EUROPE: CESR contribution to EU Commission White Paper

Thursday November 9 2006

CESR has published its contribution to the Commission’s White paper. This takes the form of comment on a list of key issues developed within the Reports of the Commission Expert Groups on Market Efficiency and on Alternative Investment Funds.

Perhaps of most interest is CESR’s disagreement with the suggestion put forward in the Reports on Alternative Investments that alternative investment funds should be able to be distributed to retail investors on a cross-border basis, as long as the sale takes place in accordance with the provisions of MiFID.

CESR reject this view both on an investor protection and a competition basis, comparing the situation that alternative investment funds would then be with the position of UCITS.

As regards investor protection, CESR notes that UCITS are subject to a high degree of control over their structure (eg the depositary) and their investment and borrowing powers. Because of these safeguards, they are suitable for distribution to retail clients on a cross-border basis. By contrast, alternative investment funds may be subject to only limited (or to none) investor protection features in these areas.

As regards competitive effects, CESR notes that one of the main benefits to a manager in setting up a UCITS is the ability to market the product on a cross-border basis, subject to the notification procedure. However, if the view is taken that cross-border marketing is possible instead simply by using intermediaries who are complying with MiFID, then there would seem little incentive for the manager to establish a UCITS rather than an alternative fund (when the alternative fund might involve less cost through having a lower degree of investor protection). The Expert Group `s opinion therefore seriously undermines the UCITS Directive.

This is clearly a key issue for the future development of UCITS as well as the future development of alternative investment funds for the retail market.

Other aspects on which CESR provides comments are:

*A harmonised private placement regime

*Role of custodian/depository

*Authorisation and notification of UCITS (CESR’s Guidelines for simplifiocation of the notification procedure and UCITS Requirements vs. Prospectus Directive)

*Cross-border merger of UCITS – benefits and potential investor protection issues

*Pooling

*Management company passport

*The feasibility of a passport for depositaries