Undertakings for Collective Investments in Transferable Securities
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Undertakings for Collective Investment in Transferable Securities (or UCITS, pronounced yoo-sits) are a set of European Union regulations that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state.
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: euractiv - 2005)
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[edit] UCITS legal form
Depending on the jurisdiction, UCITS can be constituted either:
- under the law of contract (as common funds), or
- under trust law (as trusts), and (also)
- under statute, i.e. in corporate form (as investment companies).
The Directive may refer to both non-corporate forms under one designation, e.g. "common fund" or "unit trust". Importantly, some Member States' legal frameworks are limited to common funds, i.e. all their UCITS are without legal personality and depend on a designated external fund manager (a management company).
(Source:European Commission - COM(2004) 207 final)
[edit] History
The objective of the original 1985 UCITS directive (the 1985 Directive), was to allow for open-ended funds investing in transferable securities to be subject to the same regulation in every Member State without further authorisation. The reality was somewhat different to the expectation primarily because each Member State created obstacles to cross-border marketing of UCITS. In addition, the limited permitted investments for UCITS reduced the marketing possibilities.
In the early 1990s, in recognition of the weaknesses of the 1985 Directive, proposals were developed to more successfully achieve the harmonisation of laws throughout Europe. These discussions led to the draft UCITS II directive which was utimately abandoned 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); these became the UCITS III directives. These proposals were finally adopted in December 2001.
[edit] UCITS III
UCITS III consists of the following two directives (the “Directives”):
- Directive 2001/107/EC of the European Parliament and of the Council (the Management Directive)
- Directive 2001/108/EC of the European Parliament and of the Council (the Product Directive)
The Management Directive seeks to give investment managers 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, comprehensive information in a simplified format to assist in cross-border marketing.
The primary aim of the Product Directive is to remove barriers to the cross-border marketing by allowing funds to invest in a wider range of financial instruments. Under the new Directive, it is possible to establish money market funds, derivatives funds, index-tracking funds and fund of funds as UCITS. The ultimate success of UCITS III is dependent on the way in which each Member State implements the Directives.
[edit] UK implementation
The (UK) Financial Services Authority requires investment managers to convert all UCITS I products to UCITS III no later than 28 February 2007. However, investment managers which have launched new UCITS I funds since 13 February 2002 must have converted all those funds to UCITS III by 31 December 2005.
Under the FSA's final rules for consumer product disclosure in relation to UCITS funds; the product information is contained in a single new document known as the Simplified Prospectus. EU rules require this document to be offered to anyone who wants to invest in a collective investment scheme that holds a UCITS certificate.
The new FSA rules build upon the existing UK regime for investment product information - the Key Features document - by adding new information requirements only where it is necessary to meet the revised EU standards.
The new EU information requirements include:
- a Total Expense Ratio (TER) figure showing the costs and charges of the fund. The figure will not take account of front-end charges, exit costs or certain fund expenses such as dealing costs.
- a Portfolio Turnover Rate (PTR) figure, to reflect the volume of dealing within the fund; and
- the historic performance of each UCITS fund showing up to ten years' annual returns.
[edit] NURS
Since the wide adoption of UCITS status within the UK assest management industry a new acronym has been adopted for Non-UCITS Retail Schemes (NURS). These funds allow investment outside the UCITS framework including property funds, investment trusts and Exchange Traded Funds (ETFs).
