Yesterday, November 5, 2003 the Law 35/2003, of November 4 on Undertakings for Collective Investment (the “New Act”), has been published in the Spanish Official Gazette (“Boletín Oficial del Estado”). The New Act will replace the Spanish Act 46/1984, of December 26, on Undertakings for Collective Investment (“UCIs”), in its entirety, and will introduce a significant change in the current regulation of UCIs in Spain.
The New Act will enter into force three months after its publication in the Official Gazette and the UCIs authorised prior to its entry into force will have one year to adapt their management regulations and articles of association to the new legislation.
The New Act refers numerous matters to the secondary legislation which will develop it. However, at this stage we have considered that it would be useful to provide you with an initial analysis, which by no means is intended to be exhaustive, of the main developments introduced by the New Act.
The New Act will apply to the following entities and to those persons holding managing or directive posts, or their representatives, in such entities:
1. Spanish UCIs.
2. UCIs authorised in another Member State of the European Union, in accordance with Council Directive 85/611/CEE of December 20, 1985 (hereinafter, “EU harmonized UCIs”), when marketed in Spain.
3. UCIs from other EU Member States that are not EU harmonized or from other countries (hereinafter, “non-EU harmonized UCIs”), when marketed in Spain.
4. Management Companies of the UCIs (the “Management Companies”).
5. Depositaries.
6. Other entities rendering services to the UCIs, in the terms laid down by this Act and its secondary legislation.
The New Act represents a fundamental change in the principles applicable to collective investment management, which can be summarized in two distinctive notes:
1. The relaxation and liberalization of the investment regulations and the configuration of the UCIs that will permit the creation of new UCIs with a more open style of management and innovative operating rules; and
2. Simultaneously, the reinforcement of the protection given to investors and of the duties and obligations of the entities that carry out collective investment activities, as well as an improvement in the supervision and disciplinary regime of the Spanish Securities Exchange Commission (Comisión Nacional del Mercado de Valores, hereinafter, the “CNMV”) on these entities.
The following are the main developments introduced by the New Act:
(a) Elimination of former typologies of UCIs, authorisation of new suitable assets, and relaxation of the risk and operational limits of the UCIs.
(b) Introduction of important amendments to the conditions for the setting up and operating regime of the UCIs and extinction of the Spanish Securities Investment Companies (Sociedades de Inversión Mobiliaria or SIM).
(c) Amendment of some investors’ rights and creation of new means of protecting them.
(d) Extension of the activities of the Management Companies, liberalization of the cross-border activities of Management Companies and EU harmonized Management Companies, and introduction of new obligations.
(e) Establishment, through rules of conduct, of more rigorous duties of Management Companies and Depositaries and tighter control of the separation between Depositaries and Management Companies.
(f) Tougher rules on supervision and sanctions applicable to entities subject to the New Act.
The New Act aims to achieve a flexible and open form of UCIs. For that reason, it does away with the typology of specialized financial UCIs that are distinguished in the current regulations (e.g. FIM, FIAMM, FIMF, FIMP, FIMS, FIME, etc.).
The New Act sets forth only three types of UCIs:
1. Financial UCIs, whose purpose is to invest in financial assets and instruments;
2. Property UCIs, whose purpose is to invest in urban real estate for leasing; and
3. Other non-financial UCIs, which will be governed by the provisions of the New Act and special secondary legislation to be approved for this purpose.
All of these will take the legal form of either a Mutual Fund or of an Investment Company.
Besides the assets in which traditionally FIMs and SIMCAVs used to be able to invest, the financial UCIs (which will be the only UCIs of a financial nature) will be able to invest in the following new assets (provided that such investment is permitted by their risk profile, their investing vocation and their category):
1. Shares and units in EU harmonized UCIs provided that the articles of association or the management regulations of the said harmonized UCIs do not allow them to invest more than 10% in other UCIs.
2. Shares and units in other non-EU harmonized UCIs, provided that the purpose of these entities is not to invest in turn in other UCIs, and as long as they comply with certain requirements. From among these requirements we would highlight those which require that the level of protection provided to the shareholders and unitholders is equivalent to the level laid down by the New Act in the terms set forth by the CNMV.
3. On demand deposits or deposits that can be withdrawn, with a maturity of no more than twelve months, in EU credit entities or credit entities that are subject to prudential regulations equivalent to the Spanish ones. This rule does away with the centralization of the UCIs’ deposits in their Depositary.
4. Financial derivative instruments traded on a market or in a trading system permitted by the New Act. The requirements to be met for a market to be suitable have not changed from those currently in place. The underlying must consist of suitable assets or instruments, financial indexes, interest rates, currency or exchange rates, in which the financial UCIs can invest according to their investment policy. Besides, if the markets or trading systems do not meet certain requirements, the requirements applicable to OTC derivatives must be met.
5. Financial derivative instruments not traded on a market or trading system (OTC), provided that they have the underlying mentioned in the preceding paragraph and that they comply with the following conditions:
- the counterparties to transactions involving derivatives must be entities subject to prudential supervision (e.g. credit institutions) and belonging to the categories or types of entities authorised by the CNMV,
- the positions in derivatives must be subject to a reliable daily valuation and may be liquidated at any moment at their market value at the request of the UCI.
6. Money market instruments which are not traded on a market or on a trading system, provided that they are from certain issuers (certain States, public authorities and entities, companies admitted to trading on stock markets, entities subject to prudential supervision or the remaining categories established by the CNMV) or that they are guaranteed by some of these entities (essentially, public institutions or entities which are subject to prudential supervision).
7. As for investment companies, they may acquire the movable property and real estate necessary to conduct their activity.
8. Securities or financial instruments different from those referred to in previous paragraphs. This clause may, through its regulatory development, allow for investment in new suitable assets.
The New Act sets forth that financial UCIs may not acquire precious metals or any kind of raw materials, movable goods or real estate, apart from the suitable assets set forth by the New Act.
The New Act does not ban financial UCIs from short selling of transferable securities and monetary instruments admitted to trading or in the course of being admitted, nor that of derivative financial instruments where possible.
Although the New Act sets forth that the financial UCIs may not, in general, get into more than 10% of debt, it allows the secondary regulations to set higher limits, provided that specific requirements on transparency are met. Furthermore, the New Act does not maintain the current requirements establishing that the purpose of the indebtedness must be to resolve transitory cash difficulties and that it must not be maintained for more than a certain maximum period of time (which is currently one month).
The New Act introduces interesting developments in terms of the authorisation, set up and operating of UCIs.
The most interesting developments in this field are the introduction into Spanish Law of the “umbrella” UCIs (with compartments) and the classes of units or series of shares that will permit, for instance, commercial commission strategies aimed at each type of investors. The main amendments are the following:
1. Regulation of the UCIs by compartments (the umbrella UCIs that already exist in other jurisdictions), in which under a single constitutional deed and management regulations or articles of association, two or more compartments are grouped together. These compartments will be operated independently of one another and will have individual investing policies. In other words, a full range of products could be created within the framework of a single Fund or Investment Company.
2. Establishment, within the UCIs, of classes of units or series of shares that are distinguished by the applicable commissions, in such a way that the UCIs may differentiate between investors and apply different commissions depending on their characteristics.
3. Abolition, in the case of Funds, of the requirement of being set up by means of a public deed.
4. Although the New Act leaves the settlement of a minimum share capital needed to incorporate a SICAV up to the secondary legislation, it admits, in an indirect way, the possibility of a SICAV having a share capital of less than € 300,000 (currently, the minimum share capital is about € 2,400,000).
5. The exception to this innovative development is that of a consolidated figure in Spain: the Investment Companies with a Fixed Share Capital (Sociedades de Inversión de Capital Fijo, “SIM”), which will be abolished. The SIMs will have to be converted into SICAVs within the two years following the entry into force of the New Act. During this transitory period, they will maintain the same tax regime.
In this area, the New Act abolishes some of the rules that had been proved to be incoherent with the UCIs regime and regulates the merger, transformation, split-off and transfer transactions. The following developments are of particular note:
1. The obligation of applying for admission to trading is done away with for Investment Companies (SICAV). The shares of the SICAV will be issued and, if so requested by any interested party, reacquired by the own company at the net asset value corresponding to the date of the request.
2. The Spanish takeover bid rules will not apply to SICAVs.
3. The New Act contains the regulations on the merger and transfer of investment Funds and regulates for the first time their transformation and split-off.
4. The possibility of making in-kind subscriptions and reimbursements in exceptional cases is foreseen, provided that it is covered by the secondary legislation and by the management regulations.
The rules on foreign UCIs are essentially the same as those currently applicable, although certain developments can be highlighted:
1. The concept of “marketing” is defined by assimilating it to the active solicitation of clients as it occurs in securities tender offers. Fortunately, the concept of marketing that appeared in the bill as simply being sale, subscription or similar intermediation activities has not prospered.
2. The conditions to be met to market non-EU harmonized UCIs are toughened.
Investor protection rules are systematized and some minor developments and amendments are introduced.
It is clear that under the new rules the prospectus (simplified or full) may and should become a central piece of the definition of the UCIs’ investment strategy and policy and of their operational rules. It is also possible that under the new rules the content of the rest of the UCIs’ documentation is substantially modified. However, it is difficult to foresee how things will develop in this area, since its regulation is left up to the secondary legislation and also depends on the guidelines established on harmonization at an EU level.
In the absence of said secondary legislation, which will probably introduce the most significant amendments, the developments introduced by the New Act are the following:
1. Regulation of the obligation to have a customer service department, as well as an ombudsman, in similar terms to those established for other financial entities by the Act on Reforms in the Spanish Financial System.
2. The full prospectus and the last published yearly and quarterly reports will only have to be submitted upon a request from an investor, and the quarterly reports will only be sent periodically to those investors who have requested them.
3. The advertising activities will be covered by the secondary legislation issued by the Spanish Economy Ministry and, with its authorisation, by the CNMV.
4. It imposes the obligation to include all the UCI’s expenditure in simplified prospectus and quarterly reports.
The rules on Management Companies are substantially amended by the EU harmonization of the Management Companies of EU harmonized UCIs. This harmonization has the advantage that, through minor changes made to the requirements imposed on Management Companies (since the main requirements laid down by the EU regulations were already implemented in Spain), the Management Companies may render their services in other countries. The disadvantage is the resulting increase in competition, since EU Management Companies will be entitled to offer their services in Spain.
The corporate purpose of Management Companies may be widened, so that they may render investment services in connection with securities or financial instruments and, in particular, the following new main and complementary activities, once the appropriate authorisation has been obtained:
1. Discretional and individual management of portfolios, including those belonging to pension funds, by virtue of a mandate granted by the investors or a duly authorised person.
2. Management, administration, representation and marketing of venture capital funds.
3. Advising on investments in securities or financial instruments.
4. Custody and administration of the units of funds and the shares of investment companies.
Spanish Management Companies may establish branch offices or render their services without a permanent establishment in other Member States.
Management Companies incorporated in the EU meeting the requirements of Directive 2001/107/CE may render their services in Spain, whether this be through branch offices or without a permanent establishment. During the transitory period given to adapt to the Directive, ending on February 13, 2007, only the EU Management Companies that have adapted to the new Directive may render their services cross-border in Spain.
In any case, the rendering of cross-border services does not include acting as a managing company in other Member States of the EU.
The main developments introduced in this field are the following:
1. Management Companies will be obliged, in certain cases set forth in the secondary legislation, to exercise the voting rights corresponding to the shares in their portfolios.
2. Management Companies will be obliged to communicate any anomalies in the exercise of the Depositary’s functions.
3. Management Companies may fully or partially delegate the management of the assets corresponding to the UCIs managed by them, although they will keep their responsibilities as Management Company. This provision does not expressly mention the previous requirement that the assets were foreign, however it will be the secondary legislation that determines the applicable requirements.
The New Act, through a series of rules of conduct, establishes a more rigorous control of the activities of both Management Companies and Depositaries, as well as the separation of the two.
Management Companies must comply with the rules of conduct of the Spanish Securities Exchange Act, the New Act, their respective secondary legislation, and those contained in their own internal codes.
Management Companies will continue to be subject to strict rules in terms of intra-group transactions and will be obliged to conduct their transactions over assets subject to fair market prices and conditions, unless the transactions are carried out in conditions that are more favourable for the UCIs. This last provision is an adaptation of the current provision that UCIs must carry out their transactions either through the market or in conditions that are more favourable for the UCIs. However, the reality is completely different. Whereas under the current regulations UCIs basically invest in assets traded on organised markets or with a public source of information, under the New Act this situation need not necessarily continue. Given these circumstances, it might be difficult to determine if a Management Company is complying with that obligation.
The current regulations already contain the general duty of the Depositary to assume, vis-à-vis investors, the duty to monitor and supervise the management being carried out by the Management Company. However, under the New Act, these duties are reinforced with new obligations and responsibilities of the Depositary, such as, for instance, requesting the Management Company for all the information it needs to carry out its duties, or to communicate to the CNMV any anomaly that it observes in the management of UCIs. The model chosen appears to be the one that is prevailing in other EU Member States, in which the Depositary supervises the Management Companies’ compliance with the legislation. This will force the Depositaries to coordinate this duty with the Management Companies and UCIs whose custody they have been assigned.
Moreover, the requirement that the Depositary and the Management Company are separate is maximized, by means of the creation of an independent commission which will evaluate said separation and submit periodical reports to the CNMV, which, if unfavourable, may involve the replacement of the Depositary by another entity of the group.
The New Act reinforces the administrative role of the CNMV. The main developments introduced in this regard are the following:
1. The number of grounds on which the authorisation of UCIs and Management Companies can be revoked is increased to include (1) initiating activities before a certain period has elapsed since registration, (2) the failure to register before a certain period of time has passed since authorisation, or (3) the failure to achieve the annual volume of activity required by the secondary legislation.
2. The possibility of suspending the authorisation is contemplated.
3. The carrying out of any activities or transactions banned by the laws applicable to UCIs or not observing the requirements laid down therein is considered a very serious infringement, unless it is an occasional or isolated case.
4. The carrying out of any activities or transactions banned by the laws applicable to UCIs or not observing the requirements laid down therein is considered a serious infringement, unless it is an occasional or isolated case.
5. A number of new very serious, serious and minor infringements is set up.
6. The sanctions laid down by the former rules applicable to UCIs are replaced by a punitive regime very similar to that set forth in the Spanish Securities Exchange Act.
November 6, 2003
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For further information, please contact Salvador Ruiz Bachs (srb@uria.com, phone number +34.91.586.06.96) and Ángela Paz Suárez-Ferrin (psf@uria.com, phone number +34.91.586.45.15) in our Madrid office, Juan Velayos Lluis (jvl@uria.com, phone number +34.93.416.51.56) in our Barcelona office, or Juan Francisco Falcon (jff@uria.com) and Juan Carlos Machuca (jcm@uria.com) phone number +44.20 7.367.00.80 in our London office.