What is a UCITS fund?

The UCITS regime provides a set of common standards applicable across all EU Member States for the operation and cross border promotion of a form of mutual fund called an undertaking for collective investment in transferable securities (UCITS).

In the UK, a UCITS fund may be organised as a collective investment scheme (CIS), an open-ended investment company (OEIC) (also known as an investment company with variable capital (ICVC)), or an authorised unit trust (AUT).

What are the requirements of a UCITS fund?

Article 1 of Directive 2009/65/EC (the UCITS Directive) defines a UCITS as an undertaking which has:

• the sole object of collective investment in transferable securities or in certain other liquid financial assets of capital raised from the public and which operates on the principle of risk-spreading, and
• units that are, at the request of holders, repurchased or redeemed, directly or indirectly, out of the undertaking’s asset

UCITS must comply with detailed requirements to ensure they invest only in permitted investments, with an adequate spread of risk and a high degree of liquidity to enable investors to redeem their units on demand.

The following funds are not classified as UCITS and therefore not subject to the UCITS regime:

1. closed-ended collective investment undertakings,
2. collective investment undertakings that raise capital without promoting the sale of their units to the public within the EU or any part of it,
3. collective investment undertakings the units of which, under the fund rules or the instruments of incorporation of the investment company, may be sold only to the public in third countries, and
4. categories of collective investment undertakings prescribed by the regulations of the Member States in which they are established, for which the UCITS Directive obligations concerning UCITS’ investment and borrowing policies are inappropriate in view of their investment and borrowing policies.

Authorisation of UCITS

Article 5 of the UCITS Directive sets out the requirement that a UCITS must be authorised by the National Competent Authority (NCA) in its home Member State. Once a UCITS is authorised, this authorisation is valid for all Member States. If a UCITS is structured as a common fund, it will only be authorised if an NCA approves the management company, the fund rules and the choice of depositary. If a UCITS is structured as an investment company, it will only be authorised if an NCA approves its instruments of incorporation, the choice of depositary and, where relevant, the management company. On receipt of a complete authorisation application, an NCA has two months to determine whether to grant authorisation. An NCA will not authorise a UCITS if:

• an investment company does not comply with the preconditions in Chapter V of the UCITS Directive
• the management company is not authorised for the management of UCITS in its home Member State
• the directors of the depositary are not of sufficiently good repute or are not sufficiently experienced in relation to the type of UCITS to be managed, or
• the UCITS is legally prevented (for example, through a provision in the fund rules or instruments of incorporation) from marketing its units in its home Member State

In the UK, firms should apply to the FCA for authorisation.

Operating UCITS on a cross-border basis

The second innovation brought about by the UCITS Directive was the management company passport. This type of passport must be distinguished from the passport referred to above that allows a UCITS fund to be marketed cross-border within the EU. The management company passport enables a UCITS management company established in one Member State to operate a UCITS fund that is established in another Member State. This is akin to the passporting rights available to banks and other investment firms under EU banking law.

Depository of a UCITS

The functions and obligations of a depository are set out in Articles 22 and 32 and Chapter IV and V of the UCITS Directive. Depositories must ensure that the sale, issue, repurchase, redemption and cancellation of units effected on behalf of a UCITS fund or by a UCITS management company are carried out in accordance with the instructions of the management company, all applicable national law and the fund rules or instrument of incorporation. Furthermore, a depository should ensure that the value of units are calculated in accordance with applicable national law and the fund rules or instrument of incorporation, and that the UCITS fund’s income is applied in accordance with applicable national law and fund rules or instruments of incorporation.

UCITS management companies

UCITS management companies are companies whose regular business is the management of UCITS, as defined in Article 2(1)(b) of the UCITS Directive. The functions involved in the collective portfolio management of UCITS are specified in Annex II of the UCITS Directive and include investment management, administration and marketing.

UCITS and master-feeder structures

Articles 58–67 of the UCITS Directive permit UCITS funds to establish master-feeder structures. This is where investment management takes place in the master fund and the feeder fund simply acquires shares in the master. The aim here is to make it easier and more efficient for an investment firm to establish UCITS in a number of Member States, but without the need to replicate the investment management function in each of those Member States.