Undertakings for Collective Investments in Transferable Securities

Undertakings for Collective Investment in Transferable Securities (or UCITS, pronounced "yoo-sits") are a set of European Union directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. In practice many EU member nations have imposed additional regulatory requirements that have impeded free operation with the effect of protecting local asset managers.

The objective of the original UCITS directive, adopted in 1985, was to allow for open-ended funds investing in transferable securities to be subject to the same regulation in every Member State. It was hoped that once such legislative uniformity was established throughout Europe, funds authorised in one Member State could be sold to the public in each Member State without further authorisation, thereby furthering the EU’s goal of a single market for financial services in Europe.

The reality differed somewhat from the expectation due primarily to individual marketing rules in each Member State that created obstacles to cross-border marketing of UCITS. In addition, the limited definition of permitted investments for UCITS weakened the marketing possibilities of a UCITS. Accordingly, in the early 1990s proposals were developed to amend the 1985 Directive and more successfully harmonise laws throughout Europe. These discussions, although leading to a draft UCITS II directive, were subsequently abandoned as being too ambitious when the Council of Ministers could not reach a common position.

In July 1998 the EU Commission published a new proposal which was drafted in two parts (a product proposal and a service provider proposal), which sought to amend the 1985 Directive. These proposals were finally adopted in December 2001 (UCITS III). UCITS III consists of the following two directives:

• Directive 2001/107/EC of the European Parliament and of the Council (the “Management Directive”); and

• Directive 2001/108/EC of the European Parliament and of the Council (the “Product Directive”).

The Management Directive seeks to give management companies a “European passport” to operate throughout the EU, and widens the activities which they are allowed to undertake. It also introduces the concept of a simplified prospectus, which is intended to provide more accessible and comprehensiveinformation in a simplified format to assist the cross-border marketing of UCITS throughout Europe.

The primary aim of the Product Directive is to remove barriers to the cross-border marketing of units of collective investment funds by allowing funds to invest in a wider range of financial instruments. Under this directive, it is possible to establish money market funds, derivatives funds, index-tracking funds, and funds of funds as UCITS.

A collective investment fund may apply for UCITS status in order to allow EU-wide marketing. The concept is to create a single market in transferable securities across the EU. With a larger market the economies of scale will reduce costs for investment managers which can be passed on to consumers.

Throughout Europe approximately €5 trillion are invested in collective investments. Of these funds about 70% are UCITS. (Source: [http://www.euractiv.com/Article?tcmuri=tcm:29-142577-16&type=News euractiv - 2005] )

Reference

* [http://www.finance.gov.ie/documents/publications/legi/finregucits.rtf "EUROPEAN COMMUNITIES (UNDERTAKINGS FOR COLLECTIVE INVESTMENT IN TRANSFERABLE SECURITIES) REGULATIONS 2003 (SI 211 OF 2003)(AS AMENDED)"]

* [http://www.cysec.gov.cy/Downloads/Events/EuropeanIssues/UCITS%20Framework/CESR%2007-434%20%20CESR%20Guidelines%20on%20the%20classification%20of%20%20hedge%20fund%20indices%20as%20financial%20indices.pdf "CESR’s guidelines concerning eligible assets for investment," July 2007]

* [http://www.investmentuk.org/news/imag/Newsletter-edition17.pdf "UCITS IV good news for the industry but lack of passport a serious concern," April 2008]