[13162]
February 16, 2001
TO: INTERNATIONAL COMMITTEE No. 11-01
RE: EU COUNCIL REFERS UCITS PROPOSAL BACK TO THE NATIONAL
AMBASSADORS
At the February 12, 2001 meeting, the Council of the European Union did not reach
agreement on the text of a proposal (UCITS II Proposal) to amend the UCITS Directive to create
a passport for management companies to operate throughout the European Union. The Council
has referred the proposal to the national ambassadors (COREPER) to resolve a number of
outstanding issues, including capital requirements, delegation to third parties, and the
European passport for management companies.1 The Council has requested that the COREPER
reach agreement on the outstanding issues by March 1, 2001.
We briefly describe below what we understand the latest text of the UCITS II Proposal to
be and the discussions at the Council meeting.
Capital Requirements
The Swedish Presidency’s most recent UCITS II Proposal would require a management
company to have EUR 125,000 as initial capital and (2) .02% of the amount of the value of the
portfolios of the management company that exceeds EUR 250,000,000 as ongoing capital.2 The
ongoing capital must not, in any case, be less than 13 weeks of expenditures (as currently
provided for in the Capital Adequacy Directive).
For purposes of calculating the ongoing capital requirement, the following portfolios
would be included: (1) unit trusts/common funds managed by a management company,
including portfolios for which it has delegated the management function but excluding
portfolios that it is managing under delegation; (2) investment companies for which a
management company is the designated management company; and (3) other collective
investment undertakings managed by a management company, including portfolios for which
1 See Memorandum to International Committee No. 10-01 (Feb. 9, 2001) (describing the outstanding issues on
the UCITS II Proposal for which the COREPER met to discuss in preparation for the February Council
meeting).
2 The maximum initial and ongoing capital would be EUR 10,000,000.
2it has delegated the management functions but excluding portfolios that it is managing under
delegation.3
The proposal also includes a provision that would allow management companies to
substitute 50% of the ongoing capital with insurance. We understand that, at the February 12
Council meeting, the UK representative presented an amendment to this guarantee provision to
allow investor compensation schemes (in addition to insurance) to substitute for the ongoing
capital requirements. Separately, the latest text would require investment company UCITS
funds that have not designated a management company to have an initial capital of EUR 300,000.
Finally, there appears to have been some discussion and support at the Council meeting
from a number of member states to review the capital requirements three or four years after the
Directive comes into effect. A “regulatory committee” made up of experts from member states
with input from the Commission would be responsible for the review.
Delegation
The latest text includes (in bracketed form) compromise language on delegation. The
language would prohibit a management company from delegating “all or a major part of its
functions, such that it avoids compliance with effective supervision as regards capital adequacy,
prudential or other supervisory requirements as set out in this Directive.”
We understand that the member state representatives reacted positively to this
compromise text on delegation although several member state representatives would not agree
to specific language in the absence of an overall agreement on the UCITS II Proposal.
EU Passport for Management Companies
At the Council meeting, the British representative reiterated the UK’s position that the
UCITS II Proposal does not provide a European passport for management companies to
manage contractual UCITS funds. For this reason, the UK is of the view that the passport
created by the UCITS II Proposal is limited and does not justify the additional regulatory
requirements, especially with respect to capital. This position, however, has not gained much
support from other countries and may remain a significant stumbling block for an overall
agreement.
* * *
Please let us know if you have any concerns about the proposal. If you have any
comments or questions regarding the proposal, please contact me at (202) 326-5810 or at
jchoi@ici.org.
Jennifer S. Choi
Assistant Counsel
3 We understand that Denmark has reintroduced the concept that only harmonized funds (UCITS) should be
included for purposes of calculating ongoing capital requirements.