State Street Corporation appreciates the opportunity to comment on the Discussion Paper (DP) on share classes of UCITS.

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1 State Street Corporation 20 Churchill Place Canary Wharf London E14 5HJ T F March 2015 Via electronic submission: European Securities and Markets Authority 103 Rue de Grenelle Paris France Discussion Paper Share Classes of UCITS Dear Sir/Madam, State Street Corporation appreciates the opportunity to comment on the Discussion Paper (DP) on share classes of UCITS. State Street Corporation 1 (NYSE: STT) is one of the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $28.19 trillion in assets under custody and administration and $2.45 trillion 2 in assets under management as of December 31, 2014, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. State Street believes that the ability to create different share classes is a central element of ensuring collective investments serve the end investor. The ability to offer customised share classes allows a much wider range of investors to invest in a single pool of assets than would otherwise be the case, with all benefitting from lower costs due to economies of scale. Whilst we are broadly supportive of the development of a consistent approach to share classes within UCITS, we urge ESMA to be mindful of any measures that would limit a UCITS ability to offer customised share classes since this would lead to a proliferation of smaller sized funds. Investors in these smaller funds would then be subject to proportionately higher costs due to suffering the detriment of reduced shareholder diversification and operational efficiencies. Q1: What are the drivers for creating different share classes? Creating different share classes allows investors to benefit from scaled collective investment while tailoring their particular investment by a number of factors such as currency, investor type and 1 Our identification number in the European Transparency Register is Assets under management include the assets of the SPDR Gold ETF (approximately $27.3 billion as of December 31, 2014), for which State Street Global Markets, LLC, an affiliate of SSgA, serves as the distribution agent. Page 1 of 4

2 dividend mechanism. This helps them achieve cost efficiencies through economies of scale and maximises the value of their investment. Q2: Why do certain UCITS decide to create share classes instead of setting up a new UCITS? As highlighted above, creating different share classes allows investors to benefit from collective investment with the level of customisation they need in a cost efficient way. Creating different individual UCITS funds in order to meet the specific level of customisation that investors require would be extremely cost prohibitive and ultimately result in lower investment returns for the end investor due to the loss of economies of scale. In addition, as a result of the loss of economies of scale, these individual UCITS may not have sufficient assets to be able to meet the investment objective of the investor and would therefore be unviable from an investment perspective. Similarly, increasing the shareholder diversification within funds protects non-trading investors from the impact of major flows. We would therefore be concerned that any attempt to prevent share class customisation would undermine one of the key benefits of collectively investing in securities and ultimately harm the interests of the end investor. We would also like to highlight that share classes can be approved and left dormant to be launched at the discretion of the board. In some cases, there are currently restrictions on the length of time that approved but dormant sub funds can exist. If a separate sub fund were required to tailor the specific characteristics, a firm would be faced with a choice of getting a group of similar sub-funds approved and having to close any that was invested in prior to the expiry of authorisation or request regulatory approval every time a new sub fund in the group was confirmed at launch. This process could incur additional costs as well delaying time to market that would ultimately be at the detriment of the end investor. It is important to note that when the UCITS IV proposal was issued in 2007, EU investment funds were on average five times smaller than US funds and the cost of managing them are twice as high as in the US. The European Commission acknowledged this discrepancy in costs and one of the key policy objectives behind UCITS IV was to address the proliferation of small scale funds with their associated high costs. We are therefore concerned that ESMA seems to be proposing measures that could potentially undermine the ability of different types of investors to benefit from lower costs due to economies of scale through being able to access a wide variety of share classes. Q3: What are the costs of creating and operating a new share class compared to the cost of creating and operating a separate UCITS? The costs of creating and operating a new share class are significantly lower than the cost of creating and operating a separate new UCITS. The lower costs associated with creating and operating a new share class are the result of a wide range of factors including less operational complexity, faster time to market, lower seed capital requirements, lower costs of global distribution and lower costs in the case where a separate fund would be needed in jurisdictions where there are restrictions on the length of time that approved but dormant sub funds can exist as outlined above. As highlighted above, the higher costs associated with creating and operating a separate new UCITS will directly impact end investors and the returns they receive on their investments. We urge ESMA to work with relevant industry associations to ascertain specific data on the costs of creating different share classes rather than setting up new UCITS funds tailored to the needs of specific investors. Page 2 of 5

3 Q4: What are the different types of share class that currently exist? We are aware of the following types of share classes but believe ESMA should work with relevant industry associations to ascertain the full range of share classes that currently exist. Currency hedged share classes where share classes are denominated in different currencies from the base currency Share classes that differ according to the currency in which they are denominated Share classes which hedge the currency exposure of certain portions of the underlying portfolio Share classes with different fee levels and different types of charges which may be levied, for example performance fees Share classes that differ in terms of the type of investor Share classes that differ according to whether they distribute or retain income Duration-hedged share classes Q5: How would you define a share class? We agree with ESMA s definition of a share class as outlined in paragraph four of the DP. Q6: Do you agree that share classes of the same UCITS should all share the same investment strategy? If not, please justify your position. We believe there are two key principles that have underpinned the current ability of a UCITS to offer different share classes and which have protected the interests of investors. First, the UCITS must be a collective investment in a single pool of assets and, secondly, that investors are provided with a fair and clear disclosure of the benefits and risks associated with investing in a pooled fund. We believe these principles have served investors well to date and any future regulatory measures should take careful account of them. So therefore whilst investors must share in a common pool of assets we don t necessarily agree that they must share an identical investment strategy. Q7: Could you explain how the operational segregation between share classes works in practice? When funds have multiple shareholder classes available to meet various investor needs and demands, such as currency hedging, accounting activity needs to be distinguished as to the level where it should be posted, either specific to a particular class or to the fund. Fund activity is allocated to the classes using a ratio whereas class specific activity is posted at class level so therefore no ratio is needed. State Street offers an accounting and custody system which allows both single class and multiclass fund processing. Multiclass processing is achieved through a specific function within the system which is used to calculate the ratios that the accounting system will use to allocate income, expenses and capital activity across classes. In the multiclass model, the accounting system sums class level activity such as inflows/outflows and class specific expenses up to the composite fund level, and allocates fund level income, expense and capital activity down to the class level based on the ratios calculated. Page 3 of 5

4 Q8: Do you agree that the types of share class set out in paragraph 8 are compatible with the principle of having the same investment strategy? In particular do you agree that currency hedging that is described in paragraph 8 complies with that principle? If not, please justify your position. Whilst, as highlighted above, we do not accept that all share classes must necessarily have identical investment strategies, we generally accept that the types of share class identified by ESMA in paragraph eight are compatible with having the same investment strategy. However, we do not understand why ESMA is proposing to treat currency hedging differently whilst other legitimate ways of hedging risk, such as interest rate hedging, have been excluded from ESMA s list of permissible share classes. ESMA s list of types of share classes would clearly favour investors who want to mitigate currency fluctuation risk over investors who want to mitigate interest rate movement risk. Both are sensible legitimate forms of managing risk in the market and there seem to be no rationale why ESMA is proposing to favour one over the other. Hedging at share class level, in terms of currency as well as others forms such as interest rates, exists to protect the interest of investors in a cost efficient way. Removing the ability to hedge in interest rates, for example, would be at the direct detriment of investors. In addition, it is important to note that it would not only affect those investors that wished to avail of interest rate hedging, but also those investors in other share classes since this would mean two UCITS would need to be set up and the costs associated with this would lead to higher costs for the investors of both funds. We therefore believe if ESMA determines that currency hedging is compatible with the suggested criteria then it should logically follow that other types of hedging should be permissible as well. Q9: Do you believe that other types of share class that comply with the principle of having the same investment strategy exist (or could exist) and should be allowed? If yes, please give examples. As highlighted in response to question six, we believe that any share class that conforms to the two principles of ensuring the UCITS is a collective investment in a single pool of assets and investors are provided with a fair and clear disclosure of the benefits and risks associated with investing in a pooled fund should be permissible. Q10: Do you agree that the types of share class set out in paragraph 10 above do not comply with the principle of having the same investment strategy? If not, please justify your position. As we outlined in response to question eight, we would welcome an explanation as to ESMA's thinking as to why currency hedging is allowed but not other types of hedging such as interest rate hedging which we believe is a legitimate means of protecting the interest of investors. Q11: Please provide information about which existing UCITS do not comply with the criteria laid down in paragraph 6 as well as an indication of the assets under management and the number of investors of these UCITS. We have no comments to make on this specific question. Q12: Do you see merit in ESMA clarifying how regulatory ratios such as the counterparty risk limit should be calculated (e.g. at the level of the UCITS or share classes) We would not support such an approach and believe this would be contrary to article 49 of the UCITS Directive which states that regulatory ratios are to be calculated at the level of the UCITS, or the investment compartment where a UCITS comprises of more than one compartment. Page 4 of 5

5 Further to this, given that there is no actual asset segregation between share classes, we believe it would not be logical to apply regulatory ratios such as the counterparty risk limit at share class level. Q13: Do potential and current investors get adequate information about the characteristics, risks and returns of different classes in the same UCITS? If not, what else should be provided to them? State Street believes it is important that investors are able to make well-informed decisions based on accurate and easy to understand information. However it is important to bear in mind that too much information can hinder investors from making the right decision so it is important that an appropriate balance is struck. We believe the ability for investors to access relevant information on different share classes is already sufficient in current fund documentation and any further disclosure requirements could prove to be counterproductive and cause confusion amongst investors. Q14: Do you agree that ESMA should develop a common position on the issue on this issue? If not, please justify your position? We generally accept that developing a common position can help to create a consistent approach across the EU which allows investors to benefit from a harmonised EU wide approach. However, such a harmonised approach must not come at the expense of limiting the ability to offer customised share classes that are tailored to end investors needs and which help drive down costs, maximise value for the end investor in addition to having the benefits of being quicker to market, increased shareholder diversification and a higher level of protection due to scale. We believe any such approach would not only lead to higher costs for investors but also be in in contrast to the EU s approach to collective investment to date. Thank you once again for the opportunity to comment on the important matters raised within this DP. Please feel free to contact me should you wish to discuss State Street s submission in greater detail. Sincerely, Dr. Sven S. Kasper Senior Vice President & Director EMEA Regulatory, Industry & Government Affairs Page 5 of 5