Opinion of the Economic and Social Committee on the 'Proposal for a European Parliament and Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertaking for collective investment in transferable securities (UCITS) with a view to regulating management companies and simplified prospectuses'
28. 4. 1999 EN Official Journal of the European Communities C 116/1 II (Preparatory Acts) ECONOMIC AND SOCIAL COMMITTEE Opinion of the Economic and Social Committee on the ‘Proposal for a European Parliament and Council Directive amending Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) with a view to regulating management companies and simplified prospectuses’ (1999/C 116/01) On 16 October 1998 the Council decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned proposal. The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee’s work on the subject, adopted its opinion on 11 February 1999. The rapporteur was Mr Levitt. At its 361st plenary session (meeting of 24 February 1999), the Economic and Social Committee adopted the following opinion with 68 votes in favour and 5 against. 1. Introduction Directive 85/611/EEC(1) on Undertakings for Collec- 1. 1. tive Investment in Transferable Securities (UCITS) established a ‘single licence’ regime for Collective Investment Undertakings (i. e. an authorisation for products to be sold throughout the Single Market on the basis of approval in one Member State). Collective Investment Undertakings are now established in all Member States, whereas before the adoption of the Directive in 1985 they were not widespread. However, the Directive’s impact has been limited by the fact that its single licence regime applies only to investments in transferable securities (essentially shares and bonds) traded on a stock exchange or similar regulated market. It is now proposed to maintain the basic principles of the UCITS Directive but to extend its scope. 1. 1. 1. The proposed legislative framework would ensure a high level of protection for individual investors by setting standards both for the investment products and for the managers undertaking the investment. As regards the products, the proposed rules would ensure that funds raised from the public were invested in suitably qualified assets and that risk-spreading requirements were respected. As for the port- folio mangers, the rules would impose strict market access and operating conditions and controls. Two amending Directives have been proposed(2). 1. 1. 2. The focus of this Opinion is on the proposal concerning the financial intermediary which may manage UCITS (the management company). It would introduce co-ordinated rules on market access, operating conditions and prudential safe- guards to be respected by management companies. This co-ordination should allow a ‘single licence’ regime equivalent to that enjoyed by other financial services, increase investor protection and enable management companies to carry out the management of collective investment undertakings and portfolios on behalf of both private and institutional investors, including pension funds. (1) OJ L 375, 31. 12. 1985, p. 3. (2) COM(1998) 449 final and COM(1998) 451 final. C 116/2 EN Official Journal of the European Communities 28. 4. 1999 2. Summary of the Commission document 3. 2. Nationality 2. 1. The proposed Directive includes proposals concerning: — conditions for taking up business; — the nationality of the funds; — activities of an investment fund manager; — delegation; — right of establishment and freedom to provide services; and — investor information and simplified prospectus rules. Overall, the purpose of the proposal, according to the 2. 2. Commission, is to enable UCITS management companies to receive a European passport allowing them to set up branches in other Member States and to operate within the EU under the freedom to provide services; it would revise the current restrictions which prevent management companies from engaging in activities other than the management of the assets of common funds/unit trusts and investment companies. In future such companies will be permitted to provide, in addition to collected portfolio management, individual portfolio man- agement services to single private or institutional investors such as pension funds, as well as some specific non-core activities linked to the core-business. The proposal defines the conditions under which functions can be delegated to third parties. It is intended to modernise information documents provided to investors especially through introducing simplified prospectuses. The present UCITS Directive contains no har- monised market access rules, no prudential regulation, and no provisions regulating the establishment of branches and the free provision of services by management companies. 2. 3. Overall, the spirit of the proposal is to be welcomed. However, the actual text lacks clarity in a number of respects in others, appears to conflict with the Single Market and, principle of mutual recognition. These points are explained in paragraph 3 below. ‘“Management company” shall mean any company the regular business of which is management of unit trusts/common funds and of investment companies; a management company’s home Member State shall mean the Member State in which is situated the management company’s registered office’ (Articles 1a. 2 and 1a. 3). But a UCITS which is a unit trust takes the nationality of a Member State in which the management company’s registered office is located (Articles 1a and 5a), whereas a UCITS constituted as an investment company takes the nationality of the Member State in which the investment company’s registered office is situated (Articles 1a and 5b). This distinction is confusing, as it could give rise to different rights of access around the EU and within countries. The proposal does not, however, explain or justify the distinction, neither in the Explanatory Memorandum, nor in the Articles of the Directive itself. 3. 2. 1. Different UCITS structures exist in different Member States which work well in practice, including their supervisory arrangements. These different structures and supervisory arrangements should benefit from the principle of mutual recognition, a fundamental cornerstone of the Single Market in financial services. However: — the draft Directive creates different standards for different structures of funds and risks, discriminating against certain types of fund; — in addition, where a fund is structured in corporate form it should be able to manage funds on a cross-border basis, but under the draft Directive such freedom to provide services will not be available to it in another Member State where funds may only take the form of a Unit Trust under national law. instead of strengthening the single market In short, for financial services, the proposal runs the risk of achieving the opposite in the specific case of UCITS. 3. Specific comments 3. 3. Activities of Fund Manager 3. 1. Conditions for taking up business (amendments to Articles 1a. 2 and 5. 2) The definition of ‘management company’ is confusing as different meanings appear to be used in different places, i. e. ‘manager of invested funds or unit trusts’ and ‘delegated manager of investment companies’. Moreover, it is not clear whether ‘investment manager’ is always equivalent to ‘asset manager’. Article 5. 2, second paragraph, refers to a list of ‘activities’ of fund managers which is attached to the Directive as a new Annex 2. The purpose of this list is unclear. Moreover, the Committee is of the opinion that it should not be regarded as exhaustive, as it would otherwise preclude flexibility to react to different market circumstances and could exclude managers from carrying out other activities not included in the list, which may not be in conflict with their role as investment fund managers. It should also be made clear that a management company should not be required to carry out all the activities in Annex 2. 28. 4. 1999 EN Official Journal of the European Communities C 116/3 3. 4. Delegation particular, they must: The proposed Article 5g would prevent the investment management company from delegating asset management to persons with a qualifying holding in the management com- pany’s capital. It would mean that a unit trust manager would not be able to delegate to a parent company. 3. 4. 1. In some Practice in Europe varies considerably. countries the investment management company is bound by law to undertake the activity of asset management and/or fund accounting, while in others these functions may be delegated to third parties, including delegation to the parent company of the fund management company. — be a credit institution, an investment firm or a body authorized by the Member State to act as a custodian of accounts; — have own capital in proportion to the assets of the UCITS for which it is responsible, so as to be able to meet the commitments inherent in that function; — also be able to furnish the management company and any investor so wishing with a document drafted by its statutory auditor stating that its activities are conducted in conformity with the legislation of the Member State in which it is established. These different structures work well and provide 3. 4. 2. effective investor protection. Each national jurisdiction has implemented rules to deal with potential conflicts of interest, and national supervisors enforce these rules. All these conditions shall apply to any establishment to which the depositary delegates the safe-keeping of foreign financial instruments forming the assets of UCITS. The Committee is, therefore, of the opinion that 3. 4. 3. there is no reason for a Directive to interfere with these proven arrangements. Instead, if there is a need to say anything at all, it should be by means of stating general principles. For example, it could be required that where a Member State permits a management company to delegate to third parties for purposes of more efficient conduct of the company’s business, the management company should be required to notify the competent authority in advance, and that no delegation should be made to any person whose interests may conflict with those of the management company. 3. 5. The Right of Establishment and the Freedom to Provide Services The proposed Articles 6, 6a, 6b and 6c establish the principle that once the management company has been authorised by its home Member State, it may carry out business throughout the EU either by the establishment of branches or under the freedom to provide services, without being subject to further authorisation requirements by host countries. The broad objective is to be welcomed, but although Article 6a requires the management company to provide information to its home country authority before being able to establish a branch or provide services in host Member States, Article 46 requires an investment company to provide information to the host Member State, which seems unduly onerous. 3. 6. Depositaries Depositaries are a crucial feature of investment fund manage- ment which need to be properly authorized and structured, in 3. 6. 1. The current UCITS Directive states that depositaries must be established in the same Member State as the fund. This means that they have no passporting rights across the EU. The Committee encourages the Commission to examine ways in which passporting rights could be extended to depositaries while ensuring adequate supervisory regulation for investor protection. 3. 7. Investor Protection and Simplified Prospectus (Articles 27 and 28) The proposal to introduce a simplified prospectus offers a welcome opportunity to simplify the marketing of funds on a cross-border basis, which has been hampered in the past by the need to comply with a proliferation of information requirements among the Member States. The provision of a simplified prospectus should not be mandatory. 4. Conclusions 4. 1. Overall, the Committee welcomes the intention to extend the passporting principle to UCITS, to enable them to provide individual as well as collective portfolio management services, to undertake other activities beyond portfolio man- agement and to publish simplified prospectuses. 4. 2. However, the proposal is very unclear with regard to the reasoning behind the different status, nationality and market access rights to be made available to UCITS constituted as unit trusts and UCITS constituted as investment companies. The draft Directive creates different standards for different structures, risks discriminating against certain types of fund C 116/4 EN Official Journal of the European Communities 28. 4. 1999 and restricts the freedom to provide services in other Member States to certain types of funds, so that instead of strengthening the Single Market for financial services, the proposal runs the risk of achieving the opposite. In short, it risks contradicting the principle of mutual recognition because the different structures which exist at present are regarded as satisfactory by their respective national competent authorities. 4. 3. The Committee is also of the opinion that the proposed restrictions on delegation of asset management are unnecess- ary. Existing structures work well, provide effective investor protection, are subject to rules dealing with potential conflicts of interest and are acceptable to national supervisors which enforce these rules; as such the proposal runs counter to the principle of mutual recognition. Brussels, 24 February 1999. The President of the Economic and Social Committee Beatrice RANGONI MACHIAVELLI APPENDIX to the opinion of the Economic and Social Committee This appendix sets out how the Commission’s proposal amends the 1985 Directive. Article of 1985 UCITS Directive concerned (85/611/EEC) Changes proposed by Commission in COM (1998) 451 final Purpose Article 1 Insert new Article 1a Defines terms used in Directive Article 4, paragraph 3 Replace with new paragraph 3 Technical amendment due to new Articles 5, 5a and 5b Articles 5 + 6 Replace with new Article 5 Articles 5 + 6 Insert new Article 5a Articles 5 + 6 Insert new Article 5b Articles 5 + 6 Insert new Article 5c Articles 5 + 6 Insert new Article 5d Specifies new conditions for taking up business for management companies (principle of mutual recog- nition; collective portfolio management; individual portfolio management; non-core activities) Specifies criteria for authorization of management companies Specifies further authorization criteria (similar Investment Services Directive) to Extends reciprocity regime of Directive to non-EU management companies Investment Services Requires monitoring of continuing compliance with authorization criteria Articles 5 + 6 Articles 5 + 6 Insert new Article 5e Requires monitoring of qualifying holdings Insert new Article 5f Requires Member States to draw up prudential rules for management companies Articles 5 + 6 Insert new Article 5g Regulates delegations of management companies’ func- tions to third parties 28. 4. 1999 EN Official Journal of the European Communities C 116/5 Article of 1985 UCITS Directive concerned (85/611/EEC) Changes proposed by Commission in COM (1998) 451 final Purpose Articles 5 + 6 Insert new Article 5h Articles 5 + 6 Replace with new Article 6 Articles 5 + 6 Insert new Article 6a Articles 5 + 6 Insert new Article 6b Foresees future proposal on compensation mechan- isms Extends right of establishment and freedom to provide services to management companies Details notification procedures for establishment of new branches Details notification procedures for activities without establishment of new branches Articles 5 + 6 Article 7 Insert new Article 6c Specifies powers of host Member States Add new heading to create Section IIIa Formal amendment to text Article 27, paragraph 1 Modify wording Introduces obligatory simplified prospectuses Article 28, paragraph 1 Replace with new paragraph 1 Article 29 Reword Article 29 Article 30 Reword Article 30 Article 32 Reword Article 32 Article 33 Replace with new Article 33 Article 35 Reword Article 35 Article 46 Replace with new Article 46 Article 47 Replace with new Article 47 Article 52 Insert new Article 52a Article 52 Insert new Article 52b Technical consequence of changes to Article 27, para- graph 1, and specifies preconditions of simplified prospectuses Technical consequence of introduction of simplified prospectuses Technical consequence of introduction of simplified prospectuses Technical consequence of introduction of simplified prospectuses Requires compulsory offer of simplified prospectuses before conclusion of contract Technical consequence of introduction of simplified prospectuses Establishes notification procedures for cross-border activities of investment companies Regulates language regime of prospectuses in host Member States Regulates co-operation of Member State supervisors in the case of cross-border activities (as in Investment Services Directive) Regulates co-operation of Member State supervisors in the case of cross-border activities (as in Investment Services Directive) Annexe 1Schedule A Insert new paragraph 1. 3Amend paragraph 1. 13Insert new para- graphs 5 and 6 Aligns information included in full prospectuses to that of simplified prospectuses Annexe 1 Annexe Insert new Schedule C List of pre-conditions for simplified prospectuses New Annexe 2 Defines functions included as ‘collective portfolio management’ [Article 2 of new Directive] Transitional provisions and permission of fathering’ ‘grand-