On January 30, 2017, the discussion paper classes of UCITS European Securities and Markets Authority released an Opinion relating to the share classes of UCITS as the Directive governing the UCITS does not prescribe the extent of the differences of the types of the share class that are permitted. Further, the UCITS Directive is mum on the definition and scope of share classes and lacks guiding principles on setting up a variety of share classes.
ESMA is of the view that the offering of share classes to investors apart from separate funds or investment compartments has beneficial traits. Such issuance is similarly advantageous to the promoter, investment manager or distributor. ESMA consults on different share classes of UCITS.
The Opinion listed high-level principles which are to be used as guidance in setting up different share classes
- These high-level principles include:
- “Common investment objective”
- Non – circumvention
1st Principle : “Common investment objective”
Considering that there are wide varieties of share classes set up across EU possessing different features, it is prudent to have share classes of the same fund to have a common investment objective realized through the investment in a common pool of assets. Likewise, taking into consideration the factor of having a risk profile, the Opinion relates that hedging arrangements at share class level are incompatible with the requirement for a fund to have a common investment objective. In this regard, UCITS should be set up as a separate funds or sub-funds with the exception of currency risk hedging.
2nd Principle: “Non-contagion”
Given the risk of contagion (spill-over) that could disadvantage investors in classes with no derivative overlay and those that benefits from the overlay, ESMA relates that any additional risk introduced to the fund through the use of a derivative overlay for a given share class should be mitigated and monitored appropriately and only be borne by the investors in the respective share class in the event of its materialisation. As to the additional costs associated with risk management, ESMA if of the opinion that such costs should only be carried by the respective share class. Concomitantly, operational principles relating to share classes with a derivative overlay are proposed as minimum standards.
3rd Principle: Pre-determination
Taking into consideration the different features and properties of share classes and also its affiliated risks owing to the lack of segregation of share classes, it is considered necessary to have the investors and other actors involved in the fund, be fully informed of the attributes and potentialities of share class. Thus, ESMA renders its view that all information relating to a share class should be initially determined prior to its setting up. Such pre-determination should likewise apply to share classes with hedging arrangements and currency risk.
4th Principle: Transparency
ESMA is of the view that the existence and nature of all the share classes of the fund are disclosed to all investors of the fund, whether they are participants in the share class or not. In the same way, new and existing investors should be informed about the creation and existence of such share classes in a timely manner. This can be done by providing fund prospectus, current and readily available list of share classes, and stress test results (on request).
5th Principle: Non-Circumvention
ESMA is of the view that share classes should never be set up to circumvent the rules of the UCITS Directive, particularly those on diversification, derivative eligibility and liquidity
ESMA is fully aware of the consequences of the issuance of the Opinion dated January 30, 2017 to the investors in share classes which were established prior to the release of such Opinion, thus:
- In this regard, these share classes should be allowed to continue to operate
- However, these share classes should be closed for investment by new investors within six months of publication of the Opinion, and for additional investment by existing investors within 18 months of publication of the Opinion.
The Opinion can be accessed at this website: https://www.esma.europa.eu/sites/default/files/library/opinion_on_ucits_share_classes.pdf
For further information and details about this Opinion, you may visit our website at https://www.hance-law.com or reach us through this number: +352 274 404