European mutual funds - EY

1 European mutual funds An introduction to UCITS for US asset managers I. Introduction and a brief history of UCITS. Since the early days, when the European Steel and Coal Community UCITS are regulated investment products established and authorized was established in 1951 in order for commodities to be sold and under a common EU legal and regulatory framework. Once a UCITS is transported freely within European borders, European policymakers established and authorized by the regulatory authority in its chosen have long sought to create a seamless market for goods and services country of domicile (an EU country only), it can then be marketed throughout the continent. After the European Union (EU) was and distributed to all types of investors (both retail and institutional).

2 Officially created and replaced the European Economic Community throughout the European Economic Area (EEA)1 via the UCITS. following the treaty of Maastricht in 1993, financial services, and European passport. UCITS can also be sold outside the EEA subject asset management in particular, have moved to the very center of to each individual country's national regime. In fact, many UCITS are widespread sweeping legislative initiatives. available for distribution in non-EU countries such as Switzerland, Hong Kong, Singapore, Taiwan, Chile, Peru, Bahrain, South Africa and With the first implementation of the Undertakings for Collective Japan. In short, once an investment product is duly registered under Investment in Transferable Securities (UCITS) legislation, the entire UCITS, it can be distributed to a very large proportion of the global European continent has been steadily moving toward a single market asset management market.

3 In terms of the manufacturing and distribution of asset management products. What this means for global asset management firms, Unlike the Investment Company Act of 1940, which regulates mutual especially those originally domiciled outside of Europe, is simple: funds in the United States, the underlying UCITS regulations (known the UCITS regime enables a firm to register an investment product as the UCITS Directive) are constantly evolving. The original UCITS. one time in one EU domiciliation and then effectively distribute Directive was completed and published in 1985. UCITS IV was that product across the entire EU, which is now the world's second published in 2010, and UCITS V and VI are currently being discussed.

4 Largest fund market outside of the United States. Given the relentless Below is a timeline for the various iterations of UCITS as well as future integration and globalization of the financial services industry and amendments currently being considered. ongoing regulatory restructuring of the EU distribution landscape, growth-oriented firms can readily leverage the UCITS regime to increase assets under management and widen their investor base efficiently and effectively. UCITS I UCITS II UCITS III UCITS IV UCITS V UCITS VI. 1985 Abandoned 2001 2009 Spring 2016 (estimated) To be determined Original UCITS II was Firms were given until February UCITS IV was effective UCITS V amendments were proposed by Potential areas covered UCITS abandoned in 2007 to ensure their funds were 1 July 2011.

5 Key the EU Commission in July 2012 and include the following: directive 1998 after EU UCITS III compliant. UCITS III was provisions included the approved by European Parliament in April published. Member States divided into two distintive following: 2014. Will align UCITS Directive with the - Eligible assets, use of failed to reach directives: AIFM Directive. Key provisions include derivatives and ef cient an agreement - Streamlined regulator- the following: portfolio management on its scope Management directive: to-regulator noti cation techniques and purpose. Creation of the European procedures - Depositary regime updates, including - Liquidity management Key provisions Passport whereby a UCITS - Management company their appointment and eligible entities, included much fund authorized in its home oversight duties, cash-monitoring duties, - Depositary passport passport created of the state could be sold anywhere safe-keeping duties, delegation and - Money market funds framework within the EU.

6 Also required - Key Investor Information overall liability (KII) document replaced - Long-term investment of UCITS III. the use of a simpli ed - Establishment of remuneration policies the simpli ed prospectus funds prospectus detailing the and practices that promote sound and key features of a fund . - Master-feeder fund - Consistency with effective risk management and do not structures are introduced AIFM Directive Product directive: Allowed encourage risk-taking. Remuneration for investments in a wider - Framework for domestic structures will need to include rules on range of asset classes with and cross-border fund variable and xed compensation, a corresponding distinction mergers is created including a requirement that at least between non-sophisticated 50% of variable remuneration be in the and sophisticated funds .

7 Form of units - Creation of a sanctions regime and whistle-blowing procedures for reporting incidents to authorities 1. The European Economic Area includes all EU countries (Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom) as well as Iceland, Liechtenstein and Norway. European mutual funds An introduction to UCITS for US asset managers | 1. II. Domiciliation UCITS Directive updates are proposed by the European Parliament Service provider considerations, including the ability to leverage in a somewhat similar process by which US legislation is proposed; relationships with current service providers to US domestic debated; and then, eventually, approved by the Congress.

8 Products In the case of EU directives, however, after authorization by the Native language(s) spoken in domicile and those of investors European Parliament, each new directive must then be translated as well as cultural alignment and transposed into the local law of each EU country individually. This can create minor differences in terms of both implementation Political, economic and social environment stability and interpretation. As mentioned, the key benefit obtained from Legal environment and taxation regime UCITS registration is that once your fund has been approved by the regulatory authority in the country of domiciliation, distribution to Authorization of a promoter's fund as a UCITS involves the all other countries in the EEA is relatively simplified and streamlined, submission of an application, prospectus and Key Investor Information and takes the form of a standardized notification procedure with (KII) document, as well as other key agreements, documents and the regulatory authorities for each of the countries of distribution.

9 Information with the regulatory authority in the chosen country The level of interaction with the host country regulator and each EU of domicile. Once approved, the prospectus obtains a VISA stamp country's own interpretation of the UCITS directive, as well as the confirming that the regulator of the country of domicile has factors noted below, make the decision on where to domicile your authorized the UCITS. Distribution throughout the EEA is then subject UCITS often one of the first and most important determinations. to notification procedures. The notification procedures, which were Other key factors that may influence a promoter's decision as to simplified under UCITS IV, involve the submission of a notification where to domicile their UCITS include the following: letter and required documents to the regulatory authority in the country of domicile (home country).

10 The home country regulator then Preexisting relationship with and reputation of the regulator communicates and coordinates directly with the regulatory authority in the domicile in the country of desired distribution (host country) for approval. Reputation of domicile or brand in the investment fund industry and outside the EEA. Distribution strategy and location of investors UCITS Market*. Assets of the top 10 domiciles . European investment fund Belgium $127,109. industry, end December 2014. France $1,391,271. Germany $359,867. Ireland $1,547,344. Italy $238,327. Luxembourg $3,208,264. Spain $274,050. Sweden $302,226. Switzerland $415,100. United Kingdom $1,208,443. 0 100 500 1m 2m 3m Net assets in mio US dollars (*Source: EFAMA: In the sense of publicly offered open-ended investment funds (transferable securities and money market instruments), including funds -of- funds assets.)