UCITS IV EN

UCITS IV

Being well prepared for the changes

March, 2010

Introduction

Since the first UCITS directive in 1985, European management companies have broadly used UCITS, whose brand is recognised worldwide. Still, the initial goal of an integrated pan-European fund distribution model has not been fully achieved yet, as mentionned in our “Cross-border distribution of UCITS” publication issued in November 2008.The UCITS IV directive, adopted by the Council of the European Union on 22/06/2009 and whose implementation is expected by mid-2011, aims at improving the single market’s efficiency by reinforcing the asset management industry’s competitiveness and by improving fund distribution, whilst maintaining the level of protection granted to investors. CACEIS closely follows this regulatory development, as well as the other structuring evolutions for the European fund industry: depositary function harmonisation and the proposed AIFM directive on alternative investment fund managers. This document has a dual objective: to remind the readers of the background, the time-line, the challenges and the key measures of the UCITS IV directive, and to inform our clients about the CACEIS services in order to support them in this new context. We hope that this information will help our clients to better understand one of the major developments within the fund industry in Europe and facilitate the evaluation of business opportunities.

1 Background, time-line and challenges of the UCITS IV directive > From UCITS I to UCITS IV > Time-line for the implementation of UCITS IV > Challenges 2 Key measures of the directive > Simplification and reduction of the timing of the cross-border notification procedure > Replacing the simplified prospectus by the KII > Management company passport > Cross-border UCITS mergers and master/feeder UCITS structures

3 CACEIS’s support

Summary

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What to expect from the revision of the UCITS directive?

The UCITS IV directive will have noticeable consequences for everyone regarding information and will contribute to better cooperation between the regulators and the European authorities in charge. Will it yield the expected results in terms of cross-border distribution and economies of scale? Without doubt, the simplification of the notification procedures is a positive step forward and it is more than likely that the management companies will make broader use of these new possibilities.This confirms one of the top priorities of CACEIS’s offer, which is widely recognised for its know-how in providing distribution support, taking advantage of its presence in Luxembourg and Ireland. The cross-border master-feeder system also looks promising since it uses known techniques and can contribute to a better use of the strengths and assets of the different European financial centres as well as the different players within the fund promoters/producers/distributors groups.The advice required from the CESR regarding the future Level 2 measures however confirms that it will be difficult to define a system where responsibilities are clearly identified and balanced between the different players. The professionals however are less enthusiastic regarding the potential effects of the clauses in terms of cross-border fund mergers.Within this field, due to a lack of European harmonisation, the planned information obligations would still be restrictive and the tax impact of these operations would still represent an important obstacle. Finally, the European passport granted to management companies should lead to a differentiation of players through their service offers. In this context, the professionalism and international implementation of CACEIS are two major assets for the strategic support of our clients.

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Background, time-line and challenges of the UCITS IV directive 1

From UCITS I to UCITS IV

UCITS = U ndertakings for C ollective I nvestment in T ransferable S ecurities > Also called coordinated funds > Investment funds established and autorised in conformity with the requirements of directive 85/611/CEE (the UCITS directive)

UCITS IV Council Directive n o 2009/…/EC under implementation

UCITS III Council Directives n o 2001/107/EC & 2001/108/EC of 21/01/2002 Broadening of investment possibilities and of investment funds eligible for the product passport

UCITS I Council Directive n o 85/611/EEC of 20/12/1985

UCITS II Council Directive never implemented

UCITS V

Principles for European harmonisation in terms of investment funds, Product passport

Management company passport, improving the single market efficiency

Depository passport?

Possible impact of the AIFM Directive

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UCITS IV implementation time-line > The directive comes within the scope of the 4 step Lamfalussy process 1. Adoption of legislation by the European Parliament and the Council of the EU – Framework directive (level 1) 2. Enforcement directive, technically detailing measures issued in the framework directive, CESR advice (level 2) 3. Implementation of the text into national legislation by local regulators, cooperation principle guaranteed by the CESR 4. Strict control by the European Commission of the enforcement of the new texts adopted in member states

> Its implementation is expected on 01/07/2011

Autumn 2009 Publication of the text in the Official Journal of the EU

22/06/2009 Text formally adopted by the European Coucil

Late 2006 Publication of a white paper by the European Commission

13/01/2009 Text including a management company passport adopted by the European Parliament

31/10/2009 & 31/12/2009 CESR's technical advice on the level 2 measures

From 2010 to the end of June 2011 Implementation of the text into national legislation of the Member States

01/07/2011 The new recast directive comes into force

> Relations between the depositories and the management companies in a cross-border environment > Standard agreement between the depositories of a master and its feeders > The content and the presentation of the key information to investors (KII) > The information to the bearers in the case of cross-border mergers of funds > The investigation powers of the supervision authorities of the fund with a management company implemented in another Member State > The cross-border information exchange regulations and procedures between the local authorities of the home country and those of the host country...

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Challenges: implementing the objectives of the 2006 white paper > To improve the information delivered to investors •The simplified prospectus does not enable investors to compare investment funds fonds > To maintain the same level of protection for investors, or even to reinforce it in a cross-border context where various supervision authorities interact > To remove cross-border fund distribution barriers •Quite long lead times to market funds •High distribution costs •Lack of an European passport for management companies gestion > To increase the average size of UCITS and favour economies of scale •A highly fragmented European market

1200

800 1000

American market

As at 31/12/2008

Europe (UCITS)

United States (Mutual funds)

600

Assets

4,575 €bn

6,899 €bn

400

Number of funds

37,643

8,022

European market

Number of funds 0 10000 20000 30000 40000 50000 0 200

Average size of funds

121,5 €m 860 €m

Average size of funds in €m

Source: EFAMA and ICI

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Key measures of the directive > 1 - Simplification of the cross-border notification procedure > 2 - Replacing the simplified prospectus by the KII > 3 - Management company passport > 4 - Cross-border UCITS mergers and master/feeder UCITS structures 2

Simplification of the cross-border notification procedure > A simplified process to register UCITS abroad • By relying on a strong coordination and communication between supervision authorities in the home and host states > A set up enabling a significant reduction in time to market • Maximum 10 working day time period (versus 2 month time period currently) to authorise the marketing of a fund in the host state, upon submission of the registration file to the home state supervision authority

Country A - Home member state

Country B - Host member state

 Submission of the registration file to market the UCITS fund in country B

 Checking of the completeness of the notification file

 Electronic transmission of the file and of an attestation that the fund complies with the directive UCITS IV

Management company

Supervision authority A («pilot » of the process)

Supervision authority B

UCITS

 Notification of the file transmission

The fund can be marketed in country B as soon as the file transmission to the host state regulator has been notified by the home state regulator

Not permitted to request any additional documents or impose any modifications

Minor translation requirements

Ex post checks of the marketing methods of the UCITS

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Replacing the simplified prospectus by the KII

> The simplified prospectus, introduced under UCITS III, did not prove to be an efficient and useful tool to assist investors in their decisions > UCITS IV proposes to introduce a more readable and homogeneous document: Key Investor Information (KII) > All the existing simplified prospectus shall be replaced by 01/07/2012

Current situation (UCITS III)

Target situation (UCITS IV)

KII benefits > Common format allowing for comparison > Written in a brief manner and in non technical language KII Content > Short description of the UCITS investment objectives and policy > Concise presentation of past performances > Costs and associated charges > Risk/reward profile of the investment

Simplified prospectus drawbacks >Too long and complex > Writing and updating time- consuming > Numerous adaptations needed for countries having specificities > Do not allow a real comparison between various funds

Simplified prospectus

KII

Full prospectus

Detailed note

Detailed note

Fund rules

Fund rules

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Management company passport

> UCITS III required a management company seeking to create foreign-domiciled funds to set up an authorised structure in each host state > Key measure: UCITS IV, with the management company passport, will enable management companies, authorised in their home state, to manage funds in other member states without being established in these countries > Players’ domiciliation with UCITS IV

Any Member State can be different from the country where the fund is domiciled Country of domiciliation

Management company

Custodian/Depository

Country of domiciliation of the fund

No domiciliation requirement.The fund administrator must enforce the ac- counting and fiscal rules of the country of domiciliation of the fund

Fund administrator

Country of domiciliation of the management company, if necessary in cooperation with the supervision authority of the country where the fund is domiciled

Supervision authority of the management company

Supervision authority of the fund

Country of domiciliation of the fund

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Cross-border UCITS mergers and master/feeder UCITS structures

> To reinforce the European asset management industry’s competitiveness by rationalising the product offer within the EU and by increasing the average size of funds , through two measures:

1000 1200

Target

0 200 400 600 800

Current situation

Average size in € million 0 10000

20000

30000

40000

50000

Number of funds

Cross-border fund merger

Absorbed fund 1

Absorbing fund

LUXEMBOURG

FRANCE

Absorbed fund 2

• The set up of a harmonised process to facilitate fund mergers at the European level

Illustration

SPAIN

Cross-border master/feeder funds

Master FRANCE

Feeder 1

Feeder 2 Feeder 3 Feeder 4 Feeder 5

• The creation of a harmonised framework for master/ feeder UCITS structures

UNITED KINGDOM

LUXEMBOURG

SPAIN

ITALY

GERMANY

Illustration

> 1 management company > n dépositaries and jurisdictions

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3

CACEIS’s support

UCITS IV, new opportunities (1/2)

CACEIS ACCOMPANIES ITS CLIENTS THANKS TO: > A multi-jurisdictional presence • To reconcile offshoring benefits and proximity benefits in the framework of the management company passport set up • To provide a single depositary bank representative in the context of cross-border master/feeder structures and the cross-border mergers/absorptions set up > Cross-border fund distribution support, through the CACEIS Prime TA ® service offer, in order to take full advantage of the management company passport • Registration and post-registration services • The operational workflow management, namely with the order gateway service which provides a single order capture point • The management of distribution networks, of holdings per distributor/country and of trailer fees • A comprehensive and flexible data transmission and reporting solution

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UCITS IV, new opportunities (1/2)

CACEIS ACCOMPANIES ITS CLIENTS:

> By taking charge of Key Investor Information (KII) documentation or providing management companies with the necessary information to produce their own KIIs

> Through the support of its Fund Structuring experts in product range rationalisation decisions: cross-border fund mergers, creation of cross-border master/ feeder funds

Our client relationship managers, product and legal experts remain at your disposal for further information

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