Opinion of the European Central Bank of 16 March 1999 at the request of the Council of the European Union under Articles 109l(2) and 109f(6) of the Treaty establishing the European Community and Article 5.3 of the Statute of the European Monetary Institute on two European Commission proposals for European Parliament and Council Directives amending Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), ref. 98/0242 - COM(1998) 451 final and ref. 98/0243 - COM(1998) 449 final (CON/98/54)
7. 10. 1999 EN Official Journal of the European Communities C 285/9 OPINION OF THE EUROPEAN CENTRAL BANK of 16 March 1999 at the request of the Council of the European Union under Articles 109l(2) and 109f(6) of the Treaty establishing the European Community and Article 5. 3 of the Statute of the European Monetary Institute on two European Commission proposals for European Parliament and Council Directives amending Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), ref. 98/0242 - COM(1998) 451 final and ref. 98/0243 - COM(1998) 449 final (CON/98/54) (1999/C 285/08) 1. The European Central Bank (hereinafter referred to as the ECBí) received requests from the Council of the European Union (hereinafter referred to as the Councilí), dated 16 and 26 October 1998, for an ECB opinion on draft legislative proposals for European Parliament and Council Directives (hereinafter referred to as the ádraft Directivesí) amending Directive 85/611/EEC on the coordination of laws, regu- lations and administrative provisions relating to under- takings for collective investment in transferable securities (UCITS) (hereinafter referred to as the UCITS Directiveí). new version of the UCITS Directive would be preferable. This is all the more the case since the UCITS Directive appears to have been interpreted differently by Member States. Such different interpretations are undesirable in the context of a single money and financial market and may lead to competitive distortions and misallocation of funds. Alternatively, consideration could be given to the possibility of including a new recital (introduced by áwhereasí) in both draft Directives stating that all Member States should make every effort to implement both Directives simultaneously in their national legislation. 2. In accordance with Article 109l(2) of the Treaty establishing the European Community (hereinafter referred to as the Treatyí), the ECB has taken over the advisory functions of the European Monetary Institute (EMI), which went into liquidation upon the establishment of the ECB on 1 June 1998. The requests from the Council were based on Articles 109l(2) and 109f(6) of the Treaty. The ECB’s competence to deliver an opinion is now based on Article 105(4) of the the European Treaty and Article 4(a) of System of Central Banks and of the European Central Bank, both of which entered into force on 1 January 1999. first sentence, of the Rules of Procedure of the ECB, this ECB opinion has been adopted by the Governing Council of the ECB. In accordance with Article 17. 5, the Statute of 4. The ECB notes that in part, the draft Directives present a new in an earlier solution to issues dealt with, proposal for a Directive amending the UCITS Directive (COM(93) 37 final, modified by COM(94) 329 final) on which the EMI delivered an opinion on 27 July 1995 (CON/94/8). The ECB notes that, to a certain extent, the draft Directives raise issues similar to those contained in the earlier proposal. Consideration may therefore also be given to the advisability of taking account of the previous opinion of the EMI in the context of the discussion on the draft Directives. the first (COM(1998) 449 final) 3. The ECB has decided to deliver one opinion dealing with both consultations as the two draft Directives both aim at amending Directive 85/611/ECC. The ECB understands that the Commission of the European Communities has prepared a package of measures distributed through separate proposals: focuses essentially on the types of investment funds, whereas the second (COM(1998) 451 final) focuses essentially on the service provider (the management company) and on the In the explanatory prospectus requirements for UCITS. memoranda to both draft Directives, it is stated that it will be of no consequence if one of the two Directives is adopted more rapidly than the other. However, given the fact that amendments to one draft Directive may have an impact on the other and the fact that the draft Directives propose substantial modifications to the UCITS Directive, the ECB believes that, for the sake of clarity, transparency and legal certainty, discussion of a complete and integral 5. The any that amendment ECB notes to Directive 85/611/EEC might have an impact on the legal definition of money market funds for statistical purposes, as defined by the ECB itself in Annex 1, Part I, Section I, paragraphs 5 and 6 of the ECB Regulation concerning the consolidated balance sheet of the Monetary Financial Institutions sector (ECB/1998/16), as adopted by the Governing Council of the ECB on 1 December 1998 (OJ L 356, 30 December 1998, p. 7). Therefore, the draft Directives have been assessed in particular with regard to their consistency with the ECB’s legal definition of money market funds. I. COM(1998) 449 final 1. One objective of this draft Directive is to remove barriers to the cross-border marketing of units of collective investment undertakings through (a) the extension of the freedom to be marketed throughout the European Union C 285/10 EN Official Journal of the European Communities 7. 10. 1999 to collective investment undertakings investing in financial assets other than transferable securities, such as units of other collective investment undertakings, money market instruments, bank deposits, standardised options and futures contracts, (b) the revision of some provisions in order to update the UCITS Directive in the light of new portfolio management techniques which have been developed since 1985 and (c) the removal of uncertainties relating to the interpretation of a number of provisions contained in the UCITS Directive which impede uniform application of the Directive. collective investment undertakings 2. The ECB takes note of the objectives of the draft Directive, in particular the extension of the definition of UCITS to those investing in financial assets other than transferable securities, such as units of other collective investment undertakings, money instruments, bank deposits, standardised options market the and futures contracts, because the definition of existing UCITS Directive does not cover all money market in bank deposits in some countries. In addition, definitions of transferable securities and money market instruments are provided in the draft Directive, both of which are broadly in line with the definition used by the ECB for statistical purposes. some of which also invest funds, 3. The ECB notes that Article 1(7) of the respective provisions. The the draft Directive proposes a new Article 22(a) of the UCITS Directive facili- tating the establishment of UCITS, the investment policy of which is to áreplicateí a specified stock index. The Council may wish to consider whether it may be preferable to refer to UCITS, the investment policy of which is to átrackí a specified stock index. In this case the kind of átrackingí would have to be specified in order to ensure uniform application of ECB recognises that there is an interest in the establishment of such types of UCITS. Nevertheless, the ECB recommends that the provision of Article 22(a)(2) (definition of replicate stock indices) be spelt out in greater detail so as to ensure that no distortions arise as a result of certain existing indices not being on the list published by the European Commission, recognising however the technical difficulties of establishing more detailed notions. In particular, the áhaving a composition which is sufficiently notions of diversifiedí, ábeing easy to replicateí and árepresenting an adequate benchmark for the equity market to which they referí are not sufficiently clear, which may result in unwar- ranted market distortions, if certain indices were to be unduly promoted more than other indices. Furthermore, consideration might be given to whether the limit of 35 % in Article 22(a)(1) is too high. The investment of up to 35 % of the assets of a fund in instruments of one issuer can hardly be reconciled with the principle of risk- spreading laid down in Article 1(2) of the existing UCITS Directive which shall apply to all UCITS. In this respect, the same group. the current proposal 4. The ECB notes that the scope of the definition of UCITS (Article 1(1) of the draft Directive, amending Article 1, paragraph 2, first indent of the UCITS Directive) has also been extended to cover money market funds and is consistent with the ECB’s legal definition of money market funds. The ECB notes in particular that Article 1(3) of the draft Directive (proposed new Article 19, paragraph 1(f) of the UCITS Directive) provides for the possibility of investing in ádeposits with credit institutionsí. In this context, the ECB notes that Article 1(9) of the draft Directive allows for investments of up to a maximum of 35 % of the UCITS assets in deposits with credit insti- tutions of the ECB to draw attention to the EMI opinion should like in the draft (CON/94/8). Under Directive, an investor could lose up to 35 % of his/her investment through the failure of a single credit institution. The considerations concerning appropriate warnings to investors also apply in the context of this proposal (see below). In this respect, the Council may wish to consider lowering the maximum limit for investment of the UCITS assets in deposits with credit the same group. In this context it also seems questionable whether the assets of a fund in the investment of up 35 % of instruments of one issuer can be reconciled with the principle of risk-spreading laid down in Article 1(2) of the existing UCITS Directive which shall apply to all UCITS. Moreover, when defining the relevant limits the Council may wish to take into account the fact that a fund may incur exposure to the same credit institution also in relation to instruments and contracts other than ádepositsí (e. g. debt securities, equities or OTC derivative contracts). institutions of 5. The ECB welcomes the fact that the definition of trans- ferable securities, as determined by Article 1(2) of the draft Directive (proposed new Article 1, paragraph 8(a) is cosistent with the definition of the UCITS Directive), of negotiable instruments used by the ECB for statistical purposes. 6. The ECB notes that the UCITS Directive) the definition of money market instruments, which is provided in Article 1(2) of the draft Directive (proposed new Article 1 paragraph 8(b) of the UCITS Directive) and further specified in Article 1(3) of the draft Directive (proposed new Article 19, paragraph is broader in scope than 1(i), of that contained in the ECB’s legal definition of money market funds but is consistent with the ECB’s definition in general terms. The latter is more specific in defining to be the considered as a money market such as liquidity, depth of the money market and certainty in value and low interest rate risk. The ECB notes that this could result in a financial instrument representing a money market instrument according to Community law failing to requirements instrument, instrument financial for a 7. 10. 1999 EN Official Journal of the European Communities C 285/11 fulfil all criteria as determined in the ECB’s legal definition of money market funds. This becomes obvious on considering the ECB’s legal definition of money market funds contained in Annex 1, Part I, Section I, paragraph 6(iv) to the ECB Regulation concerning the consolidated balance sheet of the Monetary Financial Institutions sector (ECB/1998/16), which defines low interest rate risk áin the meaning of having a residual maturity of up to and including one year, or regular yield adjustments in line with money market least every twelve monthsí. As the definition conditions at given in the draft Directive is broader than the ECB’s defi- nition and as the draft Directive is not aimed at defining categories of UCITS, the two definitions do not seem to be in contradiction. Nevertheless, that a the definitions would promote trans- harmonisation of parency. the ECB notes 7. In addition, the ECB considers that the possibility for UCITS, as laid down in Article 1(3) of the draft Directive (proposed new Article 19, paragraph 1(f) of the UCITS Directive) of also investing in ádeposits with credit insti- is consistent with the ECB’s legal definition of tutionsí money market determines more precisely the kind of bank deposits in which a money market in order to be considered as such. However, as no distinction is made in Community law between different categories of collective investment institutions, this does not give rise to any inconsistencies. Nevertheless, the ECB notes that a harmonisation of the definitions could be considered. fund may invest funds. The latter funds, ECB suggests 8. Given the fact that amendments to the UCITS Directive might have an impact on the ECB’s legal definition of money market the the relationship between the UCITS Directive and the ECB’s legal definition of money market should be clarified in a recital (introduced by áwhereasí) in the draft Directive by referring to the competence of the ECB to define money market funds within the framework of the ECB Regulation concerning the consolidated balance sheet of the Monetary Financial Institutions sector. funds that risk-spreading. 9. The ECB believes that careful consideration should be safeguarding the transparency and given to measures the ECB holds the In this respect, stability of UCITS. view that careful consideration should be given to the appropriateness, desirability and feasibility of measures safeguarding the principle of In this context, the Council may wish to consider whether it is advisable, in respect of the calculation of thresholds for the investment in transferable securities and/or instruments of a single issuer, for áconnectedí issuers to be regarded as a single risk as a matter of principle. The draft Directive introduces this principle in relation to investments in deposits with credit institutions (Article 1(9) of the draft Directive, introducing a new Article 24(a) of the UCITS Directive), but this principle could apply irrespective of the type of investment or instrument. The ECB recognises, however, that the requirement that áconnectedí issuers have to be regarded as a single risk could impose additional burdens on the management companies. Therefore, a quali- tative approach could be considered, possibly as a transi- tional solution only, whereby the UCITS manager would be required to ensure that, taking account of the objective of the scheme and the manager’s policy for achieving that fund rules or objective, as stated in the most recent the scheme provides a instruments of prudent all investments and instruments. In relation to this alternative solution the Council may wish to consider the possible potential for supervisory arbitrage. distribution of incorporation, considering issuer risk 10. The ECB recommends that a review is made of a potential inconsistency between the possibility for more traditional UCITS of investing in derivatives for hedging and portfolio management purposes and the rules on the investment policy of derivatives-specialised UCITS, namely in relation to the OTC market (to which only the former category may resort). The Council may wish to consider whether the use of OTC derivatives should be allowed for all types of the same conditions. The relationship between Article 21 of the Directive and the new Article the ECB 24a may need to be clarified. Furthermore, recommends reconsideration of the draft that Directive does not establish any specific limits or other more specific measures to protect investors against risks related to derivative transactions. funds under the fact and specific determine áprospectuses provisions which the 11. The ECB notes that the draft Directive contains a number obligations of any promotional concerning the draft Directive literatureí (see Article 1(9) of proposing a new Article 24(a) of the UCITS Directive) and which deal with obligations concerning the investment policies of UCITS. The inclusion of these provisions is not systematic and transparent and may lead to conflicting solutions. The Council may wish to consider combining all obligations concerning the mandatory information to be given to investors in one section of the UCITS Directive. the EMI’s In this context, suggestion, as made in the EMI opinion mentioned above (CON/94/8), that consideration should be given to the imposition of an obligation in the UCITS Directive stating that the investors should be informed that funds which constitute close substitutes for deposits (money market funds/cash funds) will not be subject to deposit protection. the ECB wishes to recall 12. With the aim of reinforcing the soundness and trans- instruments, parency of the regulation of these financial the ECB underlines the need that UCITS should invest, as a general investment rule, only in other ácoordinatedí Investments in non-coordinated funds could be funds. possible safeguards suitable protecting the position of the investors. to further subject strict C 285/12 EN Official Journal of the European Communities 7. 10. 1999 13. Respecting the importance of the control function of the depositary and the necessary strength of the regulation of UCITS, the Council may wish to reconsider the provisions restricting or prohibiting transactions with the UCITS’ depositary (Article 1(6) and 1(9) of the draft Directive). These provisions may be inconsistent with commercial practice and, instead of being prohibited, could be made to the requirement of being carried out under subject normal commercial the requirement concerning the location of subsidiaries might be drafted in a more flexible way. Subsidiaries outside the EEA could be accepted subject to the necessary conditions relating to efficient supervision of at least the same level of quality as in the EEA. However, it is stated in this the national central banks hold divergent context views on these proposals and in some cases are even of the opinion that none of the proposals is feasible. terms. Similarly, that II. COM(1998) 451 final that, sector in consideration of (in particular, 1. The ECB notes that the aim of this draft Directive is to reinforce the single market in the area of UCITS by: (a) updating the rules governing management companies by bringing these into line with those existing for other operators in the financial services area (banks, investment the firms and insurance companies), these ongoing growth of this operators would receive a European passportí in accordance with the principles of the Treaty, would allow them to set up branches in other Member States and to operate within the EU with the freedom to provide services); (b) restrictions which prevent management companies from engaging in activities other than the management of the assets of common funds/unit portfolio companies trusts management); identifying the functions which the activity of collective portfolio management comprises; (d) defining the conditions under which such functions can be delegated to third parties; and (e) amending the provisions concerning the information documents to be given to investors (in this respect the proposal introduces simplified procedures). investment (collective revising current the (c) as proposed the business of 2. The ECB notes in particular that the draft Directive aims at ámanagement widening the scope of the companiesí. This widening and the expansion of the European product range as well as the granting of passportí draft Directive may in the substantially contribute to a further process of desinter- mediation of financial services, in the sense that more and more financial intermediation will be carried out via insti- tutional institutions. As stated in the EMI opinion (CON/94/8), this may contribute to significant changes in the business environment and should liability therefore be taken to ensure that the proposed prudential supervisory regime meets the standards necessary to foster financial stability and will result in a consistent prudential framework for all intermediaries, which takes account of their specific features. investors rather than via credit institutions. Care structure of financial credit the suggests companiesí companies, companiesí, ámanagement application of the ECB understands the the discretionary portfolio management 3. The ECB notes that the draft Directive proposes that the specialisation principle applied to date in the area of UCITS be rendered more flexible. According to the draft Directive, there will be two distinct types of ámanagement companiesí: those which exclusively engage in the management of unit trusts/common funds and investment companies and those which also provide ádiscretionary portfolio managementí. For the latter category, the draft Directive (Article 1(3) of the the draft Directive proposing a new Article 5. 4 of certain UCITS Directive) Articles of Directive 93/22/EEC. According to the draft Directive, that UCITS may be managed or áconstitutedí by three different types of enter- prises to which three different sets of rules would apply: and áinvestment authorisation of which ámanagement covers serviceí. there might be a certain risk of The ECB believes that supervisory arbitrage and confusion induced by this relatively complicated structure. In particular, this may be the case whenever the investment companies outsource their management activities to other enterprises. The Council may wish to consider different possible solutions on which the national central banks hold divergent views and in some cases are even of the opinion that none of the proposals is feasible. First, whether a complete integration of the UCITS business into the scope and application of Directive 93/22/EEC might not be preferable and whether this would provide for the equal and consistent application investment of firms, the financial system. Second, the proposed structure could be simplified by (a) restriction on the activities of management companies in the UCITS Directive, or (b) allowing the credit firms and insurance companies authorised under the relevant single market Directives to manage the assets of UCITS as well the Investment as individual portfolios by extension of Services Directive and the Second Banking Directive. Third, the scope of the proposed new Article 5(g) of the UCITS Directive (which deals exclusively with management companies) may be enlarged to also cover investment companies, and to the foreseen requirements a further requirement could be added stating that the mandate may be conferred only upon credit institutions and investment firms authorised under the relevant single market Directives and upon similar third country institutions that are subject to equivalent prudential requirements. Whichever solution may be developed, the objective of avoiding conflicts of interest should be pursued. Moreover, the ECB would like to stress the importance of equivalent prudential rules being applicable to the different intermediaries. the supervisory standards elobarated for thus better ensuring the stability of removing the institutions, investment 4. The ECB notes that the draft Directive proposes certain cooperation obligations ácompetent authoritiesí. The for ECB welcomes the respective provisions and would like to suggest that the Council considers even broader cooperation obligations which would also include cooperation with insurance authorities competent undertakings, own subsidiaries active in the UCITS business. in the supervision of such undertakings often since 7. 10. 1999 EN Official Journal of the European Communities C 285/13 provides the UCITS Directive) 5. Article 1(3) of the draft Directive (proposed new Article 5 of that mangement companies shall be granted an official authorisation by the competent authorities in the home Member States and that such authorisation shall be valid in all Member States. This impact on the List of Monetary provision has a direct Financial Institutions, in so far as management companies managing money market funds will be able to operate through branches which are established in other Member States. With respect to the activities of the European System of Central Banks (hereinafter referred to as the ESCBí), the ECB notes that this provision has the effect that the national central bank of the Member State in which such branches are located will have to report the branches as domestic Institutions and include the reference Monetary Financial and residence of the head office, as is currently the case for credit institutions. for statistical purposes, 6. Article 1(3) of the draft Directive (proposed new Article 6(c) of the UCITS Directive) provides that the host Member State require all management may, companies with branches within its territory to report peri- odically on their activities to the competent national authority in that host Member State. With respect to the activities of the ESCB, the ECB notes that this provision does not prejudice the collection of additional statistical information in accordance with Article 5 of the Statute of the European System of Central Banks and of the European Central Bank. investment fund rules, instruments of that áthe criteria identifying a money market fund may be derived from the public prospectus, incor- poration, established statutes or by-laws, subscription documents or contracts, marketing documents, or any other statement with similar effect, of the collective investment under- takingsí. This provision implies that even a full prospectus may not be sufficiently detailed in every case. The ECB notes that the introduction of a simplified prospectus, in addition to the full prospectus, does not change the the draft Directive existing situation, as Schedule C of foresees under Investment Informationí a rather general definition of the objectives, investment policy and historical performance of the UCITS and the profile of the typical investors for which they are designed. The ECB states that this general definition may not be sufficiently detailed to provide a basis for the various UCITS in or from the list of Monetary Financial Institutions. Therefore, consideration may need to be given to amending the definition accordingly. the inclusion or exclusion of 8. As already outlined under Article I. 8. , the ECB suggests that the relationship between the UCITS Directive and the legal definition of money market funds set out in the ECB Regu- lation concerning the consolidated balance sheet of the Monetary Financial Institutions (ECB/1998/16) should be clarified in a recital (introduced by áwhereasí) to the draft Directive. 7. Article 1(5) of the draft Directive (proposed new Article 27, paragraph 1, and Article 28, paragraph 1 of the UCITS Directive) provides for simplified prospectus requirements. According to these draft provisions, only the distribution of a simplified prospectus is mandatory, whereas the full prospectus shall be provided, free of charge, at the investor’s request. The elements to be contained in the simplified prospectus are outlined in Schedule C annexed to the draft Directive. With respect to the ECB’s legal definition of money market funds, the ECB notes that the ECB’s defi- nition in Annex 1, Part I, Section I, paragraph 5 to the ECB Regulation concerning the consolidated balance sheet of the Monetary Financial Institutions sector (ECB/1998/16) states 9. The Council may wish to consider a significant increase of the initial capital required in the proposed new Article 5(a)(1)(a) of amount of the UCITS Directive. The EUR 50 000 (1) does not seem to be an adequate capital base for the activities allowed. This ECB opinion will be published in the Official Journal of the European Communities. Done at Frankfurt am Main, 16 March 1999. The President of the ECB Willem F. DUISENBERG (1) The ECB assumes that all references to ECU will be replaced by references to the euro