EUROPE: European Commission UCITS Hearing

Thursday April 26 2007

On 26 April 2007, in Brussels, there was an Open Hearing on Initial orientations for deepening the Single Market for UCITS Investment Funds.

The hearing discussed a number of areas for possible UCITS “adjustments” which would allow elimination of unnecessary costs and wasteful duplication and enable the industry to reap all the scale economies and specialisation benefits on offer in the single market. These were the, now familiar, areas of:

* Cross-Border Fund Notifications

* Management Company Passport

* Fund Mergers

* Pooling

* Simplified Prospectus

* Private Placement

Below is a summary report of the discussions as well as of the concluding remarks of Stefan Bichsel, President EFAMA who calls on the European Commission to raise the level of its ambition. He rightly notes that these efficiency improvements are “limited” and a “bare minimum” and that there are pressing needs to address the regulatory imbalance between already transparent products such as UCITS and other financial instruments – for example structured notes/certificates and also the need to provide a single market framework for non-harmonised retail funds such as real Estate and Fund of Hedge Funds.

Cross-Border Fund Notifications

There was broad support for moving to a system based on regulator-to-regulator communication as opposed to requiring UCITS managers to file information directly with host Member State authorities. There was acceptance that home authorities should be exclusively responsible for monitoring compliance of a UCITS with requirements harmonised under the EU Directive.

However it was also noted that UCITS face growing competition from other investment products which can be marketed cross-border more easily and that a paramount consideration is to scale back any regulatory or administrative requirements that penalise UCITS compared to these other vehicles.

It was also suggested that the scope of any residual host country responsibilities in respect of rules in the area of marketing and advertising be definitively and systematically mapped.

Management Company Passport

There were two distinct schools of thought on how to allow the remote management of funds.

The Commission suggestion that certain core administrative functions be physically undertaken in the fund domicile under the responsibility of the local supervisor was seen by some as a useful attempt to clarify the respective responsibilities of supervisors for fund managers and the fund itself.

However, the arguments in favour of this ’partial management company passport’ were hotly contested and the Commission-proposed borderline between core administrative functions (’the fund’) and management activities was challenged as arbitrary and not operational.

In his concluding remarks to the event, Stefan Bichsel, President EFAMA stated that nothing less than a full passport is acceptable for the industry.

Mergers

The fact that the Commission proposal clearly stated the right for funds to merge was welcomed.

Conditions for successful conclusion of mergers were identified, including: common valuation methods to be employed by both merging and dissolving funds; review by an independent auditor; information flow to shareholders and measures to ensure that recent investors would not lose all of their initial ’entry fee’ on exiting a merging fund.

It was observed that cross-border fund mergers can be successfully undertaken if supervisors learn to trust each other, work together and co-operate in real-time. The panel suggested that the Commission give further thought to the role of the receiving fund competent authority and expressed support for the idea of a lead-regulator.

Whilst the need to ensure that end-investors share in the savings from funds mergers was identified, unsurprisingly there were no ideas on concrete steps that could be taken to ensure such outcomes.

Pooling

The master-feeder structure approach to pooling is clearly in the ascendancy and it was agreed that pooling would be a useful means for achieving cost reductions.

A number of insightful comments also emerged including:

* Some industry representatives regretted that the Commission services had not pursued the possibility of allowing feeder funds to invest in several master funds. A leading fund authority expressed the view that more flexible investment freedoms for feeder funds would imply little additional risk

* The proposal that feeders should merely replicate the investment policy of the master was challenged by a trade association: it was suggested that feeder funds should be free to use derivatives not only for hedging currency risks, but also to enhance portfolio performance

* The proposal that the master fund should have at least two feeder UCITS as investors was criticised as a disproportionate restriction: efficiency gains could be achieved with only one feeder. Moreover, master-feeder structures could be motivated by considerations other than pooling.

* Industry representatives considered the proposed requirement for masters and feeders to enter into a contractual agreement to be superfluous where both belonged to the same financial group.

Simplified Prospectus

Proposals to replace the existing simplified prospectus by standardised and investor friendly ’key investor information’ enjoyed wide support. This support extended to both the proposed content and form of disclosures, the working methodology and objectives to be achieved.

However, two very much related points were also identified:

*The need to create an environment where other investment products (structured notes and unit-linked life insurance) be obliged to produce similar product and cost disclosures

* The need to ensure that the respective responsibilities of fund managers and distributors must be clearly articulated. Distributors should be compelled to make use of these disclosures before selling funds to their clients.

Private Placement

The workshop on private placement confirmed that the absence of an EU level understanding of private placement imposes significant costs and missed opportunities on cross-border investment.

CONCLUDING REMARKS

Stefan Bichsel, President EFAMA

In his concluding remarks Mr. Bichsel provided useful perspective and context to these proposals for UCITS adjustments.

He noted that bigger challenges are facing the industry. A particular concern is the need for a level playing field between investment products – in terms of clear and comparable conditions for investment products at both the point of sale and the production level. To date, the European Commission has signally failed to do anything to address this problem. MiFID provides the possibility for imposing common point of sale disciplines across a broad universe of financial instruments. However, proposed implementation of MiFID has threatened to exacerbate the regulatory imbalance between already transparent products such as UCITS and other financial instruments – for example structured notes/certificates.

Attention must also be given to insurance products which fall outside the scope of the MiFID – either by bringing unit-linked life insurance contracts within the scope of MiFID or aligning the Insurance Mediation Directive with MiFID.

Mr. Bichsel also called on the Commission to grasp the nettle of UCITS scope and to address the pressing need to provide a single market framework for non-harmonised retail funds such as real Estate and Fund of Hedge Funds.