CESR s guidelines for supervisors regarding the transitional provisions of the amending UCITS Directives 2001/107/EC and 2001/108/EC

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1 CESR s guidelines for supervisors regarding the transitional provisions of the amending UCITS Directives 2001/107/EC and 2001/108/EC Consultation Paper ref: CESR / A response from Fidelity International Limited December 2004 Executive Summary Fidelity International welcomes the opportunity to comment on CESR s proposals for transitional provisions for the UCITS regime. The UCITS regime was a forerunner for many of the single market initiatives that have been enacted in recent years. However, the latest Directives and delays in agreeing transitional proposals mean that UCITS could fall behind other areas of the financial services industry in the opportunities it offers firms to operate within a genuine single market. Detailed answers to the questions are given below. We would highlight three overriding concerns: the shortening of the deadline for conversion to UCITS III places additional burdens on regulators and asset management firms. If the deadline is to be met, regulators will need to ensure they have the resources available to meet the inevitably greater demands from firms; the revised deadline will require firms to apply for UCITSIII approval at a time when the eligibility of certain investments is unclear (CESR plans to issue advice in October 2005) and when some Member States will not have finalised their requirements for derivatives risk management or the Simplified Prospectus; despite the passage of the Directives and the actions taken by CESR to implement them, the UCITS regime will emerge from this process well 1

2 short of attaining the goal of enabling full, cross-border management and distribution of UCITS. For firms with pan-european aspirations such as Fidelity this has been a bitterly disappointing development and we sincerely hope that CESR, working with the Commission and Member State governments, will achieve what was so clearly the objective behind the new management company regulations. Introduction Fidelity Investments was founded in Boston in 1946 under the name of Fidelity Management & Research Company (FMR Co.). Today FMR Co. is a subsidiary of FMR Corp. Fidelity International was set up by FMR in 1969 to act as a management centre for Fidelity s offshore funds. In 1979 Fidelity International was spun off from FMR and established as a separate and independent holding company for the Fidelity International group of companies. In 1979 FIL s assets under management amounted to US$ 0.5 billion; today they stand at more US$ 200 billion, illustrating investors growing interest in global diversification of portfolios. Combined, FIL and FMR Corp. currently have over 20 million clients and customers and US$ 1.2 trillion of assets under management Fidelity International Limited serves the major markets of the world by providing investment products and services to individual and institutional investors outside the US. FIL s products and services include equity funds, fixed-income funds, money market funds and institutional portfolio management. FIL s programme of overseas expansion has continued and today we have a network of offices trading 24 hours a day, covering all the major world stock markets. Within Europe, FIL has three significant mutual fund centres: the UK, Luxembourg and Dublin with around US$ 71bn in assets (as at 30 September 2004). All the key fund ranges have multiple registrations outside their home jurisdiction and this underlines the importance of the creation of an efficient Single Market for Fidelity. 2

3 QUESTIONS ON THE TRANSITIONAL TREATMENT I UCITS I Management Companies 1. Can a grandfathered UCITSI management company, i.e. authorised before 13 th February 2004, launch passportable UCITS III funds? We see no significant problem with this proposal. We have always felt that there was a balance between the extended freedoms being offered by the UCITS III regime and the governance structure required to manage those freedoms. Accordingly we see the CESR proposal as appropriate and would not anticipate that it would create practical problems for firms. We nevertheless feel that there could be better clarification as to the effect of this proposed transitional on self-managed UCITS. Generally, the requirements for the management company read across to the UCITS itself in the context of a selfmanaged scheme, but it s not clear whether a UCITS I scheme with no management company and operating under the grandfathering arrangements would have to comply. We assume that the requirement to comply with Art. 21 will not apply if the UCITS in question does not invest in derivatives. We would welcome clarification on this point. In any event we trust that the effective date for this measure will allow time for both affected entities and regulators to seek and issue respectively the written attestation. We would expect that this will require a minimum two-month lead time, but with the other pressures it may be expedient to allow even more time. 2. Can a grandfathered management company continue to launch passportable UCITS I funds after 13 th February 2004? We agree with CESR s proposal. II UCITS I funds (single fund structure) 1. Can a UCITS I fund authorised between 13 th February 2002 and 13 th February 2004 and wishing to be marketed in another Member State obtain an UCITS I product passport and benefit from a grandfathering period until 13 th February We recognise that the technically correct answer should possibly be No. We are not aware that there is any significant number of funds in this category, but 3

4 recognise entirely the need to offer a practical remedy to the current position. We therefore agree with CESR s proposal. III UCITS I umbrella funds 1. Can a passportable UCITS I sub-fund be launched in a grandfathered UCITS I umbrella fund? We felt that the original UCITS III transitional arrangements were sufficiently clear to allow the launch of new sub-funds until February The fact that certain Member States were unwilling to accept this is disappointing. In the face of this, the 31 December 2005 deadline represents a reasonable compromise. However, this deadline is barely a year away. If it is to work, regulators in all Member States will need to make a concerted effort to ensure they have the resources necessary to handle the process. This is true both of Home and Host State regulators. Our experience is that registration of a new sub-fund outside its Home State can take anything between four days and four months depending upon the regulator concerned. We therefore welcome the assertion made by Carlo Biancheri at the CESR open hearing in Paris on 18 November that conversion was solely the competence of Home State regulators. We would like to see individual regulators confirm that this is their understanding of the position as well. Without this, the deadline is in danger of being missed. We would like to see CESR further consider the entire question of registration notification. It should be acceptable throughout the EU that if the Home State has approved a new sub-fund there should be no necessity to re-register that fund in all Member States. A simple notification should suffice. This is a commercial issue in that the long delays in achieving EU-wide registration are inhibiting the development of new UCITS funds. It would be helpful if there was greater clarity around the impact of failing to meet the deadline (a very real possibility given the tightness of the timescale). The paper states that host authorities will no longer be obliged to accept those UCITS I sub-fund passports. We believe that this affects only those sub-funds authorised in their Home State after 13 February 2004, but would be grateful for confirmation. 4

5 2. Can a passportable UCITS III sub-fund be launched in a grandfathered UCITS I umbrella fund? We agree with the CESR proposal and this is consistent with our view of the umbrella fund as a single legal entity. IV Simplified prospectus 1. Must a UCITS I have a simplified prospectus available in order to maintain its registration? We agree with CESR s proposal with one proviso. If there is a delay by Member States in meeting the Commission s 28 th February 2005 deadline, this should be taken into account in considering whether to extend the 30 th September 2005 deadline accordingly. 2. Is it possible for UCITS which have no simplified prospectus and which wish to be marketed in another Member State to obtain a UCITS III passport? We believe CESR s proposals are entirely consistent with the intent and meaning of the Directive. 5

6 QUESTIONS CONCERNING THE EUROPEAN PASSPORTS I Management company passport 1. Are the product and the management company passport issued separately or combined? We agree with CESR s view that they are issued separately and for separate purposes. 2. Does a management company which wants to distribute in a host Member State UCITS units, without establishment of a branch only need a product passport or is a management company passport necessary in addition? We believe that most firms operate on the basis that a management company will appoint locally authorised distributors in each Member State. Those distributors will offer for sale the units of a fund registered for sale in that State. We believe that if the management company itself is not undertaking any activity in a Member State, either on a cross-border basis or through the establishment of a branch, no passport would be required and feel it would be beneficial if CESR s advice could make this clear. We support the comment that there would be little point in having a separate management company passport if it were always required on top of the UCITS own passport. We therefore support Option B. 3. Does a management company which wants to distribute in a host Member State UCITS units through an own branch need both the product and the management company passport? See our response to question 2 immediately above 4. Which passports are needed when a management company wants to provide in a host Member State only the so-called ISD services We agree with the CESR proposal. 5. Does a management company which wishes to combine the provision of the socalled ISD services in a host Member State with the cross-border distribution of UCITS units, either directly, or by itself, or indirectly, entrusting a third party, need both the product and the management company passport? We note that there is some confusion in the market arising from the overlap between the UCITS and ISD (soon to be MiFID) passports. We believe that it will be possible for a company wishing to undertake a number of the activities of 6

7 a management company to do so under the ISD framework, and therefore feel that the result of this debate should not be to create a more burdensome route if the UCITS management company passport is employed. Where authorised third parties are employed in Member States the question of a separate authorisation level for the management company seems more than unnecessary. 6. Can an open-ended investment company designate a management company in another EU jurisdiction? We strongly disagree with the CESR proposal. The CESR paper cites Article 3 of the Directive (and its interaction with recital 7 of the amendment and article 5g and Annex II) to arrive at its proposal not to allow an open-ended investment company to designate a management company in another EU jurisdiction. But this is selective quotation. Recital 6 of the Preamble to Directive 2001/107/EC states By virtue of mutual recognition, management companies authorised in their home member States should be permitted to carry on the services for which they have received authorisation throughout the European Union This is elaborated in recital 7, as CESR points out, and refers to those functions included within the activity of collective portfolio management. Article 6 of the Directive states: Member States shall ensure that the management company, authorised in accordance with this Directive by the competent authorities of another Member State, may carry on within their territories the activity for which it has been authorised, either by the establishment of a branch or under the freedom to provide services. On what basis, therefore, does CESR assert in its paper that the legislators intention does not seem to have been to allow cross-border provision of all management company services? Article 6 seems clear to us. At best, one can say that the Directives are contradictory with articles 3 & 6 apparently at odds. What is frustrating for the industry (and inexplicable) is that, faced with this contradiction, CESR members have opted for the more restrictive interpretation available to them. This undermines the single-market purpose that lies at the heart of the UCITS Directives. The CESR proposal amounts to selecting some acceptable activities for passporting from the definition of a management company while leaving others out for what appear to be plainly protectionist reasons. This was not was the intention of the Directive. 7

8 We would note that the proposed position has the effect of leaving the management company as the only financial services organisation which cannot operate on a cross-border basis for its core activity. This significantly undermines the objectives of the Financial Services Action Plan. It begs the question, What is the management company passport for? All the other activities can be undertaken within the context of the current ISD (soon to be MiFID) passport. Without the freedom of movement intended in the Directive, the management company structure has little to commend it in a pan- European context. Most fund promoters will consider the self-managed option as preferable now that the benefits of passporting are to be denied. However, not all Member States recognise and cater for self-managed SICAVs and so this proposal has the effect of creating an unlevel playing field for promoters with funds domiciled in those states. We do not believe that that was the intention of the Directive and we do not believe it to be consistent with the objectives of the Financial Services Action Plan. We endorse CESR s intention to recommend that the Commission consider an amendment to clarify the position. But we believe CESR should give a steer as to what needs to be done to ensure the single market intention of the Directive is achieved. 7. Does a management company which manages based on an outsourcing mandate the portfolio of an open ended investment company or of an investment fund domiciled in another EU jurisdiction need a management company passport and if yes, for individual or for collective portfolio management? We agree with the CESR proposal. This is our understanding of the current ISD position, and we believe that it is necessary to ensure sensible harmonisation of these two regimes given the degree of overlap. 8. Is distribution of third party funds included in the scope of activity of a management company? We do not have a view on CESR s proposal but believe that the market structure described in its argument is not one that is recognisable in many Member States. 8

9 9. Can a management company benefit from the management company passport (in particular for its ISD services) whilst it is no longer, at a given moment, managing harmonised UCITS or whilst it is not yet managing harmonised UCITS but preparing an application procedure for approval of a harmonised UCITS or whilst it does not manage harmonised UCITS funds as designated management company in its home Member State? No II Product passport 1. Do those non-ucits funds which, pursuant to the national provisions of the host Member State, have already been entitled to distribute their units in the Host State and which now adapt to UCITS III lose their former permission? We regard this as a sensible proposal 2. Do those UCITS I funds which adapt their registration to UCITS III lose their UCITS I passport? We agree with the CESR position but would reiterate our view that it would assist if Member-State regulators were minded to adopt some form of fast-track process for conversion. We believe this is implicit in the use of the phrase as an update in the final sentence of the proposal. 9