
other  hand,  a  number  of  regulators  and  investor  associations  welcomed  the  proposal.  They 
stressed that it would clarify the respective responsibilities of feeder and master funds.  

Feeder's responsibility: Several industry stakeholders claimed that the feeder should only be 
responsible  for  selecting  the  master.  The  feeder  fund  should  then  be  able  to  rely  on  any 
information it receives from the master. This point of view was contested by those who argue 
that  master-feeder  structures  should  be  treated  as  a  form  of  (management)  delegation  and, 
therefore, the delegating entity (feeder) should remain responsible and be fully accountable to 
its unit-holders.  

Feeder  depositary/auditor's  role:  Several  industry  stakeholders  opposed  the  idea  that  the 
feeder depositary/auditor should be obliged to monitor whether the master fund was operated 
in line with the obligations binding on the feeder fund. In their view, they should be able to 
rely on the information they receive from the master's depositary/auditor. Other respondents 
(notably  regulators  and  investor  associations)  defended  the  envisaged  approach  arguing  the 
master-feeder structures were comparable to a delegation of the asset management.  

Info-sharing agreement between depositaries/auditors: Several industry stakeholders criticised 
the need for a formal info-sharing agreement between the depositaries/auditors of the feeder 
and  master  funds.  They  claimed  that  the  costs  would  outweigh  the  benefits.  On  the  other 

EN 

96 

   EN 

 
hand,  several  regulators,  but  also  some  industry  representatives  argued  that  the  info-sharing 
agreements were needed in order to allow these actors to comply with their obligations.  

Investment  into  the  master  threshold:  Most  stakeholders  agreed  with  the  envisaged 
requirement that the feeder invest at least 85% of its assets in the master.  

Derivatives:  Respondents  discussed  whether,  for  what  purposes  and  to  what  extent  a  feeder 
should be able to hold derivatives. A few respondents argued that no specific restrictions on 
the feeder's use of derivatives should be contemplated. However, others favoured restricting 
the use of derivatives to a few specific situations (e.g. hedging currency risk).  

Objectives 

A legislative framework for entity pooling should properly address the different stakeholders' 
concerns and realise their expectations. This framework should therefore: 

a) from a single market perspective: 

•  Facilitate the cross-border pooling of assets (and thus encourage scale savings and 

specialisation gains) 

•  Encourage a broader fund offer  

b) from an industry angle: 

•  Facilitate the reaping of economies of scale related savings 

•  Create the minimum (administrative) burden 

•  Allow a high degree of flexibility in the management of pooling structures 

c) from the regulators' point of view: 

•  Allow regulators to fulfil their supervision and investor protection duties 

•  Be clear as regards regulators' respective responsibilities 

d) as well as, ensure that investors: 

•  Have access to an enlarged and innovative fund offer adapted to their needs 

•  Are properly informed of the implications of investing in a two-layer structure 

•  Are adequately protected 

Benefits  

The main benefits of that new framework would be the following: 

Short-term 

For investors 
A large fund choice; 
lower costs 

For the industry 

Lower costs 

Long-term 

A greater fund choice; 
lower costs 

More business 
opportunities; lower costs  

EN 

97 

   EN 

 
 
Costs savings will materialise rather quickly once the entity pooling structures in place. Since 
many  of  these  savings  will  take  place  at  the  fund  level,  investors  will  benefit  directly  from 
them (most probably in the form of higher performances). A facilitated framework for entity 
pooling  will  also  encourage  product  innovation114;  enlarging  thus  investor's  choice  and 
industry's  business  opportunities  in  the  medium  to  long-term.  Lower  costs  and  greater 
business  opportunities  should  also  have  durable  positive  dynamic  effects  on  the  European 
economy. 

Design of the new pooling framework 

Preferred choices are presented in bold and italics.  

Relevant 
aspects 

Minimum 
pooling 
require-
ment 

Possibilities 

Comments 

At least two feeders 

No minimum 
requirement 

The exposure draft's requirement for at least two feeder 
funds to pool into a master responded to investor protection 
concerns. Particularly, the risk that pooling would be used 
just to create double cost-layer structures. However, this 
does not appear to be the most cost-effective approach to 
deal with this risk. It implies cumbersome administrative 
procedures that could not only outweigh potential pooling 
savings but, at the end of the day, also increase the costs 
paid by the investor. Adequate and transparent disclosure 
provisions (e.g. clear information on the implications, 
including costs, for the investor of the pooling structure) 
seem a most proportionate way to achieve investor 
protection115. 

Regulatory 
approval 

No regulatory 
approval 

Regulatory approval 
by the feeder's 
competent 
authorities (CA) 
Regulatory approval 
by both the master's 
and the feeder's CA 

The investment of the feeder into one (or more) master(s) 
having potentially important consequences for the investors 
of both the master and the feeder, the first possibility does 
not seem to be appropriate from an investor protection point 
of view. Requiring the approval of the CA of both the 
master and the feeder could be too burdensome and 
discourage cross-border structures. Since investors of the 
feeder are most directly affected by the two-layer 
investment, involvement of only the feeder's CA appears 
more appropriate116. 

114 

115 

116 

Pooling  allows  fund  promoters  to  offer  a  series  of  (feeder)  funds  with  different  characteristics  (e.g. 
covering or not currency risk, with or without capital guarantee) even if they are all invested in the same 
master. 
Furthermore, even in those cases where a master fund would have only one feeder fund, the master may 
also pool assets from direct investors. The two-feeder requirement is therefore overly prescriptive since 
a one-feeder-structure also enables the pooling of assets and thus the achieving economies of scale. 
The main negative consequence of the pooling structure on the master investors (other than the feeder) 
would  be  linked  to  the  impact  of  the  feeder's  subscriptions  and  redemptions  on  the  master's 
performance. However, as explained in the fund merger IA fiche, industry players have the tools to deal 
with  performance  dilution  risk.  Imposing  additional  regulatory  control  (by  the  master's  CA)  would 
probably  not  enhance  significantly  investor  protection  and  would  render  the  procedure  considerably 
cumbersome.  

EN 

98 

   EN 

 
 
                                                 
Relevant 
aspects 

Possibilities 

Comments 

Rights of the feeder 
vis-à-vis the master 
set out in the 
Directive 

Existence of 
agreement required 
for approval 

Master and feeder 
free to organise their 
relation 

Info-sharing 
requirements set out 
in the Directive 

Info-sharing 
agreements to be 
entered into 

Relevant actors free 
to organise their 
relation 

Relation 
between 
master 
and feeder 

Relation 
between 
master & 
feeder's 
depositarie
s/auditors 

Feeder's 
investment 
into the 
master(s) 

No minimum 
investment required 

Directly laying down in the Directive all the rights of the 
feeder  vis-à-vis  the  master  was  considered  ahead  of  the 
preparation  of  the  exposure  draft.  It  was  however 
rejected since it appeared as a burdensome and inflexible 
solution  (any  need  to  update  those  rights  would  require 
changes to the Directive). The requirement for feeder and 
master to enter  into an agreement was  also criticised by 
several  (mainly  industry)  respondents  to  the  exposure 
draft  consultation.  They  pointed  out  the  increased  costs 
and lack of flexibility that the requirement would entail. 
Despite this, some form of (working) arrangement would 
be necessary for investor protection reasons. This would 
ensure  that  the  feeder  can  meet  its  obligations  vis-à-vis 
its investors. In order to mitigate the risk of higher costs 
and  operational  rigidity,  a  principle-based  requirement 
(allowing  master  and  feeder  enough  flexibility 
to 
efficiently organise their relation) could be envisaged 

Again,  introducing  a  detailed  set  of  information-sharing 
provisions in the Directive would create a rather onerous 
and  inflexible  framework  for  the  relation  between  the 
relevant  actors.  On  the  other  hand,  the  requirement  for 
depositaries/auditors  of  the  master  and  feeder  to  set  up 
information  sharing  arrangements  was  also  considered 
burdensome  by  some  (industry)  respondents  to  the 
exposure  draft  consultation.  As  in  the  case  of  the 
agreement  between  master  and  feeder,  info-sharing 
arrangements  appear  necessary  since  they  aim  to  ensure 
that  the  depositaries/auditors  of  both  master  and  feeder 
are  able  to  fulfil  their  duties  (enhancing  thus  investor 
protection).  As  explained  above,  the  corresponding 
legislative  provision  could  however  consist  of  a  (simple 
and) principle-based requirement.  

in  dealing  with 

Allowing the feeder to invest any proportion of its assets 
in  the  master(s)  would  give  the  feeder's  manager  more 
leeway 
investors'  subscriptions  or 
redemptions.  On  the  other  hand,  fixing  a  relative  high 
minimum  investment  requirement  would  ensure  greater 
transparency  (and  reliability)  of  the  pooling  structure.  It 
can  also  be  considered  as  an  effective  way  to  link  the 

EN 

99 

   EN 

 
Minimum investment 
required 

can  also  be  considered  as  an  effective  way  to  link  the 
investment  policies  of  master  and  feeder.  The  85% 
minimum investment threshold proposed in the exposure 
draft was generally regarded as adequate. The remaining 
(free invested) 15% was considered to allow the feeder's 
manager 
to  adequately  manage  (subscriptions  and) 
redemptions.  In  any  case,  the  choice  between  these  two 
possibilities  will  depend  on  the  entity  pooling  option 
finally chosen (please see analysis below) 

Relevant 
aspects 

Possibilities 

Comments 

Use of 
derivatives 

Unrestricted use 

Restricted 
qualitatively and 
quantitatively 

Restricted only 
quantitatively 

Only selecting the 
master(s) 

Feeder's 
role 

Selecting the 
master(s) and close 
on-going monitoring 
of its/their activities 

purposes. 

Investment  in  derivatives  is,  under  certain  conditions, 
for  portfolio 
the  UCITS  Directive 
allowed  by 
management 
quantitative 
Imposing 
restrictions  to  their  use  would  make  sense  from  an 
investor protection point of view (e.g. derivatives could 
be included in the above 15% threshold and the global 
exposure of the pooling structure relating to derivatives 
limited).  Some  respondents  to  the  exposure  draft 
consultation  argued  in  favour  of  introducing  also 
qualitative restrictions. In particular, it was considered 
that  the  use  of  derivatives  should  only  be  allowed  for 
currency hedging purposes. While this would appear as 
offering greater protection to investors, other measures 
could be sufficient to that end (e.g. limiting the pooling 
structure's  global  exposure). 
It  would  also  be 
inconsistent with the current Directive approach which 
does  not  limit  investment  in  derivatives  to  that 
particular use. 

the  delegating 

The fact that the master is a UCITS (as proposed in the 
exposure  draft)  should  provide  an  additional  layer  of 
protection  for  investor.  Requiring  that  the  feeder 
monitors  the  master  may  then  lead  to  a  redundant  use 
of resources. However, as rightly pointed out by some 
respondents to the exposure draft consultation, pooling 
could  be  considered  as  a  form  of  delegation  (and 
therefore 
retain 
responsibility).  Additionally,  the  feeder,  as  any  other 
UCITS,  has  a  number  of  obligations  vis-à-vis  its 
investors  and  would 
to  monitor 
somehow the activities of the master. In order to avoid 
any duplication of costs (that are ultimately passed on 
to  investors)  the  preferred  solution  would  be  the  first 
one  (only  selecting  the  master)  coupled  with  some 
monitoring  elements  that  would  allow  the  feeder  to 
comply with its duties. 

therefore  need 

should 

feeder 

EN 

100 

   EN 

 
 
Conversion 
of UCITS 
into a 
feeder 
UCITS 

Investors not 
informed 

Investors just 
informed 

Investors informed 
+ right to redeem 
free of charge 

Transforming an existing UCITS into a feeder one implies a 
change of investment policy. This should ideally be 
communicated to investors before it takes place117. The first 
possibility should therefore be excluded for investor 
protection reasons. However, introducing a simple 
information obligation may not be enough to protect 
investors' interests. They may find themselves owning 
shares of a fund quite different to that into which they had 
originally invested and that does not respond anymore to 
their particular needs. They should then, as in the case of 
fund mergers, be offered the right to redeem free of charge. 

Impacts analysis 

The  tables  above  provide  an  overview  of  the  main  recommended  features  for  an  entity 
pooling  framework.  Many  of  the  choices  are  uncontroversial.  Others  are  influenced  by  the 
type of pooling technique chosen. As explained before, the preferred technique presented in 
the exposure draft was 'master-feeder' structures. Responses to the consultation show that this 
choice  is  not  without  critics.  The  corresponding  advantages  (and  disadvantages)  of  both 
master-feeders  and  entity  pooling  in  a  broad  sense  are  discussed  below  in  more  detail. 
However, comparison in quantitative terms is difficult given the absence of relevant data.  

Option 1: Entity pooling in a broad sense 

The  Directive  already  allows  UCITS  to  invest  in  other  funds.  Funds  of  funds118  rules  were 
introduced with the 2001 amendments in line with the Directive's underlying principles, i.e. 
by enlarging the list of assets eligible for UCITS to invest into (i.e. funds) and by extending 
the diversification criteria to this new eligible asset. Allowing entity pooling in a broad sense 
would require to reconsider (or eliminate) those diversification criteria. In order to overcome 
any  concerns  derived  from  this  relaxation  of  the  diversification  rules,  the  Expert  Group  on 
market efficiency recommended that both feeder and the masters be UCITS.  

Impacts from the point of view of: 

a) Industry: The possibility to use this pooling technique would bring important advantages 
to industry players. Flexibility to tailor feeder funds' composition would allow fund promoters 
to  adapt  quicker  their  fund  ranges  to  changing  trends  and  investors'  demands.  This  pooling 
technique  would  also  facilitate  the  access  to  the  best  investment  managers  (and  should 
encourage  competition  between  them).  It  could  be  argued  that  these  advantages  are  already 
available (although to a lesser extent) to industry players thanks to the current funds of funds 
regime. Nevertheless, entity pooling in a broad sense would increase the industry's leeway119. 

117 

118 

119 

Changes  to  a  fund's  investment  policy  would,  in  some  MS,  even  require  the  approval  of  investors. 
However, this is not a universal practice (and depends on the legal form of the fund). 
A fund of funds is a fund whose portfolio is basically made of funds (and liquidity). This structure is 
however typically not used for the purpose of pooling assets but of asset allocation and diversification. 
Funds of funds' investors can therefore take advantage of the expertise of different asset managers and 
invest into a generally highly diversified (and therefore less risky) financial product. 
UCITS  can  invest  only  up  to  20%  of  their  assets  into  a  single  fund  (Article  24).  Entity  pooling  in  a 
broad sense would imply that a (feeder) UCITS can invest any proportion of its assets in any chosen 
number of (master) UCITS. 

EN 

101 

   EN 

 
                                                 
As  regards  to  the  potential  savings  offered  by  this  technique,  according  to  a  number  of 
industry responses to the exposure draft consultation, entity pooling in a broad sense would 
lead to greater efficiency gains than master-feeder structures120. However, if the objective is to 
achieve  economies  of  scale  through  the  pooling  of  assets,  this  seems  to  be  more  easily 
attained through master-feeder structures121. There is also the view that the costs of the entity 
pooling in a broad sense model are not negligible. Supervision by the manager of the resulting 
structure  will  require  robust  compliance  monitoring  infrastructure.  This  could  push  up  the 
costs of setting-up these structures. Subscriptions/redemptions into/from the feeder need to be 
allocated proportionally (between the masters) and would entail a high number of operations 
than  for  a  master-feeder  structure.  An  important  number  of  working  arrangements  between 
feeder  and  masters  may  also  need  to  be  entered  into,  further  increasing  costs.  It  needs 
however to be noted that many of these are one-off costs (contrary to the expected benefits).  

b) Investors: They would undoubtedly have access to a wider range of funds. Scale savings 
should  also  flow  down  the  fund  value-chain  to  investors.  Investors  may  however  find  more 
difficult  to  understand  the  implications  of  the  double-layer  investment  that  this  technique 
implies. It could be said that this is not different from the case of funds of funds (or master-
feeders  structures)  and  could  be  dealt  with  through  specific  information  obligations  (e.g. 
regarding  the  total  costs  of  the  structure).  There  remains  however  an  additional  source  of 
complexity  (vis-à-vis  master-feeder  structures).  This  is  the  fact  that  the  feeder's  investment 
policy and performance depends on that of a number of masters. It needs also to be noted that 
investors  associations  expressed  little  support  for  this  option  during  the  exposure  draft 
consultation.  

c)  Regulators:  The  analysis  ahead  of  the  exposure  draft  publication  concluded  that  entity 
pooling in a broad sense structures would render more difficult its oversight by the regulator, 
the fund administrator and the depositary; what was a clear cause of concern from an investor 
protection  point  of  view.  While  several  industry  respondents  defended  during  the  exposure 
draft  consultation  their  ability  to  effectively  monitor  these  structures,  regulators  often 
expressed  a  greater  unease.  Several  highlighted  the  potential  confusion  with  fund  of  funds 
structures  and  the  fact  that  it  was  a  less  well-known  entity  pooling  technique.  Greater 
resources  on  the  side  of  regulators  would  seem  therefore  to  be  needed  in  order  to  ensure 
appropriate oversight. 

Option 2: Master-feeders structures  

Implementation of option 2 will imply extending the UCITS framework to a technique that is 
already employed at national level in some Member States. Master-feeder structures are used 
to  offer  investors  access  to  management  capabilities  that  do  not  exist  'in-house'  (e.g.  using 
'white  labelling'),  to  adapt  products  to  different  investor  preferences122  and/or  achieve 
economies  of  scale.  Since  UCITS  cannot  invest  more  than  20%  in  another  fund,  existing 
feeders cannot take advantage of the UCITS passport and therefore can only access national 
investors. Giving the possibility to set-up master-feeders on a cross-border basis will boost the 
potential for scale savings of these structures.  

120 

121 

122 

Unfortunately, no data seems to be available in order to give an idea of the size of these potential extra 
gains. 
For a master in an 'broad entity pooling' structure to attain the same size as a master in a 'master-feeder' 
structure, a more important number of feeders need to pool their assets into it. 
For example, offering investors the same fund: one denominated in the fund currency (e.g. dollar) and 
the other in the investor's currency (e.g. euro) by hedging the currency risk. 

EN 

102 

   EN 

 
                                                 
Impacts from the point of view of: 

a) Industry: Master-feeder structures would not offer the degree of flexibility sought by the 
some industry players. Its efficiency potential would therefore seem more limited. However, 
this technique seems to better achieve the pooling objective by putting the assets of different 
feeders into a single master. Thus, the potential for economies of scale (and therefore savings) 
should  be  higher.  Set-up  costs  should  also  be  lower.  On-going  administration  (including 
performance attribution) should be also simpler than in the case of entity pooling in a broad 
sense. 

b) Investors: Investors support to master-feeders during the exposure draft consultation was 
neither strong (although more a 'no objections' position than in the case of option 1). The main 
concern for investors' associations related to how cost savings would flow down to investors. 
As explained above, economies of scale could be more quickly achieved with this technique 
than by using entity pooling in a broad sense structures. Running costs should be then rapidly 
reduced  and  investors  would  benefit  from  this.  (As  an  example  of  that  savings  potential,  it 
could be noted that the average Total Expenses Ratio of a Luxembourg fund of assets under 
US  $  5  million  is  more  than  twice  that  of  a  fund  over  $  250  million123.)  As  in  the  case  of 
entity pooling in a broad sense, proper investor protection would require clear disclosure of 
the risks and costs associated to the two-layer investment. 

c)  Regulators:  Most  regulators  during  the  exposure  draft  consultation  favoured  this  option. 
The main reasons were its lower degree of complexity, the fact that the use of this technique 
has already a positive track-record and the potential confusion with fund of funds structures of 
entity pooling in a broad sense. Monitoring of the master-feeder structure is facilitated by the 
fact  that  both  master  and  feeder  have  similar,  if  not  identical,  investment  policies.  The 
regulator's  role  appears  therefore  simpler  both  at  the  level  of  the  initial  authorisation  of  the 
structure and during its on-going supervision. 

Other effects  

Impact on SMEs: One suggestion made by the Expert Group on market efficiency could help 
to avoid the confusion between entity pooling in a broad sense and fund-of-funds structures. 
This is that the asset manager of both master and feeders be the same (or that they belong to 
the same asset management group). This would imply that small fund promoters may not have 
the sufficient mass of assets to be able to attain the scale savings sought by entity pooling in a 
broad sense124. Also the ability to gain access to the best managers would be diminished. 

Tax considerations: Potential tax implications have not been explicitly taken into account in 
the  above  analysis.  The  WPIA  report  stressed  that  withholding  tax  could  be  an  issue  as 
regards entity pooling (both in a broad sense or master-feeder structures). An IMA report in 
2005125  pointed  out  that  the  assets  of  feeder  funds  that  benefit  from  tax  treaty  entitlements 
would  need  to  be  pooled  into  a  fiscally  transparent  entity  (master)  in  order  to  continue 
enjoying that tax advantages. (In fact, MS such as Ireland have developed transparent vehicles 
for this purpose.) This would therefore restrict the benefits of entity pooling to certain type of 
structures.  Accordingly,  both  that  report  and  the  expert  group  on  market  efficiency  put 

123 
124 

125 

"Economies of scale and consolidation in collective funds" Lipper, March 2005. 
As explained before, entity pooling in a broad sense requires a higher number of feeders per master than 
master-feeder structures in order to achieve the same degree of pooling.  
Please see footnote 98. 

EN 

103 

   EN 

 
                                                 
forward  as  a  solution  to  work  on  a  common  approach  to  fiscal  transparency,  developed 
through  the  auspices  of  the  OECD.  On  that  basis,  an  in  line  with  the  strong  stakeholder 
support  for  action  in  this  area,  the  WPIA  considered  that  the  risk  of  potential  negative  tax 
implications  was  not  an  obstacle  significant  enough  not  to  proceed  with  the  creation  of  a 
facilitating  framework  for  entity  pooling  structures.  It  concluded  however  that,  investors 
should be fully informed of the potential tax implications (e.g. in terms of lower returns) that 
the  use  of  this  pooling  technique  may  entail.  No  new  elements  to  this  debate  have  been 
provided during the exposure draft consultation. 

Administrative burden: The possibility for UCITS managers to engage in entity pooling will 
introduce new opportunities for the industry but also new obligations and therefore additional 
administrative burden. However, the additional administrative burden appears justified by the 
need  to  ensure  adequate  levels  of  investor  protection.  It  needs  to  be  noted  that  given  the 
greater  complexity  of  'entity  pooling  in  a  broad  sense'  structures,  additional  investor 
information obligations may need to be imposed on fund providers. Thus, the negative impact 
on  administrative  burden  of  option  1)  risks  been  greater.  As  regards  to  the  other 
recommendations  put  forward  (please  see  'choices'  tables  above),  they  aim  at  reducing  the 
administrative burden by clearly identifying the industry's responsibilities.  

Summary table 

Specific Objectives 

Overall Objective

Investor 
protection 

Efficiency 

administrative 
burden 

sector 
efficiency 

Pro Single 
Market? 

Entity 
pooling 
broad sense 

- 

(supervisory concerns) 

- 
(higher burden) 

+ 
(higher flexibility 
lower ec. of scale) 

yes 

(will encourage 
market integration) 

Master-
feeders 

+ 

(more well-known and 
positively tested) 

+ 
(lower burden) 

+ 
(less flexibility; 
higher ec. of scale) 

yes 

(will encourage 
market integration) 

Preferred option 

In  practical  terms,  entity  pooling  in  a  broad  sense  would  imply  an  important  change  to  the 
UCITS Directive. Relaxing the diversification requirements of funds of funds structures could 
be seen as a challenge to the principles underpinning the Directive. In addition, entity pooling 
in  a  broad  sense  has  not  yet  been  widely  tested  at  national  level  and  both  regulators  and  a 
number of industry players seem wary about it126. The preferred option is therefore option 2 
(master-feeder structures). Its potential for savings is higher and investor protection impacts 
are lesser. 

126 

Support  for  master-feeders  structures  have  been  generally  higher  than  for  entity  pooling  in  a  broad 
sense. Please see responses to the Expert Group report on Market Efficiency and to the exposure draft 
consultation. 

EN 

104 

   EN 

 
 
 
 
 
                                                 
However,  implementing  master-feeder  structures  will  still  require  setting  a  series  of 
requirements  (including  information  obligations)  in  order  to  minimise  any  potential 
supervisory  concerns.  Most  of  those  are  summarised  in  the  tables  of  the  'Design  of  the 
framework' section. An effective co-operation mechanism between regulators would also be 
required  in  order  to  overcome  potential  investor  protection  concerns  in  the  case  of  cross-
border structures.  

Other (general) considerations 

There  exist  close  interlinkages  between  this  and  other  of  the  issues  analysed  in  this  report. 
First of all, clear and meaningful  disclosures would enhance investors'  understanding of the 
implications  of  the  pooling  structure.  Particularly  attention  should  be  given  in  the  Key 
Investor Information to the resulting investment policy and the global costs to be borne by the 
investor. Additionally, the savings potential of cross-border master-feeders could be boosted 
if  an  effective  management  company  passport  would  be  in  place.  Finally,  the  relation  with 
fund mergers, already explained in the fund mergers' fiche.  

EN 

105 

   EN 

 
Impact table 

Option 

Affected 
parties 

Effect 
Direct: D 
Indirect: I 

Entity 
pooling in 
a broad 
sense 

Master-
feeders 

Industry 

D 

Investors 

D 

D/I 

Regulators 

D 

Industry 

D 

Investors 

D 

D/I 

Regulators 

D 

Impacts 
Positive: + 
Strongly positive: ++ 
Negative: - 
Strongly negative: -- 
Neutral/marginal: ≈ 

++  

(product innovation 
flexibility) 

+ 

(scale savings) 

- - 

(more complex 
monitoring/administ.) 

++ 

(greater fund choice) 

≈/-  

(lower protection) 

+  

(lower costs) 

-  

(more resources 
needed) 

+  

(product innovation 
flexibility) 

++ 

(scale savings) 

≈  

(more complex 
monitoring/administ.) 

+ 

(greater fund choice) 

≈  

(lower protection) 

+  

(lower costs) 

+ 

(less supervisory 
concerns/resources) 

Impact 
Timing 
One-off 
Short-term 
Medium-term 
Long-term 
On-going 

Impact 
Nature 

Dynamic 
Static 

Impact 
Likelihood
Certain 
High 
Medium 
Low 

on-going 

dynamic 

on-going  

dynamic 

high 

low 

high 

medium 

on-going 

static 

medium 

on-going 

dynamic 

high 

low 

high 

on-going  

dynamic 

low 

high 

on-going 

static 

high 

EN 

106 

   EN 

 
 
Virtual pooling 

Virtual pooling uses information technology to commingle the assets of two or more funds in 
a virtual investment pool. This technique is extensively used in some MS, such as Ireland127. 
However,  to  achieve  its  full  savings  potential,  some  parts  of  the  industry  are  asking  for  the 
freedom  to  pool  fund  assets  across  borders  (No  cases  of  cross-border  virtual  pooling  have 
been accounted for so far.) 

Advantages 

As indicated above, virtual pooling achieves savings at three levels: front-office, middle and 
back-office  and  on  trading  desks.  Vis-à-vis  entity  pooling,  since  the  pool  is  not  a  fund,  the 
costs associated to the establishment and maintenance of that 'master' fund are not incurred.  

Disadvantages 

Virtual pooling relies on efficient accounting systems capable of identifying at any time the 
assets of each participating fund. This often implies investment in complex IT systems. Part 
of the economic advantages of virtual pooling could be thus initially foiled. Overtime, the cost 
of virtual pools is considered to be limited128. 

From  a  supervisor's  point  of  view,  the  difficulty  for  virtual  pooling  structures  to  segregate 
assets  is  a  source  of  concerns.  Valuation  processes,  depositaries'  monitoring  and  regulators' 
supervision become more complicated. Lack of segregation of assets and interdependency of 
the  funds  mean  that  investment  in  one  participating  fund  would  have  repercussions  on  the 
performance and costs for investors in other funds within the same structure. Operational risks 
are also shared among participating funds. For the investor, virtual pooling is less transparent 
and more difficult to understand. 

Barriers 

Virtual pooling structures are not prohibited by the UCITS Directive. However, the absence 
of a common understanding among regulators hinders its cross-border development. Further 
hurdles are related to the restrictions to delegate cross-border the safe-keeping of assets. Tax 
barriers are in general not considered to be an insurmountable problem129.  

Conclusion 

No  legislative  change  is  required  in  order  to  create  a  pan-European  framework  for  virtual 
pooling.  Nothing  in  the  Directive  impedes  the  use  of  this  pooling  technique.  The  question 
therefore is whether the Commission should take any measure in order to create a facilitating 
environment for virtual pooling. However, the analysis carried out does not find at this stage 
sufficient grounds to justify such measures. Savings appear to be less straightforward than for 
other pooling techniques, such as master-feeder structures. Important cross-liability and other 
investor protection concerns exist. The use of the technique is rare outside a few MS and no 
experience with cross-border virtual pooling has been identified so far. Industry responses to 

127 
128 

129 

Allowed by the Irish regulator since 2004. 
The appendices to the Report on Investment Fund Market Efficiency (July 2006) considered that "in the 
worst case virtual pooling would involve a premium charge of 4bps. In the best case, it would involve a 
premium of under one basis point." 
Please see the report referred to in footnote 98. 

EN 

107 

   EN 

 
                                                 
consultations show a clear preference for entity over virtual pooling techniques. Analysis of 
the issues blocking the cross-border development of virtual pooling should be first discussed 
in appropriate fora, e.g. CESR (as recommended by the expert group on market efficiency). 

The  issue  could  be  then  revisited  by  the  Commission  once  there  is  a  deeper  and  broader 
understanding  among  regulators  (but  also  within  the  industry)  about  virtual  pooling 
techniques.  In  the  medium-term,  however,  one  of  the  White  Paper's  announced  measures 
could already have a positive impact on the use of cross-border virtual pooling. The planned 
communication/ recommendation on delegation of custodial functions by depositaries should 
encourage  the  possibility  to  delegate  cross-border  the  safe-keeping  of  assets  and  therefore 
facilitate virtual pooling across borders. 

EN 

108 

   EN 

 
 Management Company Passport 

Problem description 

The 1985 UCITS Directive introduced a passport for the product, the investment fund. This 
implied that once authorised in a MS, a UCITS fund could be marketed in other MS following 
a  simple  notification  (to  the  host  MS  authorities).  The  management  company  (MC)  had  no 
comparable right to provide collective portfolio management services directly to UCITS funds 
domiciled in another MS. The management company needed to be formally established in the 
domicile of the fund. However, over the years, centres of excellence have developed in some 
parts  of  the  EU  (based  on  the  delegation  of  activities  by  the  appointed  MC  in  the  fund 
domicile  to  other  operators).  Investment  management  activities  are  typically  carried  out  in 
London,  Paris  or  Frankfurt  and  fund  administration  activities  in  Luxembourg  and  Dublin. 
This concentration trend has led to important advantages in terms of economies of scale and 
of know-how.  

Amendments  made  to  the  UCITS  Directive  in  2001  (also  called  UCITS  III  amendments) 
introduced  important  changes  in  respect  of  management  companies130.  One  of  the  main 
objectives  was  to  up-date  the  regulation  for  MC,  aligning  it  with  that  existing  for  other 
operators  in  the  financial  services  area131.  These  amendments  sought  to  introduce  a 
management  company  passport,  i.e.  the  possibility  for  a  MC  to  manage  a  UCITS  (of  a 
corporate  form132)  based  in  another  MS.  In  parallel,  new  provisions  on  minimum  capital 
requirements  for  the  MC,  increased  risk  control  obligations  and  cooperation  mechanisms 
between supervisors were also introduced. 

Implementation of the management company passport provisions has encountered difficulties. 
They  were  insufficiently  clear.  Commission  services  recognised  this  problem  in  the  Green 
Paper  on  investment  funds.  The  main  concern  has  been  that  the  subsequent  split  of 
supervision  (between  the  fund  supervisor  and  the  MC  one).  Supervisory  gaps  risked 
undermining  investor  protection133.  National  regulators  consider  that  the  legal/supervisory 
conditions  do  not  exist  to  allow  cross-border  fund  management  to  take  place  under 
appropriate  safeguards  for  investors  and  sound  risk  management.  The  respective  roles  and 
responsibilities of the competent authority for the fund and for the MC were not specified by 
the  2001  amendments;  creating  uncertainty  over  the  monitory  and  compliance  of  UCITS 
rules. No attention was given to the conditions needed to ensure effective information flows 

130 

131 

132 

133 

Amending  Directive  2001/107/EC  of  21st  January  2002  also  called  the  "Management  Company 
Directive" 
Explanatory  Memorandum  of  the  "Proposal  for  an  European  Parliament  and  Council  Directive 
amending Directive 85/611/EEC", COM(1998) 451 final, 17th July 1998. 
'Corporate UCITS' or investment companies are UCITS constituted under statute. They generally have a 
Board of directors and investors (shareholders) can be entitled to vote in general assemblies. Corporate 
UCITS have a legal personality. On the other hand, 'contractual UCITS' are constituted under the law of 
contract (common funds) or trust law (unit trusts). They do not have a legal personality. 
The UCITS would be supervised by the authority of its home Member State whereas the management 
company  would  be  under  the  supervision  of  another  Member  State  authority.  If  the  UCITS  does  not 
comply with the rules of its home Member State the supervisory authority responsible for it would have 
therefore  no  legal  means  to  call  directly  to  account  the  management  company  located  in  another 
jurisdiction.  

EN 

109 

   EN 

 
                                                 
between fund depositary and MC. The modalities for cooperation between national authorities 
and enforcement in the context of cross-border fund management were not addressed. 

In  2005,  CESR  concluded  that  "…  the  legislator's  intention  does  not  seem  to  have  been  to 
impose to UCITS home Member States to recognise the possibility for a foreign management 
company  to  set  up  a  [corporate  UCITS]  in  their  own  constituency"134.  The  passport  would, 
according  to  CESR,  be  possible  for  the  article  5.3  services  (i.e.  individual  portfolio 
management, investment advice and safekeeping and administration). As shown in the WPIA, 
the possibility to passport those ancillary services have been exploited to a limited extent by 
European  management  companies  (only  some  10%  of  the  total  number  of  management 
companies).  According  to  the  Expert  Group  on  market  efficiency,  this  low  take-up  was  the 
proof  of  a  mismatch  between  the  passporting  services  available  and  the  flexibility  that  the 
industry really needed. 

In the absence of a working management company passport, fund promoters have to establish 
management  companies  in  all  countries  in  which  they  set  up  fund  ranges.  Then,  they  will 
quite  often  delegate  portfolio/asset  management  to  an  entity  typically  based  in  one  of  the 
European  investment  management  centres.  This  not  only  results  in  a  duplication  of 
resources135  but  also  impedes  the  industry  from  benefiting  from  greater  specialisation  and 
economies  of  scale.  UCITS  III  "substance"  requirements  (minimum  capital,  at  least  two 
persons  conducting  the  management  company's  business…)  are  said  to  considerably 
exacerbate  the  situation.  According  to  EFAMA,  the  fully-loaded  costs  of  a  management 
company  in  an  EU  jurisdiction  are  approximately  €  1  million  a  year.  The  Expert  Group  on 
IFME  considered  that  "the  establishment  and  maintenance  of  a  UCITS  III  management 
company  in  an  ‘exporting’  country  can  cost  between  €  500,000  and  €  1  million".  Hiring  a 
third party to act as local MC is also expensive136. Cost are thus pushed up and charged to the 
fund and its investors. The fact that the original passport was limited to funds of a corporate 
type  also  reduces  the  potential  benefits  of  the  passport.  Funds  of  a  contractual  form  are  the 
most common type of fund in 18 MS and the only existing type of fund in 13 of them.  

Consequently, the WP announced that the Commission would revisit this issue in order to see 
if the MC passport could be rendered operational through changes to the relevant provisions 
of  the  Directive.  However,  it  emphasised  that  a  precondition  for  a  management  company 
passport  would  be  that  both  the  MC  and  the  fund  were  subject  to  effective  and  coordinate 
oversight.  The  ambiguities  and  legal  uncertainty  that  had  undermined  the  2001  passport 
provisions would need to be tackled by the introduction of effective provisions. The exposure 
draft  submitted  to  consultation  in  March  2007  tried  to  strike  a  balance  between  a 
comprehensive  MC  passport  and  supervisory  concerns.  The  proposed  (partial  passport) 
framework  included  provisions  to  ensure  a  minimum  of  substance  in  the  fund  domicile 
(indicating  the  functions  that  should  remain  in  that  MS  so  as  to  provide  the  fund  authority 
with direct control over some core administrative functions and a basis on which to monitor 
and  enforce  compliance).  It  also  aimed  at  enhancing  supervisors'  cooperation  mechanisms. 

134 

135 

136 

"CESR  guidelines  for  supervisors  regarding  the  transitional  provisions  of  the  amending  UCITS 
Directives (2001/107/EC and 2001/108/EC)", February 2005. 
This would typically include the costs related to the staff and premises, administration and legal costs, 
as well as the cost of capital. 
In its response to the Green Paper consultation, Goldman Sachs Asset Management stated that engaging 
the services of a third party management company for its Irish and Luxembourg ranges would amount 
to  €  4.4  million  annually.  Also  IMA,  in  its  response,  reports  costs  of  €  750,000/annum  to  rent  a 
management company to oversee a simple structure and € 1,5000,000/annum for an umbrella structure. 

EN 

110 

   EN 

 
                                                 
The exposure draft proposals envisaged that the fund domicile would be determined against 
two  criteria:  1)  the  country  under  whose  laws  the  fund  is  constituted  and  2)  where  the 
verification of the fund valuation and the maintenance of the unit-holders' register take place. 
The  passport  would  be  also  extended  to  funds  of  a  contractual  type.  The  depositary  would 
remain based in the fund domicile. 

Responses to the Exposure Draft consultation 

Scope  of  the  passport:  A  majority  of  respondents  (mainly  industry  players)  considered  that 
management companies should be able to provide the full range of portfolio management and 
fund  administration  activities  on  a  cross-border  basis.  They  argued  that  only  a  full  passport 
would enable real economies of scale and lead to the establishment of centres of excellence. 
This would increase the quality of customer service and risk management. Supporters of the 
exposure  draft's  approach  considered  that  some  administrative  substance  must  be  located  in 
the  fund  domicile  in  order  to  allow  the  competent  authority  of  the  fund  to  discharge  its 
responsibilities for ensuring that the fund is operated in accordance with EU and national fund 
rules.  

Extending the passport to contractual funds: A number of respondents questioned the viability 
of the management company passport in the case of contractual funds. (As contractual funds 
have no legal personality distinct from the management company, it is difficult to distinguish 
between MC and fund for legal or supervisory purposes).  

Regulatory  responsibilities  and  effective  cross-border  supervision.  Several  respondents 
pointed out that split supervision was a fact of life in an integrated financial services market 
and would have to be dealt with whatever the scope of the passport. However, a number of 
respondents  (including  a  majority  of  regulators)  considered  that  regulators'  respective 
responsibilities  should  be  further  clarified.  Most  stakeholders  were  of  the  opinion  that 
enhanced supervisors' co-operation mechanisms together with the presence of a depositary in 
the fund's domicile should prove sufficient to ensure proper seamless supervision of fund and 
MC. Many respondents underlined the important role of CESR in enhancing supervisory co-
operation and solving potential problems with regards to split supervision. 

Safeguarding  investor  interests:  Some  contributors  claimed  that  a  full  passport  might  be  a 
superior solution from an investor protection perspective because it would permit integrated 
supervision  and  risk  management.  Other  respondents  were  concerned  that  split  supervision 
between UCITS and management company home Member States could compromise investor 
protection.  Some  respondents  were  concerned  that  expected  cost  savings  would  materialise 
only very gradually for investors.  

Definition of UCITS fund domicile. Most respondents proposed to define the fund domicile 
by  reference  to  the  applicable  law.  Many  contributors  challenged  the  proposal  that 
"verification  of  valuation  and  pricing"  and  "maintenance  of  unitholders'  register"  were  core 
administrative  functions  which  needed  to  be  performed  in  the  fund  domicile.  Conversely, 
some  contributors  believed  that  if  all  management  functions  were  performed  on  a  remote 
basis,  'letter-box'  entities  would  result;  with  consequent  dangers  in  terms  of  less  effective 
enforcement of fund rules. 

Depositary.  The  majority  of  respondents  agreed  that  the  depositary  should  continue  to  be 
located in the same MS as the fund. Some replies indicated that a deeper specification of the 
responsibilities of the fund depositary could be one means to help supervision by the fund's 

EN 

111 

   EN 

 
competent authorities. 

Taxation.  Several  respondents  raised  this  issue.  Many  of  them  considered  that  the  potential 
negative  tax  consequences  of  the  full  passport  had  been  overstated.  No  tax  complications 
were identifiable for corporate funds or the most successful (fiscally transparent) contractual 
funds. 

Objectives 

An  enhanced  legislative  framework  for  the  management  company  passport  should  properly 
address  the  different  stakeholders'  concerns  and  realise  their  expectations.  This  framework 
should therefore: 

a) from a single market perspective: 

•  Encourage cross-border activity driven by efficiency gains and competition 

•  Facilitate  the  development  of  (fund  management  and  administration)  centres  of 

excellence [and thus encourage scale savings and specialisation gains] 

b) from an industry angle: 

•  Allow  market  participants  to  organise  their  business  models  on  a  cross-border 

basis in line with commercial priorities 

•  Facilitate the reaping of specialisation and economies of scale related savings 

•  Create the minimum (administrative) burden 

c) from the regulators' point of view: 

•  Allow regulators to fulfil their supervision and investor protection duties 

•  Be clear as regards regulators' respective responsibilities 

d) as well as, ensure that investors: 

•  Have access to the best asset management teams 

•  Are adequately protected 

Benefits  

The main benefits of an effective management company passport would be the following: 

For investors 

For the industry 

Short-term 

(no or limited effect) 

possibly lower costs 

Long-term 

possibly lower costs 

More business 
opportunities; lower 
costs  

EN 

112 

   EN 

 
 
Costs savings and specialisation gains will materialise slowly over the short to medium-term. 
Duplicated costs will be eliminated progressively (notably minimum capital requirements and 
other costs linked to the establishment of the management company). Fund management and 
administration  functions  will  move  to  the  most  cost-effective  locations,  where  competition 
among related services providers should intensify. This competition may encourage savings to 
flow gradually up to the investor level. In the long-term, the passport could encourage fund 
promoters to establish fund ranges in a larger number of domiciles. Lower costs and greater 
business opportunities should have a positive effect on the development of the European fund 
market over the long run. 

Redesign of a framework for the management company passport 

The  early  debate  over  the  scope  of  the  MC  passport  has  been  driven  by  commercial 
considerations.  Concerns  regarding  the  supervisory  and  regulatory  challenges  posed  by 
remote fund management were not initially at the front of discussions. In the light of concerns 
expressed  by  some  stakeholders  (including  a  large  number  of  regulators)  in  response  to  the 
exposure draft, the Commission services have adopted a risk-based approach to the design of 
a possible MC passport. This involved a systematic approach to identify: 

a) which risk controls should apply at the level of the MC and which at the level of the fund; 

b) the mechanisms and conditions needed to ensure that fund administrators overseers could 
ensure the sound day-to-day function of the fund in accordance with its rules; 

c)  mechanisms  to  create  effective  and  timely  information  flows  between  the  respective 
national authorities to ensure that the authority responsible for the fund is: 

– 

– 

satisfied with the risk management controls used by the MC (in other MS) 

confident  that  it  has  means  to  monitor  the  functioning  of  the  fund  in  an  on-
going  basis,  to  detect  or  avert  breaches,  to  respond  promptly  in  case  of  a 
problem and to employ effective remedies.  

The options that will be analysed are the following: 

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

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

3) Make the MC passport work for corporate funds 

Impacts analysis 

Option 1: Do nothing 

Impacts from the point of view of: 

(Since  the  main  implications  of  this  option  have  been  already  explained  in  the  problem  description 
part, the following analysis will highlight only the most important ones.) 

a) Industry: This will be seen as an important missed opportunity by the fund industry. While 
direct  annual  savings  are  relatively  modest  (the  WPIA  estimated  potential  cost  savings  of  € 
381 to € 762 million/year), the medium to long-term implications are considered important by 

EN 

113 

   EN 

 
the  industry.  The  current  lack  of  flexibility  in  organising  the  different  activities  of  the  fund 
value-chain  hinders  the  industry  development  by  impeding  the  exploitation  of  scale  and 
specialisation gains. 

b)  Investors:  They  will  continue  to  bear  the  indirect  consequences  of  the  lack  of 
organisational flexibility: higher fees. It has also been argued that current (asset management) 
delegation  agreements  render  risk  controls  more  difficult  (increasing  therefore  operational 
risks) to the detriment of investors. 

c)  Regulators:  Maintaining  the  status  quo  will  give  regulators  comfort  as  to  their  ability  to 
effectively  ensure  the  supervision  of  funds  under  their  jurisdiction.  Otherwise,  no  relevant 
impact on regulatory authorities is to be expected if the current situation continues.  

Option 2: A working MC passport for corporate funds and contractual funds 

Impacts from the point of view of: 

a) Industry: This is the option that could in principle maximise the gains from the passport 
(please see the estimated savings figure indicated in the problem description part) and the one 
most widely supported by industry players137. However, implementation of this option would 
require  reinforcing  the  capacity  of  the  regulator  to  supervise  the  remote-managed  fund  as 
explained above. This would most probably require additional reporting and other obligations 
on the side of the concerned fund's management company and/or the depositary, which could 
partly offset the passport's expected savings. 

b)  Investors:  Main  benefits  for  investors  will  derive  from  the  centralisation  of  the  risk 
management  and  the  specialisation  gains  that  the  passport  should  encourage.  These  would 
increase the quality of products and could reduce operational risks. In case of costs savings, 
this  could  flow  on  gradually  towards  investors.  This  outcome  depends  on  sufficient 
competition  in  fund  management  leading  to  savings  being  reflected  in  the  fees  paid  by 
investors.  

c)  Regulators:  National  regulators  have  often  expressed  concerns  about  the  risk  that  split 
supervision  (between  the  fund  regulator  and  the  MC  regulator)  would  be  detrimental  to  the 
effective  protection  of  investors.  A  clear  definition  of  the  roles  and  responsibilities  of  each 
regulator has repeatedly being mentioned as the 'sine qua non' condition for the acceptance of 
the  management  company  passport138.  In  order  to  avoid  potential  supervisory  gaps  (or 
overlaps),  this  clarification  should  be  provided  at  level  1  (i.e.  at  the  Directive  level).  Both 
authorities should have the means to monitor and enforce rules under their responsibility. It 
will be also necessary to provide for effective information exchanges and other cooperation 
mechanisms in order to allow both the fund and the MC regulator to properly carry out their 
supervision  tasks.  Although,  some  cooperation  and  information  obligations  already  exist  in 
the Directive these will need to be reinforced in order to overcome regulators' reluctance to 
the  passport.  This  would  clearly  imply  greater  costs  for  the  regulators.  The  design  of  the 

137 

138 

Previously expressed fears that the scope for savings would be reduced due to greater costs on the side 
of the depositary (which will have to monitor a management company from another MS) were broadly 
dismissed  by  respondents  to  the  exposure  draft  consultation,  which  considered  that  the  'physical 
presence' of the depositary in the country of the MC was not necessary given modern electronic means. 
The fact that the depositary remains in the fund's domicile should also provide comfort to regulators. 

EN 

114 

   EN 

 
                                                 
relevant provisions appears also a difficult task considering the current lack of consensus of 
national regulators on this issue. 

Another  important  issue  to  be  taken  into  account  is  the  following.  Contrary  to  corporate 
funds,  contractual  funds  lack  legal  personality.  In  their  case,  the  MC  is  the  entity  that 
represents  legally  the  fund.  (In  fact,  some  see  the  contractual  UCITS  and  its  MC  as  an 
indivisible  whole139.)  The  problem  is  therefore  that  the  fund  and  its  MC  can  not  be  easily 
distinguished for legal or supervisory/enforcement purposes. 

This presents the following problems from the perspective of the MC passport: 

1) the fundamental difficulty of identifying a fund domicile which is different from that of the 
MC  (given  that  the  fund  is  part  of  the  same  legal  personality  as  the  MC  and  that  location 
generally is defined by reference to the country where the MC's head office is based) 

2)  if  a  solution  to  1)  can  be  found,  the  fund  supervisor  may  not  have  a  legally  accountable 
entity  in  its  jurisdiction  to  whom  it  can  address  questions  regarding  compliance  or  pursue 
enforcement actions in the event of a breach of the law140. 

Despite  a  careful  analysis  of  these  problems,  expert  groups  and  detailed  research  have  not 
identified effective solutions.  

During the exposure draft consultation, some respondents raised an issue that deserves also to 
be considered. This is the potential tax implications of the passport. A number (even if small) 
of respondents considered that the passport would lead to a double taxation of the fund that 
would  cancel  out  the  savings  achieved  by  the  passport.  If  this  is  so,  efforts  to  fix  the 
management company passport would be vain.  

The rationale behind this is the following141: since the effective management of the fund takes 
place in the country of the MC (e.g. country A) it could be considered that the fund which it 
manages is also a tax resident in that country. If this scenario materialises, the fund could then 
be  subject  to  income  and  operating  tax  both  in  its  country  of  domicile  (country  B)  and  the 
country  of  its  MC  (country  A);  thus,  cancelling  out  all  or  part  of  the  benefits  of  the  MC 
passport. While some respondents to the exposure draft considered the risk of double taxation 
small, this eventuality cannot be ignored. 

Option 3: A working MC passport for corporate funds 

Impacts from the point of view of: 

a)  Industry:  This  will  still  be  a  step  forward  for  the  industry  that  would  be  able  to  make 
effective  use  of  the  business  possibilities  that  the  2001  UCITS  changes  were  supposed  to 
bring about. However, the savings risk being sensibly smaller than the expected gains outlined 
above. Recent data provided by CESR shows that in 13 MS corporate UCITS do not exist. In 
those  MS  that  have  both  corporate  and  contractual  funds,  the  number  of  contractual  funds 

139 
140 

141 

See for example the Finnish Ministry of Finance's response to the exposure draft consultation. 
In the case of corporate funds, even if the MC would be abroad, there would remain another responsible 
body in the fund domicile. This is the Board of directors which is accountable to the fund's regulator. 
Please  see  the  Association  of  the  Luxembourg  Fund  Industry  (ALFI)  response  to  the  exposure  draft 
consultation. 

EN 

115 

   EN 

 
                                                 
often exceeds that of corporate ones142. Again, as explained in option 2, additional reporting 
and other obligations on industry's players would compensate part of the passport's expected 
savings. 

b)  Investors:  The  effect  on  investors  would  be  similar  to  the  one  explained  in  option  2. 
However, given the lower number of funds concerned, the advantage for the investor risks to 
be limited.  

c) Regulators: As explained above, concerns regarding split supervision could be overcome 
by  establishing  an  appropriate  clarification  of  responsibilities  and  an  efficient  cooperation 
mechanism. However, the impact in terms of additional burden for regulators should not be 
neglected  considering  that  to  overcome  those  concerns  a  reinforcement  of  the  cooperation 
provisions in the Directive would be needed. 

Other effects  

SMEs:  introduction  of  a  working  passport  could  have  a  positive  impact  on  smaller  asset 
management  groups.  These  would  be  able  to  base  fund  ranges  in  a  greater  number  of  MS 
which were until now closed to them due to the costs associated to the required establishment 
of a fully fledged management company.  

Summary table 

Specific Objectives 

Efficiency 

Investor 
protection  administrative 

burden 

sector 
efficiency 

Overall 
Objective 

Pro Single 
Market? 

Feasibility 

Do 
nothing 

Passport 
for all 
funds 

Passport 
only for 
corporate 
funds 

+/- 
(some 
operational 
risks) 
-- 
(concerns re. 
split supervision 
and contractual 
funds) 
- 
(split 
supervision 
concerns) 

Preferred option 

≈ 
(status quo) 

- 
(untapped 
savings) 

no 
(barrier entry to 
service host market) 

Not applicable 

-- 
(burdensome 
procedure) 

++ 
(lower costs; 
specialisation 
gains) 

yes 
(will foster market 
integration) 

Difficult 
(particularly re. 
contractual 
funds) 

-- 
(burdensome 
procedure) 

+ 

(some cost 
savings/ 
specialis. gains)

yes 
(will facilitate 
market integration) 

Doubtful 

In  line  with  the  conclusions  of  the  WPIA,  the  first  option  (i.e.  do  nothing)  remains 
unsatisfactory. As summarised in the above table, this option is disappointing from all points 

142 

It  needs  however  to  be  noted  that  in  some  important  fund  jurisdictions  (in  terms  of  assets  under 
management) such as France, Luxembourg, Ireland or Spain both fund forms are extensively used. 

EN 

116 

   EN 

 
 
 
 
                                                 
of view (investor protection, single market and efficiency). However, the analysis carried out 
has not succeeded in proving the superiority of the other two options. In order to overcome 
supervision  related  concerns,  a  considerable  reinforcement  of  the  Directive's  supervision 
mechanisms  is  necessary.  This  would  entail,  among  others,  additional  obligations  on 
industry's players and would inevitably lead to greater compliance costs. The possible form of 
those additional supervision safeguards have been studied in parallel to the preparation of this 
impact assessment. Despite efforts to simplify and limit any additional burden on the industry, 
this  objective  has  not  been  possible  to  conciliate  with  the  need  to  properly  address  split 
supervision concerns. As a result, the expected savings stemming from both options 2 and 3 
risk being fairly inexistent (if any). In addition, given the substantial concerns expressed by 
supervisors  since  the  management  company  passport  debate  was  launched  by  the  Green 
Paper,  the  task  of  developing  a  framework  responding  to  all  those  concerns  appears,  at  this 
stage, difficult. The current lack of consensus among regulators on this issue also renders this 
undertaking particularly challenging. Accordingly, a 'feasibility' column has been added to the 
above summary table. This column reflects our doubts regarding the possibility to give effect 
to the passport; either for corporate funds (option 3) or for both types of funds (option 2). In 
this last case, the technical difficulty of designing a solution that would be appropriate also for 
funds  not  having  a  legal  personality  distinct  of  that  of  their  MC  (contractual  funds)  renders 
this option even less feasible.  

While this conclusion is disappointing (particularly given the efforts deployed since the Green 
Paper in order to find a solution), it does not mean that no further work should be pursued in 
this  area.  Since  regulators  are  the  better  placed  to  assess  the potential  risks  and  supervisory 
gaps of the passport and to identify optimal cooperation mechanisms, continued dialogue with 
them will be needed. Considering that a number of CESR members believe that obstacles to 
efficient  cooperation  are  not  insurmountable,  it  should  be  possible  to  identify  solutions  that 
give full effectiveness to the MCP without jeopardising either investor protection or expected 
cost  savings.  (The  intention  to  introduce  in  the  legislative  proposal  provisions  aiming  to 
enhance supervisors' powers and cooperation should also encourage the finding of an optimal 
solution.) 

Finally,  it  appears  necessary  to  assess  the  impact  of  this  recommendation  on  the  other 
proposed  measures.  In  particular,  whether  this  risks  unbalancing  the  effectiveness  of  the 
resulting legislative package. The answer is negative. Part of the rationalisation efforts aimed 
at  by  the  MCP  could  be  achieved  by  other  means.  First  of  all,  a  streamlined  notification 
procedure  will  increase  markets'  openness  and  thus  reduce  the  need  to  launch  parallel  fund 
ranges in different MS. A single  fund range based in a single country (and therefore with a 
single MC) will be able to easily access investors in all MS. (This would particularly benefit 
smaller asset management groups.) Secondly, the possibility to merger funds across borders 
will reinforce this MC rationalisation process. By allowing the merger (and liquidation) of a 
fund  established  in  country  A  into  a  fund  in  country  B,  industry  players  will  be  able  to 
concentrate  their  fund  ranges  in  the  most  efficient  fund  domiciles  thus  allowing  the 
dismantling of MC in the less efficient ones. 

On  the  negative  side,  the  impossibility  for  feeder  and  master  to  have  the  same  MC  when 
domiciled  in  different  jurisdictions  will  limit  the  expected  savings  of  cross-border  master-
feeder structures. However, given the size of the expected economies of scale (compared to 
the MCP identified opportunity costs), the net impact of the introduction of a master-feeder 
framework remains clearly positive (even in the absence of a MCP). 

EN 

117 

   EN 

 
Impact table 

Option 

Affected 
parties 

Effect 
Direct: D 
Indirect: I 

Do nothing 

Passport 
for all 
funds 

Passport 
only for 
corporate 
funds 

Industry 

D 

Investors 

Regulators 

D/I 

D 

D 

Industry 

D 

Investors 

Regulators 

Industry 

Investors 

Regulators 

D 

I 

D 

D 

D 

D 

I 

D 

Impacts 
Positive: + 
Strongly positive: ++ 
Negative: - 
Strongly negative: -- 
Neutral/marginal: ≈ 

-  
(less organisational 
flexibility) 

-- 
(higher costs) 
+/-  
(greater protection but 
operational risks) 
-  
(higher costs) 
≈  
(no significant impact) 

+ + 
(highest organisational 
flexibility) 
≈ 
(highest savings but 
risk that cancelled out 
by administ. costs) 
--  
(lower protection) 
+  
(lower costs) 
-- 
(supervisory concerns) 

+ 
(organisational 
flexibility) 
- 
(lower cost savings but 
risk that outweighed 
by administ. costs) 
-  
(lower protection) 
?  
(lower costs) 
-  
(lower supervisory 
concerns) 

Impact 
Timing 
One-off 
Short-term 
Medium-term 
Long-term 
On-going 

Impact 
Nature 

Dynamic 
Static 

Impact 
Likelihood
Certain 
High 
Medium 
Low 

on-going 

dynamic 

certain 

medium  

high 

high 

certain 

on-going  

dynamic 

on-going 

static 

on-going 

dynamic 

medium-term 

high 

on-going  

static 

medium 

long-term 

dynamic 

medium 

on-going 

static 

high 

on-going 

certain 

dynamic 

medium-term 

high  

on-going  

static 

low 

long-term 

dynamic 

low 

on-going 

static 

high 

EN 

118 

   EN 

 
 
 
 
 
Simplified Prospectus/Key investor information 

Problem description 

Taking  into  consideration  information  asymmetry  concerns,  the  original  UCITS  Directive 
introduced a series of disclosures obligations in 1985. This included the obligation to publish 
a prospectus. This would contain "the information necessary for investors to be able to make 
an  informed  judgment  of  the  investment  proposed  to  them"143.  However,  the  prospectus 
contained  too  much  detailed  information  to  be  able  to  effectively  fulfil  this  task.  It  was 
considered that such information did "not fit well into the needs of the average investor and 
that  investor  protection  can  be  achieved  more  effectively  through  the  provision  of  clear, 
simple  and  essential  information"144.  UCITS  III  amendments145  therefore  introduced  the 
concept of simplified prospectus.  

The objective of the simplified prospectus (SP) was to provide investors with a really useful 
tool on which to base their investment decisions. It was designed to provide clear and easily 
understandable information about the essentials the investor should know before investing in 
a fund. A schedule annexed to the UCITS Directive listed the key items that the SP needed to 
contain.  The  SP  was  also  intended  to  facilitate  the  cross-border  marketing  of  UCITS  by 
constituting  a  single  (and  therefore  comparable)  marketing  tool  throughout  the  Community. 
UCITS  were  required  to  offer  it  to  investors  free  of  charge  before  the  conclusion  of  the 
subscription  contract.  In  order  to  clarify  the  contents  and  the  presentation  of  some  of  the 
required information items, the Commission's adopted a Recommendation146 in 2004.  

However, the SP exercise turned out to be disappointing for both industry and investors. An 
inconsistent implementation of the Recommendation has undermined the comparability of the 
SP  across  MS.  Changes  to  the  SP  required  by  host  MS  regulators  during  the  notification 
procedure have created new barriers to the cross-border offering of UCITS; limiting thus the 
choice available to investors. Adapting the SP to those required changes has also considerably 
increased the costs for the industry that has to prepare tailor-made national versions. Finally, 
uncertainties  about  the  liability  attached  to  the  SP  have  driven  the  industry  to  include 
additional information and legal disclaimers creating long and elaborate documents.  

As  a  result,  investors  are  most  often  provided  with  a  complex  set  of  incomprehensible 
information  that  is  of  little  use  to  them.  The  fund  industry  is  burdened  with  inconsistent 
requirements  and  unnecessary  costs.  A  respondent  to  the  exposure  draft  consultation 
estimated  at  €  1  million  its  annual  expense  for  the  translation  and  printing  of  investor 
disclosures147.  Dutch  data  regarding  the  obligation  to  produce  disclosures  shows  that  the 
annual cost for the industry is more than € 4 million. Considering that Dutch funds represent a 

143 

144 

145 
146 

147 

"Toward  an  European  market  for  UCITS",  Commentary  on  the  provisions  of  Council  Directive 
85/611/ECC, European Commission (also called Vandamme report) 
Explanatory memorandum of the "Proposal for a European Parliament and Council directive amending 
the UCITS Directive" of 17th July 1998, COM (1998) 451 final. 
Directive 2001/107/EC of the European Parliament and of the Council amending the UCITS Directive. 
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;  hereafter 
referred to as "the recommendation". 
Please see BlackRock response to the exposure draft consultation. 

EN 

119 

   EN 

 
                                                 
small  fraction  of  the  total  number  of  European  investment  funds148,  the  costs  for  the  whole 
European industry are not negligible. 

These  costs  are  eventually  passed  on  to  investors.  This  hinders  the  ability  of  UCITS  to 
compete  with  other  comparable  investment  products.  Most  often  these  competing  products 
(e.g.  certificates,  unit-linked  insurance  contracts)  are  subject  to  less  restrictive  information 
requirements and are, therefore, cheaper to produce and easier to place in the market.  

In  order  to  push  forward  the  debate  on  the  SP  and  to  identify  ways  to  improve  it,  the 
Commission  organised  in  2006  two  workshops  with  representatives  of  all  stakeholders 
(regulators, investors and industry). The box below summarises their main conclusions.  

Simplified Prospectus Workshop's conclusions 

♦ Target public: the SP should be addressed to retail investors. 

♦  Structure/  format:  the  SP  should  be  a  short  document  in  the  form  of  a  "fact  sheet";  a 
maximum length should be imposed. The use of graphics should be further considered. 

♦ Content: the SP should provide key information to the retail investor, enabling it to make 
an informed investment decision. 

♦ Translation requirements: the SP should be available in the national language(s).  

♦ Role of home/ host state regulator: once filed with the home state regulator, the host MS 
regulator cannot require any additional elements to be added to the SP.  

♦ Respective roles of fund promoter and distributor: the fund promoter should be responsible 
for all product related disclosures, the distributor for other disclosures. 

In addition to the above-mentioned drawbacks, the UCITS Directive current provisions on the 
SP  do  not  take  into  account  practical  aspects  such  as  a)  the  different  distribution  channels 
through  which  UCITS  are  offered  to  investors;  b)  the  possibilities  offered  by  modern 
(electronic) transmission methods; c) the professional or retail nature of investors. 

The  WPIA  considered  that  changes  to  the  Recommendation  would  be  the  quickest  way  to 
improve the situation. However, given the non-binding character of the Recommendation, it 
concluded that efforts risked being unfruitful. Hence, the WPIA ultimately proposed changing 
the UCITS Directive itself. 

On  that  basis,  the  exposure  draft  presented  a  completely  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, not necessarily embodied in a specific document. KII 
would include all the product information relevant for the investor to assist him/her in taking 
an informed investment decision, as well as practical information necessary for the investor to 
be able to exercise his/her rights. It suggested that such information could differ according the 
professional or retail nature of the investor. The exposure draft proposed delivery obligations 

148 

Dutch funds represent just 1.3% of the total number of European funds (i.e. UCITS and non-UCITS). 
EFAMA data end 2005 

EN 

120 

   EN 

 
                                                 
in  line  with  the  different  distribution  models  used.  It  also  suggested  to  limit  liability  to  the 
cases where the KII was misleading, inaccurate or inconsistent with the full prospectus.  

As recommended by the WPIA, the planned changes to the UCITS Directive (Level 1) would 
concentrate in defining the high-level principles of the KII (purpose and main characteristics). 
The detailed provisions about the content and format of the KII will be designed in Level 2 
measures.  This  will  ensure  that,  once  new  measures  are  agreed,  they  will  be  implemented 
consistently  by  MS,  thus  avoiding  previous  failures  and  achieving  finally  the  objective  of 
comparability between funds marketed cross-border. 

Giving  consideration  to  the  urgency  to  remedy  the  past  failures  of  the  SP,  the  Commission 
deemed  it  desirable  to  start  straight  away  some  ground  work  on  the  detailed  provisions 
content  and  format  of  the  KII.  This  would  ensure  that  some  of  the  critical  issues  could  be 
considered  at  the  same  time  as  work  is  progressing  at  Level  1.  The  Commission  has 
accordingly made a request to CESR for assistance149. A sub-group of the CESR Investment 
Management  Expert  Group  has  been  formed  to  consider  the  detailed  content  and  form  of 
KII150.  CESR  has  been  requested  to  provide  the Commission with its  recommendations  and 
advice in early 2008. CESR advice will be based on extensive dialogue with stakeholders and 
consultation. 

The Commission has also undertaken to carry out consumer and market testing before KII is 
introduced. The objective is to ensure that KII represents a sufficient improvement to existing 
investor disclosures in order to justify the costs that firms will incur in replacing the SP. The 
testing will be done on the basis of examples on the content and form of KII developed by the 
CESR KII sub-group, as put forward by CESR in its advice to the Commission. In order to 
undertake this testing, the Commission is launching a study which is to start in early 2008. 

Responses to the Exposure Draft consultation 

General  concept.  The  proposed  approach  to  replace  the  current  SP  by  'key  investor 
information'  was  generally  welcomed  by  stakeholders.  KII  should  be  a  short,  simple 
document conveying key facts to retail investors in a clear and understandable manner so as to 
assist them in taking an investment decision. Its target public primarily is the retail investor. It 
should be possible to use KII on a EU-wide basis without further modification.  

Content. A majority of stakeholders called for the fullest possible harmonisation of individual 
disclosure items to be included in KII. Many respondents also insisted that KII should contain 
only product information and no distribution related items. Various respondents stressed the 
need for consumer/market testing to ensure that the disclosures are relevant and meaningful 
for investors. 

Format. Many stakeholders stated their preference for a single document as opposed to using 
a  more  flexible  approach  whereby  key  investor  information  could  be  included  in  other 
disclosure/marketing  documents  depending  on  the sales  channels  used.  They  considered  the 
single  document  to  be  the  most  cost-effective  solution.  A  single  document  would  also  help 
investors to compare UCITS. Some respondents welcomed a more flexible approach allowing 

149 

150 

"Request for assistance on detailed content and form of key investor disclosures for UCITS", 11th April 
2007 (published on CESR website). 
The sub-group is jointly chaired by the UK FSA and the French AMF and includes representatives of 
eight other MS. 

EN 

121 

   EN 

 
                                                 
distributors to include KII in other documents. They considered that distributors should retain 
discretion  on  how  to  convey  key  investor  information  to  the  end-investor  and  that  MiFID 
imposes stringent requirements on distributors in this regard.  

Other  issues.  Most  respondents  favoured  allowing  electronic  delivery  of  KII  and  the  use 
hyperlinks. Some respondents considered that the content of KII could vary as a function of 
the retail or professional nature of investors. However, most respondents saw little advantage 
in such differentiation. As regards to its liability,  most  respondents  supported the envisaged 
limitation  of  liability  attached  for  KII.  Proposals  regarding  the  language  regime  were 
welcomed  since  they  were  seen  as  leading  to  a  considerable  reduction  of  costs.  However, 
some respondents expressed concerns regarding the fact that other mandatory disclosures (full 
prospectus, annual reports) would not be translated. 

Objectives 

The new provisions on investors' disclosures should: 

a) from a single market perspective: 

•  Clearly indicate that host authorities do not have the power to request changes to 
KII  (what  would  simplify  the  notification  procedure  and  therefore  facilitate  the 
placing into the host market of foreign funds) 

•  Allow for comparability between funds (what should encourage competition and 

thus put pressure on costs) 

b) from an industry angle: 

•  Create the minimum (administrative) burden 
•  Provide some flexibility 
•  Clarify industry's (production and delivery) obligations and liability issues 

c) from the regulators' point of view: 

•  Allow an adequate supervision 
•  Ensure that the interests of investors are adequately protected 

d) as well as, ensure that investors: 

•  Have all the necessary information to take an investment decision 
•  Can compare among funds 

Benefits  

The main benefits of the new investors' disclosures requirements would be: 

For investors 

For the industry 

Better quality disclosures 
(i.e. enhanced protection) 

Small cost savings (due 
to adjustment costs) 

A share of costs savings  

Important cost savings 

Short-
term 

Long-
term 

EN 

122 

   EN 

 
 
Better  disclosures  will  considerably  increase  the  ability  of  investors  to  take  informed 
investment decisions,  enhancing thus investor protection. Over the long-term,  particularly if 
improved transparency and comparability encourages competition, part of the savings will be 
passed  on  to  investors  (e.g.  in  the  form  of  lower  fees  or  higher  performances).  For  the 
industry, savings would also not materialise immediately. Adjustment costs will compensate 
in the short-term part of the savings derived from the simplified disclosures. 

Design of a framework for investors' disclosures 

In line with the conclusions of the simplified prospectus workshops and the responses to the 
exposure draft consultation, the KII should have the following main features: 

•  Be clear, short and easy to understand for retail investors 

•  Be provided in the official language(s) of the investor's MS 

•  Be kept up-to-date.  

However,  regarding  other  aspects  of  the  new  disclosures  several  possibilities  exist.  The 
following table presents (in bold and italics) the preferred choices. 

Relevant 
aspects 

Possibilities 

Only on paper 

Only by electronic means 

Delivery 
method 

At the choice of the fund 
provider or distributor 

At the choice of the 
investor 

Comments 

Important savings are anticipated if fund providers 
would be allowed to deliver KII only in an electronic 
format151. However, this would most probably not 
provide an adequate level of investor protection. 
Some voices point out that both hard-copy and 
electronic delivery should be required to assure that 
any potential investor gets the information s/he 
needs152 Others defend that the basic delivery form 
should be a physical document and that electronic 
delivery should only be possible on request153. The 
most appropriate solution appears then to allow 
different delivery possibilities but to let the choice to 
the actor most apt to assess the suitability of each 
delivery method: the investor. 

Relevant 
aspects 

Possibilities 

Comments 

151 

152 
153 

For  instance,  BlackRock  in  its  response  to  the  exposure  draft  consultation  considered  that  many 
hundreds of thousand euros per annum could be saved if they were to provide only electronic KII and 
only to retail investors. 
Please see Test-achats response to the exposure draft consultation. 
Please see the Austrian Association of Investment Fund Management Companies (VÖIG) response to 
the exposure draft consultation. 

EN 

123 

   EN 

 
 
                                                 
The same for all investors 

KII 
content 

Adapted to the type of the 
investor  

Liability 

Full liability 

Limited liability 

Impacts analysis 

The exposure draft launched a debate on whether a 
distinction should be made depending on the retail or 
professional nature of the investor. During the 
consultation, some industry players argued that 
professional investors have different information 
needs than retail investors154. Allowing the contents of 
the KII to be tailored to the nature of the investor 
would provide him/her with more suitable information 
but could increase the administrative burden for the 
industry155. On the other hand, considering that UCITS 
are defined as a retail product under the UCITS 
Directive, introducing the possibility of a different 
treatment for professional investors could introduce 
some legal complexity and uncertainty.  

Uncertainties about the exact liability attached to the 
SP are one of the reasons why the SP has often 
become a legalistic document full of disclaimers and 
therefore complex and of little use to retail investors. 
Imposing a full liability regime will not improve this 
situation. A clear and limited liability regime, as 
proposed in the exposure draft, seems a more 
proportionate way forward. This has received a wide 
support, including from some investors' 
representatives (e.g. FIN-USE, FAIDER) that consider 
this as a fair compromise.  

Support  to  the  KII  exposure  draft's  proposals  during  the  consultation  period  was  wide. 
Nevertheless,  respondents  expressed  different  views  regarding  the  fact  that  the  proposal  did 
not  require  the  KII  to  be  presented  in  a  single  document.  The  following  analysis  therefore 
concentrates on the form of the KII. The two options identified are: 

Option 1: Standardised key investor information provided in the form of building blocks 
not necessarily embodied in one single document 

This would imply the possibility of 'slicing' the KII and present different parts of it in different 
documents. 

Option  2:  Standardised  key  investor  information  provided  as  a  single  stand-alone 
document 

The  KII  would  be  presented  as  an  indivisible  set  of  information  embodied  in  a  single 
document. 

154 

155 

Some  respondents  even  asked  for  an  outright  exemption  of  the  KII  delivery  obligation  when  UCITS 
were marketed to professional investors. 
Some  savings  could  be  done  however  in  the  case  of  UCITS  marketed  exclusively  to  professional 
investors (such as certain money market funds). 

EN 

124 

   EN 

 
                                                 
Option 1: 'Building block' approach 

Impacts from the point of view of: 

a)  Industry:  The  building  block  approach  would  allow  greater  flexibility  regarding  the 
presentation of the information. It would be possible to better adapt disclosures to the type of 
investor and/or to the distribution channels and methods used. (In fact, it can be argued that 
firms  are  better  placed  to  decide  how  the  information  is  most  effectively  presented  to 
investors156.)  This  approach  would  give  distributors  the  possibility  to  add  more  easily 
commercial  or  distribution  related  information.  It  could  also  be  helpful  for  distributors 
offering  UCITS  'wrapped'  in  other  products  (e.g.  fund  of  funds,  unit-linked  insurance 
contracts, structured notes…) On the other hand, replacing the current simplified prospectus 
by this new approach to disclosures would entail most possibly important adjustment costs in 
the  short-term.  On  the  long  run,  savings  derived  from  the  fact  that  the  information  is 
standardised (and not subject to changes, as recommended above) might be compensated by 
the additional costs of producing different (tailor-made) documents157. 

b)  Investors:  Key  information  would  be  spread  over  different  documents.  It  would  be 
therefore more difficult for investors to have a global picture  of the investment proposed to 
them  and  to  understand  all  its  implications.  Comparing  products  would  be  also  fairly 
difficult158.  On  the  other  hand,  the  information  might  be  better  adapted  to  his/her  concrete 
needs and situation. 

c)  Regulators:  Some  supervision  concerns  might  emerge  with  this  approach.  It  would  be 
actually more difficult to check that investors receive all the KII if this is spread over different 
documents. This approach could also increase the administrative burden (for both regulators 
and industry) of the notification procedure159. 

Option 2: Single document 

Impacts from the point of view of: 

a)  Industry:  Some  market  players  think  that  it  is  not  the  SP  that  has  been  a  failure  but  the 
divergent  way  in  which  different  MS  have  implemented  the  Recommendation  and  the 
relevant Directive provisions. They therefore support maintaining the SP/KII in the form of a 
single  stand-alone  document.  Some  respondents  to  the  consultation  recommended  using  the 
model  developed  in  2002  by  the  industry  (FEFSI,  now  EFAMA).  They  consider  it  a  less 

156 

157 

158 

159 

On the right for distributors to decide how to disseminate investor information please see the responses 
to  the  exposure  draft  consultation  of  Associazione  Bancaria  Italiana,  European  Banking  Federation, 
Investment Management Association or the UK authorities. 
Please  see,  for  example,  the  response  of  the  Czech  Ministry  of  Finance  to  the  exposure  draft 
consultation.  
In fact, the need to ensure comparability between funds was one of the most recurrent recommendations 
stemming  from  exposure  draft  consultation.  This  not  only  originated  from  investors'  organisations 
responses  (such  as  FIN-USE,  Verbraucherzentrale  Bundesverband),  industry  players  and  associations 
also  shared  that  view  (e.g.  EFAMA,  State  Street,  Slovenian  Investment  Fund  Association,  European 
Association of Cooperative Banks…). 
The  SP/KII  is  one  of  the  documents  that  need  to  be  included  in  the  notification  file.  If  KII  is  not 
embodied in a specific document this may render the procedure more burdensome.  

EN 

125 

   EN 

 
                                                 
costly  way forward160. In fact, the adjustment costs linked to this option would probably be 
less important since it would imply a less radical change vis-à-vis the current situation161. It is 
also believed that there will be a lower risk of regulatory interference (in particular in relation 
to  the  notification  procedure),  specially  if  the  content  of  such  single  document  is  fully 
harmonised.  

b)  Investors:  A  single  document  would  most  probably  be  simpler  to  use  by  investors.  It 
would be easier for them to understand and to assess the virtues/drawbacks of the fund if all 
the  relevant  (or  key)  information  is  provided  together.  Investors  will  be  able  to  compare 
between products and therefore to chose the one more in line with their needs. This ability to 
compare should, in the medium term, encourage competition forces and therefore put pressure 
on prices (fees).  

c)  Regulators:  There  would  be  greater  comfort  on  the  side  of  regulators  that  investors 
actually  receive  all  KII.  Regulators  should  then  be  less  reticent  to  allowing  a  smooth 
notification  procedure.  This  should  render  the  marketing  in  the  national  market  of  foreign 
funds  easier.  The  choice  of  funds  for  national  investors  would  thus  increase  (which  should 
enhance competition and put pressure on costs).  

Other effects  

Impact on SMEs: some positive impact on small industry players (including SMEs) is to be 
expected, particularly under the second option. If the costs of producing disclosures are lower 
and  the  notification  procedure  is  smoother,  they  could  more  easily  exploit  business 
opportunities  in  foreign  markets  where  access  was  too  costly.  On  the  other  hand,  they  will 
probably endure a more direct competition from the big foreign market players.  

Administrative burden: Although the  form  and  content  of  the  new  KII  is  still  being  worked 
out,  the  objective  to  produce  a  short  and  standardised  document  should  significantly  reduce 
the  industry's  administrative  burden.  Currently  simplified  prospectus'  size  can  range  from  a 
couple  of  pages  to  several  tens.  The  need  to  adapt  it  in  line  with  sometimes  quite  different 
local  requirements  oblige  fund  promoters  to  produce  national  tailor-made  disclosures.  The 
possibility  to  use  electronic  transmission  means  should  also  have  an  important  positive 
impact. 

Environmental impact: both options aiming to reduce the information provided to investor to 
'key'  items  (and  allowing  electronic  delivery),  they  should  have  a  positive  environmental 
impact (particularly the second option). This, however, would be negligible in relation to the 
importance of existing environmental challenges. 

Other (general) considerations 

The  close  interrelation  of  the  KII  with  the  notification  procedure  is  clearly  shown  in  the 
analysis above. As expressed by many respondents to the exposure draft consultation, a fully 
harmonised  KII  contained  in  a  single  document  would  very  much  facilitate  the  notification 
procedure. However, the KII is also interlinked with other measures analysed in other parts of 

160 

161 

Please see, for example, the response of the Association Française de la Gestion to the exposure draft 
consultation. 
Additionally, transitional provisions could be included in the legislative proposal in order to spread out 
those adjustment costs over a longer period. 

EN 

126 

   EN 

 
                                                 
this IA. For example, as regards to pooling, it is important that the KII be able to explain in 
clear terms the implications of the pooling structure's double investment layer. KII would also 
play  an  important  role  in  fund  mergers.  A  useful  KII  would  help  investors  to  compare  the 
merging funds and more easily understand the implications of the merger on their particular 
case. 

Summary table 

Specific Objectives 

Overall Objective 

Investor 
protection 

Efficiency 

administrative 
burden 

sector 
efficiency 

Pro Single Market? 

+/- 

- 

+/- 

no 

(adapted 
disclosures but no 
global view) 

(risk of higher 
burden) 

(more flexibility 
but risk of higher 
costs)  

(less comparability, could 
act as entry barrier to host 
markets) 

+ 

(more user-
friendly) 

+ 

(lower costs and 
administrative 
burden) 

+ 

(lower costs) 

yes 

(comparability will 
encourage market 
integration) 

Building 
blocks 

Single 
document 

Preferred option 

In  view  of  the  above  analysis,  and  as  shown  in  the  summary  table,  the  second  option,  i.e. 
presenting KII in a single stand-alone document, appears to be the option that complies better 
with  the  objectives  of  investor  protection  and  efficiency.  Since  it  will  allow  a  greater 
comparison  among  different  MS  funds,  it  should  also  encourage  the  integration  of  the 
European fund market. A more detailed 'impact table' is also provided below. 

EN 

127 

   EN 

 
 
 
 
 
Impact table 

Option 

Affected 
parties 

Effect 
Direct: D 
Indirect: I 

Industry 

D 

Building 
blocks 

Investors 

D 

Regulators 

D 

Industry 

D 

Investors 

Regulators 

D 

D 

Single 
document 

Impacts 
Positive: + 
Strongly positive: ++ 
Negative: - 
Strongly negative: -- 
Neutral/marginal: ≈ 

Impact 
Timing 
One-off 
Short-term 
Medium-term 
Long-term 
On-going 

Impact 
Nature 

Dynamic 
Static 

Impact 
Likelihood
(Un)certain 
High 
Medium 
Low 

+ 
(more flexibility) 
- 
(↑ costs) 
+  
(better adapted 
disclosures) 
+/-  
(↓ protection) 
-  
(more difficult 
supervision) 
≈ 
(less flexibility) 
+  
(lower costs) 
+ 
(more business 
opportunities) 
+  
(lower costs) 
+  
(↑ protection) 
+  
(easier supervision) 

medium-term 

dynamic 

long-term  

dynamic 

certain 

medium 

medium 

medium-term 

uncertain 

on-going 

dynamic 

medium 

short-term 

dynamic 

medium-term 

long-term  

short-term 

dynamic 

certain 

high 

medium 

medium 

high 

on-going 

dynamic 

medium 

EN 

128 

   EN